EXCLUSIVE: “Taking Centre Stage” – Nick Kerigan, Swift in ‘The Fintech Magazine’
As more central banks prepare to issue their own CBDCs, Swift’s Nick Kerigan explains how the global payment messaging service is working on cross-border technology to support them
Money is changing and central banks don’t want to be left behind. This is why 93 per cent of them are at least researching the possibility of launching their own central bank digital currency (CBDC).
That’s according to the results of a Bank for International Settlements (BIS) study, released in July, which predicted there could be up to 15 retail and nine wholesale CBDCs in circulation by 2030. That number includes the four that have already fully launched; the Sand dollar in The Bahamas, Dcash in The Eastern Caribbean, the e-Naira in Nigeria, and the wonderfully named Jam-Dex in Jamaica.
Why the sudden interest?
There’s no easy answer: the motivations for launching a CBDC are as numerous as the models. For the Central Bank of The Bahamas, the first to go live, the Sand dollar was all about financial inclusion and better access to digital payments for the unbanked and underbanked, especially in the remoter islands.
Launched in 2020, to date there are still only around 1million Sand dollars in circulation – most of those distributed in giveaways by the central bank – compared to eight billion Bahamian dollars. Adoption of the eNaira in Nigeria has been similarly slow. Released in 2021, less than one per cent of the Nigerian population have used it. Nigeria is unusual among African countries.
Very few have even begun a CBDC project, and, of those that have, Kenya put its on the backburner only this summer. Elsewhere, though, developing economies are leading the adoption of CBDCs with their share almost double the efforts of advanced economies.
Pilot testing of China’s e-CNY has now reached 260 million people. India is about to pilot its digital rupee. Meanwhile, the Federal Reserve Bank of New York’s Innovation Center (NYIC) completed a proof-of-concept of a regulated liability network (RLN) using distributed ledger technology to settle digital assets in July, working with nine large financial institutions and the Swift network.
But the US is still sitting on the fence when it comes to actually introducing a CBDC. France has broken ranks in Europe by forging ahead with its own CBDC pilot. And what of the UK’s digital pound?
The Bank of England (BoE) completed a consultation period on plans for a CBDC at the end of June. The response and findings were pending at the time of writing, but in February, the deputy governor of BoE, Jon Cunliffe, said that a digital pound would be needed by the end of the decade, with the goal being to provide a ‘safe, trusted form of money’.
That said, whilst recognising the advantages of CBDCs, the House of Lords Economic Affairs Committee published a report last year that pointed to concerns around financial stability and privacy.
It also reported that whilst ‘CBDC systems could bypass some of the existing frictions around cross-border payments’, these are ‘already improving because of innovation and competition in the fintech sector’, casting doubt on the advantage to be gained from one of the principal use cases for CBDCs. Their lordships, in fact, asked if CBDCs weren’t just ‘a solution in search of a problem’?
Swift, by virtue of being the world’s leading interbank payments provider, can’t stay on the sidelines of CBDC development because it will need to facilitate the movement of these new currencies if, and when, they are adopted for cross-border trade.
Its head of innovation, Nick Kerigan, is clear that Swift doesn’t take a policy position on whether or not CBDCs are inherently good or bad for the financial system.
“It’s up to national central banks, and their financial communities, to figure that out, and decide whether they want to introduce such a currency,” he says. And, as we’ve seen, that rather depends on their circumstances.
“We see central banks and national financial communities looking to solve some quite different things with the introduction of a CBDC,” he adds. “Some are looking to accelerate the digitalisation of their economy; some are looking to expand financial inclusion. Others, where maybe the economies are already more digitalised, are looking at how the public can still have direct access to central bank money, in a world where cash is a much smaller proportion of payments than it used to be.”
That sentiment was echoed by Andrew Bailey, Governor at the BoE, in a recent speech in which he said that its main motivation for a retail CBDC would be to promote ‘the singleness of money’ by ensuring the public always had access to a ‘fully functional central bank money that can be used in their everyday lives’.
“As we look across the world at this momentum,” Kerigan continues, “we think it’s incumbent on Swift to be figuring out how to respond to this important trend.”
“How do we end up with a world that’s at least as connected as we are now, if not more connected, and certainly not more fragmented? We don’t want to see unconnected digital islands”
Essentially, it wants to know how it can increase interoperability when currencies sit on a diverse set of architectures.
“How do we stitch all this together?” says Kerigan. “How do we end up with a world that’s at least as connected as we are now, if not more connected, and certainly not more fragmented? We don’t want to see unconnected digital islands springing up because of all this exciting innovation.”
THE SWIFT SANDBOX
Swift’s research into facilitating CBDCs began in 2021 and it established early on that it could achieve interoperability between two different CBDCs, using existing infrastructure.
“That was a big first step,” says Kerigan. It developed an experimental interlinking solution that it believes ‘can ensure high levels of efficiency and scalability’, he adds. “Because a central bank just needs to connect to Swift once, and gain access to all of the other national networks around the world that are connected to Swift.
“We took that experimental infrastructure and deployed it into a sandbox and opened up the sandbox to 18 central and commercial banks from around the world.”
Over a 12-week period, those banks were able to experiment and see how the technology might work in practice whilst having an ongoing dialogue with Swift. Almost 5,000 transactions were simulated to great success.
The good news for those banks and for Swift was that all 18 participants, including Banque de France, the Deutsche Bundesbank, the Monetary Authority of Singapore, BNP Paribas, and HSBC, among others, saw clear potential and value from the Swift solution, says Kerigan.
“There was clear consensus about how things are likely to work in the future… In some cases, the participants asked us to go further than we had done in the experimental solution,” he reveals. “For example, they wanted to see full atomic settlement, and that’s something we’ve taken on as a design requirement. On other topics, there was less consensus, but we were able to understand the options, gaining food for thought, as we continue to develop.”
The next step is a beta version of the solution and a second phase of testing is to take place, looking at different use cases.
“We’re committed to developing a solution that’s genuinely useful for the industry, and that helps enable cross-border payments with CBDCs,” says Kerigan. “So, at the end of the sandbox exercise, we asked all the participants ‘should we continue down this road and do you want to join us on that journey?’.
The answers were, unanimously, yes.
“Inspired by that feedback, we’ve been working really hard to develop a more robust version of that interlinking solution and test that beta version with some select central banks.”
Swift’s role is of huge importance in building interoperability into CBDC architecture from the very beginning. Its close relationship with the banks gives it a seat at the table and, hopefully, those partnerships and the shared experience of the system it has built, will help to make the world more connected.
Minutes from two Bank of England CBDC forums in March, show representatives came from not just banks but card schemes, retailers, and streaming companies, too, so there is a clear desire from multiple sectors to be involved in the conversation.
Still, though, the big unanswered question is what this will all mean for the consumer. It will make payments more intelligent and it could deliver a better user experience, as money becomes fully digital.
But how much an improvement over existing advances in real-time digital networks CBDCs represent for the person
in the street: ”That’s a question nobody has fully cracked yet,” says Kerigan.
The answer, hopefully, lies in the sandbox and with further experimentation and exploration.
Companies In This Post
- US blockchain company, Constellation Network, Welcomes Leading Experts from Top Enterprises and U.S. Government Agencies to their Enterprise Advisory Board. Read more
- JustPaid, AI-powered Finance Startup, To Launch Game-Changing GPT App In OpenAI’S GPT Store Read more
- Eltropy Collaborates with Jack Henry’s Banno Digital Banking Platform Read more
- Ledger partners with bolt to launch device protection for its industry-leading secure devices Read more
- Nigeria: African Development Bank and FSDH Merchant Bank sign $20 million Trade Finance Agreement to support Small and Midsize Enterprises (SMEs) and Corporates Read more