Swift says it is encouraged by testing it conducted into how digital trade platforms can interact with central bank digital currencies (CBDCs) to facilitate trade payments.

The organisation says simulations it ran, in conjunction with commercial and central banks, suggest that using CBDCs for payments in trade deals can be simpler and faster than current paper-based processes.

“Participants highlighted the potential of this solution to reduce trade payment delays, enhance trust among trade parties, and significantly lower transaction costs,” Swift, a bank-owned co-operative that operates the global payment messaging system, says in a report published last month.

CBDCs, also known as stablecoins, are digital versions of fiat currencies. Unlike stablecoins issued by commercial entities, such as Tether and Ripple, they are provided by central banks.

Currently, only a handful of countries have operational CBDCs, although regulators in many major economies are studying their benefits. The US Federal Reserve, the Bank of England and Bank of Japan are among the central banks currently testing CBDC models.

The Swift team carried out the testing by simulating a digital trade network including buyers and sellers, shipping and logistics providers and regulatory entities. They also tokenised a purchase order to test automatic, round-the-clock payments triggered by events in the shipping chain.

The testing simulated typical real-world trade scenarios involving purchase orders, invoices and payments. The buyers, sellers and other participants used a simulated digital trade network to mimic how such companies use real-world platforms such as Bolero, ICE Digital Trade (formerly essDocs), Enigio and WaveBL.

A Swift connecter sat between the two digital trade networks and provided a link to the simulated CBDC.

Swift’s head of innovation, Nick Kerigan, tells GTR the testing showed that combining such platforms with CBDCs can potentially provide advantages to buyers and sellers compared to traditional processes.

“There’s definitely time and money savings in terms of it being handled digitally versus [paper], because they’re not paying their staff to process and move the paper,” he says. “There’s also benefits around the reduction in manual reconciliation, because once you have the paper, you have to reconcile it with your other pieces of paperwork. Those need to be reconciled; that can then happen in an automated way.”

“Then there’s the account management between the buyer and seller and their own banks,” Kerigan adds. “With the solution we’ve described, by linking the networks together, the instruction of the banks can also happen in a more automated way. Again, providing efficiency benefits for buyers, sellers, carriers, and the banks themselves.”

Swift says tokenising payment orders could also help reduce the risk of fraud, such as double financing.

The testing on CBDCs is part of broader push by Swift to play a role in creating interoperability between the array of digital trade platforms on the market. Interoperability should allow companies to be plugged into just one platform and still be able to trade with users of other platforms.

While fully paperless transactions are still rare, their number is expected to grow exponentially as governments around the world develop legislation giving legal recognition to digital versions of paper documents such as bills of lading.

The testing of the CBDC solution was designed in conjunction with banks and other businesses active in trade finance, Swift says. It also tested use cases elsewhere, such as in FX and liquidity management.

“Interoperability between DLT networks is an important piece of the puzzle to enable efficient connectivity between CBDC and other networks and to avoid silos,” says Deutsche Bank’s head of digital assets and currencies transformation Sabib Behzad.

“Testing Swift’s solution for different use cases such as [delivery-versus-payment] and FX with 38 commercial and central banks is a significant step to overcoming fragmentation and ensuring frictionless transactions.”

HSBC’s global head of domestic and emerging payments Lewis Sun says HSBC is “excited to continue the collaboration with Swift and other industry peers to incubate an open, inclusive and technology-agnostic model that allows for more efficient payment-versus-payment, delivery-versus-payment, and trade settlement across different networks”.

Swift declined to say if it plans to test the solution on active CBDCs, but says in the report that it will bring together the results from its CBDC testing with its ongoing work on standardisation between digital trade platforms.