Recording Panel Discussion | Treasury Trends for 2023

28-11-2022 | treasuryXL | Nomentia | LinkedIn |

Recently, we had a panel discussion about a few major treasury trends for 2023 together with Nomentia and experts Pieter de Kiewit, Patrick Kunz, Niki van Zanten, and Huub Wevers. If you didn’t get the chance to attend the webinar, you can find the recording here.

During this interactive live discussion we covered some of the following topics:

  • Market and FX Risk management in current times of uncertainty.
  • Top treasury technologies to consider for 2023. Will APIs deliver their promises?
  • Building the bridge between Ecommerce and treasury.
  • The rapidly changing role of treasury to facilitate business success
  • Treasury technology visions beyond 2023.
Watch the recording

 

 

[WEBINAR] FRTB – Are Banks Ready To Be Compliant?

23-11-2022 | treasuryXL | Refinitiv | LinkedIn |

Join experts across the industry for this complimentary webinar to explore how to prepare for – and comply – with the Fundamental Review of the Trading Book (FRTB) regulation in 2023.

DETAILS:

  • Webinar: FRTB – are banks ready to be compliant?
  • Date: Tuesday, November 29
  • Time: 09:00 EST / 14:00 GMT / 15:00 CET
  • Speakers:
    • Hany Farag, Senior Director and Head of Risk Methodology and Analytics, CIBC
    • Fausto Marseglia, Head of Product Management, FRTB and Regulatory Propositions, Refinitiv, an LSEG Business
    • [Moderator] Lisa Regan, Head of Sales, EMEA, Enterprise Data, Refinitiv, an LSEG Business\
    • Volker Wellmann, Risk and Resource Manager at BNP Paribas, BNP Pariba



 

 

Register today

 

Why you need to automate swap execution

22-11-2022 | treasuryXL | Kantox | LinkedIn |

Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.

We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business. 

Setting the scene

Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.

Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.

With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.

Pain points: a resource-intensive activity

Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.

Among the most common pain points, we can cite the following three:

  • Operational risk. Many tasks are manually executed: retrieving incoming payments, selecting liquidity providers and confirming trades. The entire workflow relies on emails that circulate back and forth with spreadsheets carrying potential data input errors, copy & paste errors, formatting errors, and formula errors.
  • Lack of traceability. Lack of proper traceability hinders the process of assessing hedging performance, as swap legs are manually traced back to the corresponding forward contracts.
  • Risk of unethical behaviour. Understood as the risk that early mistakes that are not immediately reported may lead to severe losses down the road, it is prevalent throughout.

Traceability and automated swap execution

Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?

The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!

Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:

  • According to recent surveys, increasing the efficiency of treasury operations is the No. 1 expectation in tech for CFOs.
  • Using more currencies in the business to take advantage of the profit-margin enhancing possibilities of ‘embracing currencies’.
  • Taking a concrete step toward the ‘digital treasury’ is a concern voiced by many CFOs and treasurers.

At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:

  • More time to concentrate on high-value-adding tasks such as fine-tuning and improving cash flow forecasts.
  • Reduced stress levels.
  • Increased productivity at work.

And that’s no small achievement! 

Interview | 9 questions for Kurt Smith, Seasoned Treasury Expert

21-11-2022 | treasuryXL | Kurt Smith | LinkedIn |

 

Meet our newest expert for the treasuryXL community, Kurt Smith.

Kurt is a Director of Marengo Capital, a corporate advisory company specialising in treasury, financial markets, corporate finance and private equity. Marengo Capital has a track record of, and passion for, creating and managing for long term enterprise value by aligning corporate strategy, finance and risk.

Kurt is also the Vice President and Technical Director of the Australian Corporate Treasury Association, a member of the Australian Payments Network Stakeholder Advisory Council, and a member of FX Markets Asia Advisory Board.  His career includes senior positions across fund management, bank derivative trading, Fintech, private equity and corporate treasury.  He has a Ph.D in Finance and is a graduate of the University of Cambridge.

Kurt is an engaging and compelling public speaker with substantial experience in presenting, being a panellist and master of ceremonies, for intimate and large audiences in Australia, Asia, Europe, and the United States.  He is well known for providing unique insights into new and well-worn issues, balancing contrarian thinking with informed judgment, and communicating highly technical issues to non-technical audiences.

 

We asked Kurt 9 questions, let’s go!

INTERVIEW

 

 

1. How did your treasury journey start?

I started in financial markets, firstly as a portfolio manager with a macro fund, and secondly as an FX option trader and Head of Derivative Trading for a commercial bank.  While I enjoyed the excitement, spontaneity, and commercial pressure of each day, I wanted something more fulfilling.

 

I became a Director in two FinTech companies commercialising option valuation and risk management technologies, one for the interbank exotic option market and the other for retail investors.  Sourcing capital for product development was a constant challenge but also very rewarding.  By this stage I was hooked on corporate treasury.  Treasury allowed me to direct my passion for financial markets to create, operate and scale businesses by funding growth and making them financially sustainable.

 

I then moved to a $10B+ corporate to run their treasury, corporate finance and insurance businesses.  My main responsibility was developing and implementing capital management and financial risk management strategies to ensure that the company target credit rating was achieved, while obtaining funding, allocating capital to investments, and hedging market exposures to reduce earnings volatility.

 

I am now a Director of Marengo Capital which specialises in creating and managing for value in corporate treasury and corporate finance.  I am still involved in FinTech as the Group CFO of a cash flow securitization company; and I am also the Vice President and Technical Director of the Australian Corporate Treasury Association, which is engaging with and improving the treasury community in Australia.

 

2. What do you like about working in Treasury?

 

I like that the success of the company is in your hands.  The company can formulate exciting corporate strategies and business plans, but those strategies and plans will not be delivered unless capital is sourced, structured and allocated properly, and financial risks are hedged to provide corporate resilience to business cycle downturns and adverse economic conditions.

When you think about it, it is a massive responsibility.  However, I prefer to think of it as a fantastic opportunity to make an impactful contribution.

 

3. What is your Treasury Expertise and what expertise gives you a boost of energy?

 

My specialist expertise is in creating and managing for long term enterprise value.  Increasing value is critical to increasing the capital funding capacity of the company and delivering into the main goals of Executives and the Board.  Most treasurers consider treasury a cost centre and do not have ambition to add value.  To me, that makes treasury a tax on the business, an overhead to be recovered by everyone else.  I believe that there are a large number of ways that treasury can add substantial value, by increasing cash flow not just forecasting it, managing the capital structure to reduce the cost of capital, and evaluating the allocation of capital to investments to ensure value accretive and efficient returns.

 

While I get a kick out of applying commercial acumen to improve businesses, I really get a kick out of convincing others to do the same, from decision-makers to operational teams.  I get very enthusiastic – but I truly believe that value is the key to financial sustainability, which is necessary for companies to do more of what they want to do.

 

4. What has been your best experience in your treasury career until today?

 

I built a very high-functioning treasury and got team members to work on several projects simultaneously in small multi-disciplinary teams.  Team leadership was based on expertise not the hierarchy, and it not only provided all team members with rapidly growing CVs to support their careers, it also provided opportunities for, and the most satisfying discovery of, junior employees with real talent fast tracking into leadership succession planning.  This way of working was new to all of us, and we created a lot of value and had a lot of fun doing it!

 

5. What has been your biggest challenge in treasury?

 

I worked for a capital-intensive company that had rapidly growing capital expenditure to be funded predominantly by debt, during an expected aggressive interest rate tightening cycle.  The rates market had already factored five sequential monetary policy tightenings into the yield curve, such that fixed rates for term debt were very high.  Our analysis showed that in most foreseeable scenarios floating rates would outperform fixed rates, even during sharp tightening cycles.  We went with the maximum allocation to floating rates, and over the next five years interest rates decreased markedly, and we used those decreases to gradually re-weight floating rate exposure back to their neutral weight.

This was a real risk management lesson for me, that is applicable now.  One has to take emotion out decisions, especially fear, do the analysis and trust your instincts.  Worked for us!

 

6. What’s the most important lesson that you’ve learned as a treasurer?

 

Communication is crucial, especially verbal communication.

Executives, Boards and operational teams do not understand treasury and corporate finance.  Treasurers need to be able to communicate complex technical information in a persuasive and compelling way to non-technical audiences.  For example, I prepared a 35-page capital management strategy working paper that I turned into a six-page Board paper, and my presentation to the Board was a single diagram on one slide.  If they were not convinced in the first few minutes, all that work would have been wasted.  Communication is key, and I believe it is a defining characteristic between the best and the rest.

 

7. How have you seen the role of Corporate Treasury evolve over the years?

 

Corporate treasury was formerly a satellite of the business that was involved at the end of the value-chain, to be engaged only when funding of spend and hedging of exposures was required.  As a result, treasury did not influence decisions, it just implemented them.

Good corporate treasuries today are deeply integrated with, and embedded into the DNA of, their businesses; and, as a result, are involved at the beginning of the value-chain where they can influence outcomes.  This is a much more interesting space to play in.

 

8. What developments do you expect in corporate treasury in the near and further future?

 

Everyone is focusing on using technology, digitalisation and data rich environments to reduce operational risk, release resources and gain insights.  This is understandable given the change in the technology landscape and eco-system.

However, I believe that we will have to focus increasingly on our human resources as we re-examine whether the treasury operating model, governance architecture, people, processes and systems are fit-for-purpose not only now, but for the future.  Are our selection processes biased towards technocrats with limited ability to engage and communicate?  Do we hire and / or cultivate businesspeople with commercial acumen?  Do we encourage out-of-the-box innovation or do we effectively enforce the status quo through a relentless drive for efficiency?  I see treasury as a business within a business, and that it should be run as such.

 

9. Is there anything that you would like to share with our treasury followers that they must know from you?

 

As a community of treasury professionals we all have a responsibility to improve the standard of the profession, and to contribute to the recognition of the profession as a profession!  In this regard, treasuryXL is doing a fantastic job of bringing us all together and giving us opportunities to share, learn, explore and discuss treasury.  Let’s make sure that we contribute more than we take out, so that we add value overall.

 

Want to connect with Kurt? Click here

 

Thanks for reading!

 

 

Kendra Keydeniers

Director Community & Partners, treasuryXL

What’s the difference between a neobank and a challenger bank?

19-11-2020 | treasuryXL | XE |

The biggest difference between neobanks and challenger banks is the presence or absence of a banking license, but it’s not the only difference.

Most banks began looking into online services shortly after 9/11 brought air travel to a sudden and screeching halt. They wanted a way to move money which did not involve placing paper checks on airplanes. Internet-based banking, or mostly internet-based banking, was the next logical step. According to some recent market research, neobanks and challenger banks will be worth over $470 billion USD by 2027. Frequently, people use these terms interchangeably. However, there are some significant differences between neobanks and challenger banks. Challenger banks are mostly online, and neobanks are exclusively online.

Neobank vs Challenger bank

But while the presence of physical locations (and lack thereof) is an important distinction between neobanks and challenger banks, it isn’t the only difference between the two bank types. There are several differences to note, as these differences often have a direct bearing on which one is best for your family or business.

Difference #1: physical presence

Think of it like this. Many retailers, like Walmart, have both a physical and an online presence. Other retailers, like Amazon, are exclusively online. Challenger banks and neobanks are basically the same. But the Walmart comparison only goes so far. Most challenger banks only have a handful of physical locations, as their online services are their main draw. Furthermore, most of these physical locations are in the UK. After the 2008 financial crisis, the government opened the market to new banks.

Neobanks, on the other hand, first appeared in 2017 as a way to fill the niche between traditional banks and FinTechs. Less than four years later, there are hundreds of these institutions in the UK, U.S., and worldwide.

Difference #2: accounts, products, and services

There are some other differences as well. Typically, challenger banks offer both personal and business accounts. Moreover, challenger banks streamline their products and services, so they can be more internet-friendly. Challenger banks are small institutions which “challenged” the Big Four UK banks (Barclay’s, Lloyd’s, HSBC, and RBS). Their technology-based services and commitment to markets traditionally under served by the Big Four quickly attracted legions of customers.

While neobanks do offer some personal accounts and services, they usually target small and medium-sized businesses (SMEs) and business startups. They present themselves not just as banks, but as online financial technology firms, and typically appeal to more tech-savvy customers.

Difference #3: banking license

What’s the difference between a psychiatrist and a psychologist? It’s not their sense of humor, or lack thereof. Psychiatrists can prescribe medication, and psychologists can only provide therapy.

That’s also the major difference between challenger banks and neobanks. Most challenger banks have such a limited physical presence that they are essentially 100 percent online. But challenger banks have banking licenses and neobanks do not. So, only challenger banks can offer a full range of financial services. That includes things like issuing credit cards and loaning money. Neobanks can offer these services as well, but only if they are tied to a licensed institution.

There is some overlap. Many neobanks essentially began as FinTechs. Then, once regulators approved their banking license requests, they became challenger banks.

Some examples of top challenger banks and top neobanks

Formed in 1995, Richard Branson’s Virgin Money is one of the oldest challenger banks in the UK. It also has locations in Australia and South Africa. Between 2007 and 2010, Virgin Money also operated in the U.S. A private equity group began Aldermore in 2009. The online institution bought Ruffler Bank a few months later, so the neobank became a challenger bank almost overnight. Aldermore is also the poster boy of this sector’s growth. South African financial conglomerate FirstRand recently bought Aldermore for a staggering £1.1 billion.

Durham, England’s Atom Bank was the UK’s first online financial institution to tailor its platform to tablets and smartphones, as opposed to PCs. It was also the first 100 percent digital bank to receive a banking license. Shortly thereafter, international banking giant BBVA acquired a large stake in Atom Bank. As a result, it expanded its financial services to include residential mortgages, competitive savings accounts, and secured business loans.

Founded in 1996, First Internet Bancorp was one of the first FDIC-insured, state-chartered financial institutions in the United States with a 100 percent online presence. It mostly offers retail services, like checking accounts, and securities investments. Customers also have access to installment loans, personal lines of credit, and other financial services. Chetwood Financial Services is an example of a limited challenger bank. It offers most financial services, with the exception of residential mortgages. Regulators do not allow CFS to issue any buy-to-let residential mortgages. Civilised Bank, which is now known as Allicia Bank, is in the same boat. It offers a single financial product, a twelve-month savings account, by virtue of a limited Part 4a UK license.

In 2010, General Motors Assurance Corporation, GM’s financing arm and a free-standing financial services company, became Ally Financial. Not surprisingly, Ally focuses on auto leasing and financing. It has close to five million such customers. In 2016 and again in 2019, the company significantly expanded its mortgage lending business. Ally is affiliated with Via, an online vehicle auction site.

San Francisco-based Good Money sends half its profits to social justice and environmental preservation groups. Accountholders cast ballots to decide where Good Money invests. The bank offers a range of FDIC-insured products, mostly DDA checking and savings accounts. As of January 2019, there was a waiting list to be a Good Money customer. All new customers also have the option of purchasing a stake in the company. Credit Suisse X is the online arm of the venerable Zurich-based investment bank. Its online banking services are targeted to individuals with high incomes. Online financial institutions are more able to go after specific market segments.

Use Xe to make international money transfers

Neobanks and challenger banks are good options for customers who want an all-online or mostly-online experience. But they are not a very good option for international money transfers. Traditionally, bank fees are rather high in this area, and you may not get the best exchange rates for your transfers.

Money transfer providers, such as XE, are neither neobanks nor challenger banks. Xe does not try to be all things to all people. Instead, we focus on electronic funds transfers in general, and international electronic funds transfers in particular. We have worked very hard to develop a platform that’s both convenient and secure. As a bonus, we are also able to offer fast money transfers (some taking just a few minutes) and competitive exchange rates.

 

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

Visit XE.com

Visit XE partner page

 

 

The 3 Fundamental Treasury Concepts: Working Capital Management

17-11-2022 | Vasu Reddy | treasuryXL | LinkedIn |

The 3 fundamental treasury concepts being discussed currently include Working Capital Management, Bank Relationships and Treasury Transfer Pricing which are pivotal pillars for effectively and efficiently optimizing cash, liquidity,  funding and managing risk for any Treasury function to support the achievement of the organizations business objectives and strategy. In the current blog of a series of 3, Vasu Reddy explains the best practices and benefits of Working Capital Management.

Trade and Working Capital Management Products offered by banks

Working Capital Management involves working with supply, purchase, procurement, production, delivery and sales.

What are the best practices to improve working capital balances?

  • Letter of Credits for imports, Bank Guarantees instead of cash prepayments, Documentary Collections
  • Trade loans, overdrafts
  • Structured Trade and commodity finance
  • Supplier/commercial Finance – including ESG – Green Bonds 
  • Bills & LC Discounting to improve cash collection
  • Receivables Discounting to monetize cash and reduce past dues with poor paying customers with no recourse
  • Securitization of receivables on customer contracts executed mainly by Mobile operators 
  • Selling Debt to off-taker/3rd parties with minimal haircut  
  • Procurement/Travel credit cards

Benefits from these practices

  • Trade finance improves working capital Efficiency, reduces borrowing costs and enhances cash flow.

What are the best practices for Cash and Liquidity Management?

  • Implementation and use of Online banking –Centralized single banking platform across region of operation
  • Robust cash planning and forecasting policies to ensure accurate cash flow forecasting by  working with Accounts Receivables, Payables and FP&A teams including businesses to submit monthly forecasts with post month-end review discussions to understand any material variations and investigation thereof. This must be CFO Endorsed to get overall Treasury, Finance, business collaboration. 
  • Overnight/Money market deposits – Invest excess surplus cash 
  • Structured Cash Sweeping/Cash Pooling arrangements for all LE’s – to minimize having excess cash in one country and simultaneously having borrowing in another country
  • Interest Optimization structures with Regional/Global banks to take advantage of wallet size 

“Cash is the life blood to sustain operations”  Vasu Reddy


Benefits from these practices

  • Reduced Borrowings/overdrafts, increased income 
  • Cash Visibility and improved  reporting and financial planning– Group Level 
  • Strong credit rating – improved Shareholder relationship/Returns
  • Strong positive cash flow and Balance sheet – Higher Dividend distribution
  • Cost savings, reduced manual interventions – errors, reduced head-count

Thank you for reading!

 

Vasu Reddy

Corporate Treasury, Finance Executive

Information Sessions Treasury | Vrije Universiteit Amsterdam

16-11-2022 | treasuryXL |  VU Amsterdam | LinkedIn |

Want to broaden your perspective on Treasury? In November, the Vrije Universiteit Amsterdam (VU Amsterdam) is organizing Open Evenings, at the VU Amsterdam and online, where you will hear more about their postgraduate programs Treasury Management & Corporate Finance and the course Fundamentals of Treasury Management.

The Professors, lecturers and international colleagues of the Vrije Universiteit Amsterdam are happy to discuss your possibilities and answer your questions during the information sessions. Visit our next Open Evenings on:

Treasury Management & Corporate Finance:

PROGRAMME 17 NOVEMBER 2022 (at Vrije Universiteit Amsterdam) om (19:00 – 19:45)

PROGRAMME 22 NOVEMBER 2022 (Online) (19:45 – 20:45)

 

Fundamentals of Treasury Management:

PROGRAMME 17 NOVEMBER 2022 (at Vrije Universiteit Amsterdam) om (20:00 – 20:45)

PROGRAMME 22 NOVEMBER 2022 (Online) (20:00 – 20:45)

More Information & Registration

Currency Impact Report October 2022

15-11-2022 | treasuryXL | Kyriba | LinkedIn |

According to a recent Kyriba report, the earnings of North American firms will suffer a shocking $34 billion fall in Q2 2022 as a result of headwinds. When compared to previous quarters, headwinds rose by 3583% since Q3 2021 and by 134% from the prior quarter.

Source

Currency Impact Report

The average earnings per share (EPS) impact from currency volatility reported by North American companies increased from $0.03 to $0.10.

The USD is at a 20-year high, and when combined with volatility and interest rate changes, many corporations have seen their currency risk double or triple, as well as their hedging expenses double.

Kyriba’s Currency Impact Report (CIR)

Kyriba’s Currency Impact Report (CIR), a comprehensive quarterly report which details the impacts of foreign exchange (FX) exposures among 1,200 multinational companies based in North America and Europe with at least 15 percent of their revenue coming from overseas, sustained $49.09 billion in total impacts to earnings from currency volatility.

The combined pool of corporations reported $11.82 billion in tailwinds and $37.27 billion in headwinds in the second quarter of 2022.

Highlights:

  • The average earnings per share (EPS) impact from currency volatility reported by North American companies in Q2 2022 increased to $0.10.
  • North American companies reported $34.25 billion in headwinds in Q2 2022, a 134% increase compared to the previous quarter, and 3,583% increase since Q3 2021.
  • European companies reported a 68% percent increase in negative currency impacts, with companies reporting $3.02 billion in FX-related headwinds.
Download the Report

SWIFT and CBDC projects: successful experiments

14-11-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

Early October SWIFT launched two publications describing the results of two important experiments, one on interoperability and the other on tokenization. In these publications SWIFT has aid out its blueprint for a global central bank digital currency (CBDC) network following an 8-month experiment on different technologies and currencies.

By Carlo de Meijer

SWIFT thereby said that it had solved “one of the thorniest” problems central bank digital currency (CBDC) developers have been wrestling with: How to use them for cross-border transactions and how to create interoperability between different networks. The idea is that once scaled-up, via SWIFT’s interoperability  solution banks may need only one main global connection, rather than thousands if they were to set up connections with each counterpart individually.

“We see inclusivity and interoperability as central pillars of the financial ecosystem, and our innovation is a major step towards unlocking the potential of the digital future”, Tom Zschach, Chief Innovation Officer SWIFT.

Let us have a deeper look!

Present CBDC projects: the interoperability issue

As told in my last blog the emergence of CBDCs is gathering speed with a growing number of central banks worldwide building, studying or considering digital versions of their national currencies thereby starting to seriously map out the massive, costly infrastructure required to roll out digital currencies backed by countries.  .

Globally, nine out of 10 central banks are. now actively exploring into digital currencies, often using different technologies. However with a primary focus on domestic use.

Many Central Banks are thereby struggling with its technological complexities including the issues of interoperability and standardisation. Few of the roughly 100 countries are working on making them interoperable via technical standards and those that are, are generally doing so in small groups with neighbouring countries and trading partners, such as in the EU.

But with multiple players building different solutions, on different technology platforms, the danger is that it will result in a future digital financial ecosystem consisting of ‘digital islands’ that can’t interact with one another,  which may limit large scale adoption.

For the potential of CBDCs to be fully realised across borders, these digital currencies need to overcome inherent differences to interact with each other, as well as with traditional fiat currencies. That potential however can only be accomplished if the various methodologies that are being explored could unite and work together.

That is why the attention of a growing number of those central bank experiments, is rapidly turning to how the CBDCs of different countries could interact when using different networks. Making CBDCs interoperable is however difficult.

Two SWIFT Publications

Early October SWIFT launched  two publications outlining how CBDCs could work in the real world, with a particular focus on cross-border payments. They thereby explored the use of a blockchain system to connect these different blockchains, something that has not been achieved in the crypto space:

SWIFT views inclusivity and interoperability as central pillars of the future financial network/ecosystem. They have been looking at ways to make CBDCs work globally, making them compatible with regular currencies.

In these publications SWIFT described the findings from two separate experiments that started in December 2021, demonstrating how to successfully transact between different CBDC blockchains networks as well as with traditional payment networks.

 

Two Experiments

SWIFT conducted two separate experiments to prove its cross-border transaction feasibility and interconnection capabilities. In the last eight months SWIFT worked with different technologies and currencies thereby cooperating with Central Banks and financial institutions worldwide.

These experiments bridged assets between different distributed ledger technology (DLT) networks and existing payment systems, which allowed digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.

These experiments are part of the company’s wide-ranging and extensive innovation agenda to provision their strategic focus on enabling instant, frictionless, and interoperable cross-border transactions for the advantage of the SWIFT community.

Aims of the two separate experiments were

a) solving the significant challenge of interoperability in cross-border transactions by bridging between different distributed ledger technology (DLT) networks and existing payment systems, allowing digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.

b) as well as provide interoperability between different tokenisation platforms and existing account-based infrastructures.

Ultimate aim of the two trials was to create a blueprint for CBDC usage across borders.

 

First trial: Interoperability

In the first publication SWIFT released the results of the first experiment, that was  aimed at looking how CBDCs could be used internationally and even converted into fiat money if needed. This in order to overcome the difficulties encountered of interoperability between different blockchains.

How was the first trial set up?

In this first trial SWIFT narrowly collaborated with Capgemini. They thereby carried out CBDC-to-CBDC transactions between different DLT networks, as well as fiat-to-CBDC flows between these networks and instant real-time gross settlement system. SWIFT therefor built two simulated CBDC networks, one implemented on R3 Corda, and another on Quorum, a permissioned Proof of Authority (PoA) version of Ethereum.

CBDC network regulators thereby run and governed a ‘trusted DLT node’ created as part of Swift’s solution. This allowed them to have a view on transactions within the permissioned blockchain as well as its messages to the Connection Gateway. In this SWIFT implementation they lock the assets in an escrow, tell the SWIFT system it is locked, and then receive the funds from the other party.

Next Steps: CBDC Sandbox

The tests are followed by additional and more advanced testing environment by almost 20 commercial en central banks over the upcoming year 2023, including Banque de France, the Deutsche Bundesbank, HSBC, Intesa Sanpaolo, NatWest, SMBC, Standard Chartered, UBS and Wells Fargo

SWIFT has deployed the infrastructure into a running CBDC sandbox and visual interface where blockchain based central bank digital currencies (CBDC) can connect to each other globally through SWIFT, as well as connect their blockchain system to SWIFT’s more traditional ‘fiat’ system.

They are now collaborating in the more advanced testing environment, thereby further experimenting with CBDCs using real time variables, to explore how its platform could interact with the cross-border use of CBDCs, assess potential use cases and wider CBDC operability, build the solution further and accelerate the path to full scale deployment of the interoperability solution.

SWIFT will seek feedback through to late 2022.

 

Second trial: tokenization

A separated second experiment was carried out in collaboration with several  financial institutions and other technology partners such as Citi, Clearstream, Northern Trust, and technology partner SE.

This trial involved tokenization, a measure used to secure sensitive information. The test aimed to use tokenised assets to trade property like stocks and bonds.

This trial was aimed to evaluate how their existing infrastructure could be used as a single access point to multiple tokenization platforms

Under the experiment, the team explored 70 scenarios simulating real-time market issuance and secondary market transfers of tokenised bonds, equities and cash. This to mirror real-world market transfers of tokenized bonds and equities.

 

Importance of tokenization

Digital currencies and tokens have huge potential to alter he way we will all pay and invest in the future. Though tokenisation is a relatively nascent market, the World Economic Forum has estimated it could reach $24tn by 2027.

Especially when it comes to strengthening liquidity in markets and expands access to investment opportunities. The potential benefits include improved market liquidity and fractionalisation, which could increase investment opportunities for retail investors, and enable institutional investors to build stronger portfolios.

But that potential can only be unleashed if the different approaches that are being explored have the ability to connect and work together. SWIFT’s existing infrastructure can ensure these benefits can be realised at the earliest opportunity, by as many people as possible.

Single Connector Gateway

SWIFT explored the use of a blockchain system to connect these different blockchains to facilitate cross border payments, something that has not been achieved in the crypto space.

The test teams build a simulation of SWIFT’s enhanced platform and combined that  with a Connector Gateway to link different CBDC and traditional payment networks at the technical level with the aim of establishing network interoperability.

SWIFT’s new CBDC interlink solution will enable CBDC network operators at central banks to connect their own networks simply and directly not only with each other but all existing payment networks in the world through a single gateway, facilitating CBDC cross-border payments thereby ensuring the instant and smooth/seamless and scalable flow of cross-border payments.

 

Main Findings

SWIFT has confirmed that the two experiments conducted in recent months have yielded positive results. The results of the trial showed:

  • promise for cross-border interoperability among countries with varying and emerging digital ecosystems..
  • it may solve the challenges of cross border transaction by combining different DLT networks and current payment systems. It also showed the possibility of interoperability of multiple tokenized platforms.
  • it also showed that SWIFT’s existing infrastructure could be used to interconnect various CBDC blockchain networks around the world directly for cross border transactions, not only with each other but with existing payments platform systems via a single gateway.
  • SWIFT thereby successfully facilitated cross-platform transactions using CBDCs through both a fiat-to-CBDC payment network and different distributed ledger technologies.
  • these experiments also showed that it  was possible for digital currencies and tokenized assets to flow smoothly alongside, and interact with, their traditional counterparts on existing legacy financial infrastructure, guaranteeing instant and effortless cross border payments.
  • it proved that this tokenized network infrastructure could create and transfer tokens and update the balance in multiple wallets.

 

SWIFT’s future role

In collaboration with the community, SWIFT intends to explore its role further – both as a carrier of authenticated information about CBDC transactions, as it does today for fiat currencies, and as a carrier of actual CBDC value in whatever form it is issued.

Given SWIFT’s current infrastructure, all above mentioned advantages can be realized as soon as possible. The companies scale thereby adds weight to its blueprint. SWIFT has an existing network used in over 200 countries and connects more than 11,500 banks and funds.

By creating a global monetary authority digital currency network, SWIFT could thereby act as central hub and serve as a single access point to different blockchains while its infrastructure could be used to create and trade tokens across tokenization platforms.

SWIFT’s new transaction management capabilities could handle all inter-network communication. At scale such a single point of contact would more efficiently facilitate global transactions.

 

Forward looking

To become really utilitarian for cross-border payments, CBDCs and tokens will need to interoperate with the existing financial system infrastructure, which is why it is encouraging that SWIFT was able to show progress here. Solving the interoperability issue is a great step forward.

SWIFTs ground-breaking new innovation lays a path for digital currencies and tokenised assets to integrate seamlessly with the world’s existing financial ecosystem. By solving interoperability challenges the experiments may pave the way for deploying CCDC’s globally.

If successful and once scaled up banks may need only one main global connection, if they were to set up connections with each counterpart individually. This important step forward built on SWIFT’s core capabilities means that as CBDCs and tokens develop, they can be rapidly deployed at scale to facilitate trade and investment between more than 200 countries worldwide.

However for a massive use of CBDCs this also asks for tackling remaining issues. CBDCs have raised issues regarding surveillance and privacy that also should be solved. The SWIFT trials however have shown that their these results may be seen a s a great breakthrough

 

Carlo de Meijer

Economist and researcher

 

 

Only one week left! Live Panel Discussion: Treasury Trends for 2023

10-11-2022 | treasuryXL | Nomentia | LinkedIn |

A friendly reminder that next week at 11 AM CET (November 17th), we’ll be collaborating with Nomentia.

Participate in our live panel discussion regarding 2023’s predicted treasury trends. We invited industry experts to join us and have an open debate about the issues that treasurers would need to think about in 2023. Additionally, there is the option to ask questions.

Date & Time: November 17, 2022, at 11 AM CET | Duration 45 minutes

Some of the topics we’ll cover:

  • Market and FX Risk management in current times of uncertainty.
  • Top treasury technologies to consider for 2023.
  • Will APIs deliver their promises?
  • Building the bridge between Ecommerce and treasury.
  • The rapidly changing role of treasury to facilitate business success
  • Treasury technology visions beyond 2023.p

 

SIGN UP TODAY

November 17 | 11 am CET | 45 minutes

Panel discussion members:

Pieter de Kiewit, Owner of Treasurer Search (Moderator)
Patrick Kunz, Independent Treasury Expert (Panel member)
Niki van Zanten, Independent Treasury Expert (Panel member)
Huub Wevers, Head of Sales at Nomentia (Panel member)