central banks

SWIFT moves to next phase of CBDC testing after positive results

According to a recent survey by the OMFIF Digital Monetary Institute that was cited by SWIFT, 24% of central banks will introduce a CBDC within the next couple of years.

According to a statement on March 9, bank messaging platform Society for Worldwide Interbank Financial Telecommunications, or SWIFT, disclosed that the financial institution witnessed positive results related to its pilot test of linking different central bank digital currencies (CBDCs).

During a 12-week testing period, SWIFT simulated nearly 5,000 transactions between two different blockchain networks and existing fiat payment systems. Over 18 financial institutions worldwide participated in the study, including the Royal Bank of Canada, Banque de France, Société Générale, BNP Paribas, Monetary Authority of Singapore, HSBC, Deutsche Bundesbank, NatWest and more. As told by SWIFT:

“Overall, the results of the sandbox testing found that Swift’s experimental interlinking solution can meet the needs of central and commercial banks for CBDCs interoperability, ensuring CBDCs can be successfully used in cross-border payments.”

Furthermore, SWIFT said there was a “strong degree of alignment” between participants as to how CBDCs are likely to function in the future. For the next steps, SWIFT plans to run a second phase of its CBDC sandbox and develop its “CBDC interlinking solution into a beta version for payments with enhanced atomicity.”

Within the next couple of years, the OMFIF Digital Monetary Institute expects 24% of central banks to develop a CBDC solution. Over 110 central banks around the world are currently investigating the use cases of CBDCs. Lewis Sun, global head of domestic and emerging payments at HSBC, commented:

“Interoperability is key to realising the potential of CBDCs to deliver real-time cross-border payments. While interest in CBDCs is growing, so is the risk of fragmentation as a widening range of technologies and standards is being experimented with.”

Payment flow of the SWIFT CBDC connector. Source: SWIFT

Bitcoin price surge: Breakthrough or bull trap? Pundits weigh in

Bitcoin nearly broke its record for the longest streak of daily green price candles this month, but many believe its recent surge could be short-lived.

While Bitcoin (BTC) has experienced a strong price pump to kick off the new year, many industry pundits are not convinced the cryptocurrency will continue its upward trajectory — at least in the short to mid-term. 

The impressive price surge — which saw BTC experience 14 days of consecutive price increases earlier this month — has called on many to consider whether the surge marks a significant “breakthrough” or is indicative of a “bull trap.”

Speaking to Cointelegraph on Jan. 23, James Edwards — a cryptocurrency analyst at Australian-based fintech firm Finder — said the argument for a “bull trap” is stronger, warning the recent surge could be “short-lived.”

He stated that while the BTC price moved upwards over the weekend, the NASDAQ Composite and the S&P 500 also made similar rallies:

“This suggests to me that the rally in crypto is not unique, and instead part of a wider market uplift as inflation figures stall and a risk-on appetite appears to return to investments. So Bitcoin is just enjoying the effects of positive sentiment that originated elsewhere. This is likely to be short-lived.”

Edwards added that cryptocurrency markets still have some “significant hurdles to clear before a new bull market can begin.”

Among those obstacles, he mentioned include the continued fallout over FTX’s collapse and the recent Chapter 11 filing by Genesis on Jan. 19.

“As such, we’re going to see further sell-offs and downsizing as crypto firms adjust their balance sheets and dump tokens onto the market to cover debt and try to stay afloat,” he explained.

In a statement to Cointelegraph, Bloomberg Intelligence Senior Commodity Strategist Mike McGlone wasn’t confident in the BTC price trajectory either, citing recessionary-like macroeconomic conditions as too big of a barrier for BTC to overcome.

“With the world leaning into recession and most central banks tightening, I think the macroeconomic ebbing tide is still the primary headwind for Bitcoin and crypto prices.”

The sentiment was also shared among some on Crypto Twitter, with cryptocurrency analyst and swing trader “Capo of Crypto” telling his 710,000 Twitter followers on Jan. 21 that BTC’s push past resistance looks like “the biggest bull trap” he has ever seen:

However, not all industry pundits were as bearish.

Cryptocurrency market analysis platform IncomeSharks appeared bullish, having shared a “Wall St. Cheat Sheet” chart with its 379,300 Twitter followers on Jan. 22 making a mockery of the bears who think the latest price movements are indicative of a “bull trap.”

Sem Agterberg, the CEO and co-founder of AI-based trading bot CryptoSea, also recently shared a flood of posts expressing positive sentiment toward BTC price action to his 431,700 Twitter followers, suggesting that a “BULL FLAG BREAKOUT” toward $25,000 may soon be on the cards.

Meanwhile, others have refrained from making a forecast on the price, likely given the unpredictability of crypto markets.

Related: Bitcoin price consolidation opens the door for APE, MANA, AAVE and FIL to move higher

At the time of publication, Bitcoin was priced at $22,738, while the Crypto Fear and Greed Index was at “Neutral” with a score of 50 out of 100.

The cryptocurrency managed to break out of the “Fear” zone on Jan. 13 — which was then scored at 31 — after the BTC price increased for seven consecutive days.

Market sentiment of Bitcoin expressed on a 0-100 “Fear & Greed Index” scale. Source: Crypto Fear & Greed Index.

Bank for International Settlements will test DeFi implementation in forex CBDC markets

The centralized financial institution says the automated market making technology in DeFi can serve as a “basis for a new generation of financial infrastructure.”

According to a new announcement on Nov. 2, the Bank for International Settlements, or BIS — along with the central banks of France, Singapore and Switzerland — will embark on a new initiative dubbed “Project Mariana” in its exploration of blockchain technology. Project Mariana intends to use decentralized finance, or DeFi, protocols to automate foreign exchange markets and settlement. 

This includes using DeFi protocols to stimulate the hypothetical exchange of cross-border transactions between the Swiss franc, euro and Singapore dollar wholesale central bank digital currencies, or CBDCs. The technologies involved in building Project Mariana include smart contracts and automated market maker protocols, or AMMs. Researchers seek to combine pooled liquidity in AMMs with innovative algorithms to determine the prices of tokenized assets, potentially developing into a basis of exchanges for CBDCs.

As an organization created by central banks to regulate the international financial framework, BIS wrote that “AMM protocols could form the basis for a new generation of financial infrastructures facilitating the cross-border exchange of CBDCs.” Cecilia Skingsley, head of the innovation hub at BIS, added:

“This pioneering project pushes our CBDC research into innovative frontiers, incorporating some of the promising ideas of the DeFi ecosystem. Mariana also marks the first collaboration across Innovation Hub Centres; expect to see more in the future.”

BIS and the collaborating central banks have set a tentative date of mid-2023 for delivering a proof-of-concept. The financial institution was previously skeptical of digital assets due to their inherent price variance and lack of a unified regulatory framework. Nevertheless, BIS has praised elements of distributed ledger networks, such as their technological prowess relative to fiat money. According to a recent report authored by BIS, 90% of central banks worldwide are currently researching the utility of CBDCs. 

Update (Nov. 2, 5:32 pm UTC): This article has been updated to correct the spelling of the Bank for International Settlements and to correct a quote taken from its announcement.

CBDCs require governments to put a special focus on security

Any nation implementing a CBDC in the near future must make sure it’s ready to defend its digital assets and, most importantly, its private keys.

Today’s financial world is becoming increasingly digitized, and naturally, central banks want to adapt to the changing environment. The use of cash is rapidly declining. Globally, the rise of digital payment apps and COVID-19 have only accelerated the decline in cash usage, fueling interest in digital currencies and demand for easier payment solutions.

As crypto adoption continues to expand, the idea of central bank digital currencies (CBDCs) has also gained momentum. Governments across the world have been flirting with, and examining, the idea of issuing their own CBDCs, with a handful already launching.

It isn’t clear when CBDCs will become normalized. Don’t expect CBDCs to resemble Bitcoin’s (BTC) decentralized characteristics because, by definition, a central bank is a centralized entity. That being said, they can provide some of the same benefits, such as reducing payment verification times and providing proof of transaction. There are, however, still quite a few challenges to overcome.

Related: Built to fall? As the CBDC sun rises, stablecoins may catch a shadow

Among these challenges are the operational risks of the “cyber sphere.” While banks are accustomed to investing resources in safeguarding their “fiat” reserves, safeguarding digital currencies requires a different mindset. Blockchain technology has some inherent vulnerabilities — including anonymity and irreversibility — that can be exploited by clever scammers. Although, it’s not clear if CBDCs will leverage blockchain technology.

Could CBDCs potentially expose central banks to new types of cyber threats? And how would these potential threats or vulnerabilities manifest themselves?

Cybersecurity isn’t easy

Hackers have become increasingly sophisticated and brazen in their attacks over the last few years. Both traditional finance and blockchain protocols find themselves victims of malicious intent. In fact, Denmark’s central bank was hacked as part of the SolarWinds operation in late 2020. This should sound alarm bells for governments everywhere.

Imagine a group of dedicated hackers finds, penetrates and gains access to a backdoor that gives them control of the central bank’s private key. Private keys are the most important elements of a blockchain system, as any transactions conducted with the private key are registered by the system as valid and secure. At this point, the bulk — or a significant chunk — of the country’s treasury could effectively be held hostage by a criminal organization. The hacker could mint or burn digital currency at will.

An influx or reduction in a digital currency could affect the value of the genuine currency, have an impact on consumers through inflation, and lead to monetary losses for companies. A breach to this extent could be catastrophic and potentially lead to the devastation of the nation’s entire economy. Of course, an attack of this scale would be far too advanced for even some of the most talented criminal masterminds, but the threat cannot be dismissed. Such an attack would be unprecedented, so predicting the aftermath is anyone’s guess. But it wouldn’t be pretty: The world’s economic and political order and stability would, undoubtedly, be tested.

Clearly, any government would spend top dollar on cyber defenses to protect its newly established digital infrastructure. But simply investing an abundance of resources isn’t a guarantee against hacks. Naturally, any central bank launching a digital currency would be an attractive target.

So how can a country that is determined to launch its own CBDC protect its treasury from criminals trying to steal it?

Securing the national treasury

Disincentivizing malicious cyber attackers is no easy task — they are always on the lookout for new and rewarding targets while exploiting the slightest vulnerabilities. Crypto hackers are adept at identifying attack surfaces, exploiting them, injecting malicious code, and taking control of individuals’ and organizations’ private keys.

Banks invest millions, if not billions, each year to defend their databases and IT infrastructure. Various security layers are employed to protect against hackers, inside jobs or unintentional leakage of sensitive information. While banks are familiar with information security, safeguarding digital assets requires a vastly different approach than traditional assets.

If they decide to leverage blockchain, central banks must consider how existing banking frameworks can be adapted to blockchain’s distributed architecture, with extra attention paid to the system architecture, governance and consensus mechanisms.

When it comes to safeguarding a nation’s treasury, there is no such thing as “too secure.” In the case of CBDCs, banks must take great measures to protect and defend their private keys. Today’s custody solutions have come a long way, and yet, almost all of them suffer from the same deficit. Due to the anatomy of a blockchain transaction, all transactions must be conducted while connected to the internet at some point.

Related: US central bank digital currency commenters divided on benefits, unified in confusion

This connectivity is their single point of failure and the reason they cannot be 100% secure. It is suggested that governments find a “never internet-connected” solution to store and manage the private keys while issuing the CBDCs, providing custody and conducting on-chain settlements.

Most central banks are rightfully taking their time and conducting all the necessary due diligence to weigh the risks and rewards of CBDCs properly. Some may actually decide to push off their involvement, especially given the crypto market’s volatility. But any nation implementing a CBDC in the near future must make sure it’s ready to defend its digital assets and, most importantly, its private keys.

When it comes to blockchain, central banks should completely rethink everything they know about IT security needs. Only then can they launch their digital currencies with enough peace of mind.

Lior Lamesh is the co-founder and CEO of GK8, a blockchain cybersecurity company that offers a custodial solution for financial institutions. Having honed his skills in Israel’s elite cyber team reporting directly to the prime minister’s office, Lior led the company from its inception to a successful acquisition for $115 million in November 2021. In 2022, Forbes put Lior and his business partner Shahar Shamai on its 30 Under 30 List.