The exponential growth of central bank digital currencies (CBDCs) and digital assets has highlighted the need for interoperability to address concerns such as privacy, security, and compatibility. The challenge lies in developing standards that create a level playing field for new entrants, maintain privacy, and ensure compatibility with existing systems. Without addressing the problem of “interoperability,” the risk of emerging digital asset “silos” becomes apparent.
Jennifer O’Rourke, Executive Director of Innovation Strategy at the Depository Trust and Clearing Corporation, emphasized the importance of interoperability in the harmonized global adoption of digital ledger technologies (DLTs). Interoperability involves the sharing and coordination of disparate data across multiple participants.
The discussion on digital currency interoperability included insights from Federico Grinberg (Senior Economist, International Monetary Fund), Tony McLaughlin (Head of Emerging Payments and Business Development, Citi), Tom Zschach (Chief Innovation Officer, SWIFT), and Jordan Bleicher (Senior Advisor to the Under Secretary for Domestic Finance, US Treasury Department).
Importance of Interoperability:
Interoperability is crucial for avoiding a world of digital asset “silos” that cannot communicate, leading to high transaction costs and limited gains from trade.
Achieving interoperability provides a middle path, preventing a scenario of monopoly rents, limited competition, and stagnation.
Challenges of Achieving Interoperability:
Distributed ledger technology (DLT) was originally created as the opposite of regulated financial services, making its application to regulated spaces challenging.
Existing networks are predominantly single-asset networks, creating fragmentation, and finding ways to connect them is essential.
Addressing Regulatory Challenges:
The need to discard certain fundamental blockchain constructs to apply DLT to regulated spaces.
Industry should address problems related to interoperability and access standards promptly, as some organizations and governments are already moving forward with their solutions.
Approach Toward Interoperability:
Consensus on settlement venues should lead the conversation on regulatory frameworks instead of allowing technology to take the lead.
Industry should proactively address interoperability and access standards to prevent the digital divide across countries.
Leverage existing institutions such as the Group of Seven (G7), the Group of Twenty (G20), and the Financial Stability Board to fill regulatory gaps and develop new standards.
As the digital currency landscape evolves, achieving interoperability becomes a critical aspect to ensure efficient, secure, and interconnected financial systems globally. The discussion highlights the collaborative effort required from industry, regulators, and international organizations to navigate the future of digital currencies successfully.
