9-8-2023 (SHANGHAI) A new avenue to extend the influence of China’s digital yuan and other central bank digital currencies (CBDCs) is rapidly taking shape, prompting contemplation among proponents of a monetary system traditionally led by the US dollar.
Progress on the Beijing-backed digital prototype for cross-border money transfers, free from dependence on US banks, is proceeding at such a rapid pace that some European and American observers are now regarding it as a potential rival to dollar-centric payments in the realm of global finance.
Known as the mBridge project, this collaborative effort involves the participation of China, Thailand, Hong Kong, and the United Arab Emirates (UAE). Sources familiar with the initiative have indicated that a functional prototype of mBridge, which facilitates digital transactions across borders, could potentially materialise by the end of this year.
The mBridge initiative boasts a significant partnership with the Bank for International Settlements (BIS), headquartered in Switzerland, which acts as a nexus for global collaboration among central banks.
The implications of this endeavour are far-reaching. The US dollar features prominently in an estimated $6.6 trillion worth of daily foreign-exchange transactions. Further data from the BIS and the United Nations underscores that nearly half of the $32 trillion annual global trade is denominated in dollars.
The mBridge project holds the potential to enable the Chinese yuan to be employed as a credible alternative to the dollar for substantial corporate transactions through its digital iteration.
While the project’s public development commenced in 2017, some officials from the United States and Europe, who are closely monitoring its evolution, are expressing mounting concerns. They fear that mBridge could potentially grant Beijing an early advantage in deploying digital currencies to reshape cross-border wholesale payments.
Critics of a digital alternative to dollar-based settlement point to the risk of facilitating evasion of sanctions, taxes, and anti-money laundering regulations. They also express concerns about the possible fragmentation of global payment systems, which could exacerbate geopolitical tensions.
Josh Lipsky, the director of the GeoEconomics Center at the Atlantic Council, a prominent US think-tank, has noted that the progress of mBridge at the BIS has raised questions in Washington. Lipsky acknowledges that while this development may seem isolated, it aligns with China’s broader ambitions to reduce reliance on dollar-based settlement systems. He highlights that China, along with numerous other central banks, collaborates with the BIS due to the institution’s prominence in advanced research within this domain.
Ross Leckow, deputy head of the BIS Innovation Hub, which is overseeing the mBridge project, indicates that no definitive timeline exists for an operational system after the current phase of development. The subsequent step entails evaluating whether the prototype can evolve into a viable product.
The Hong Kong Monetary Authority asserts a shared objective of launching a minimum viable product in the following year. This initiative resonates with the G-20’s emphasis on experimenting with novel technologies to facilitate cost-effective and secure real-time cross-border payments and settlements.
A Time-Saving Endeavour
The Bank of Thailand commends the mBridge initiative for targeting the “pain points” in cross-border transfers. This commendation is echoed by the prospect of significantly reducing cross-border transfer durations for trade-finance transactions, potentially condensing them from several days to mere seconds. The initiative holds the promise of greater advantages for end-users and commercial banks with broader participation from different jurisdictions.
The People’s Bank of China and the Central Bank of the UAE have yet to respond to inquiries about the mBridge project.
mBridge is only one of several ongoing projects undertaken by central banks exploring the potential of digital currencies (CBDCs) to enhance cross-border payments. Despite the ongoing developmental strides, the feasibility of a comprehensive alternative to the correspondent banking system, which presently links financial institutions globally, remains a subject of uncertainty.
Nevertheless, the mBridge project has garnered recognition for its remarkable advancement. The International Monetary Fund (IMF) reportedly hosted discussions in April concerning the eventual oversight and control of this pivotal platform by an international organisation. These deliberations were initiated to prevent the project’s transformation from a technical solution into a geopolitical instrument, according to anonymous sources.
Federico Grinberg, a senior economist in the IMF’s monetary and capital markets department, clarifies that there is no intention to subject any existing platform to international control or supervision. He explains that the discussions held in April were primarily of a “technical” nature and did not pertain specifically to mBridge. Grinberg emphasises the IMF’s commitment to fostering broad engagement on the matter, particularly to benefit emerging and lower-income countries.
The Pursuit of Fluid Digital Transactions
The realm of digital currency transfers remains a burgeoning field of research, as moving funds across borders can still be a cumbersome process. These transfers necessitate a coordinated exchange of messages between private banks and central banks to initiate and confirm each step. While numerous transactions can be settled within an hour, certain transfers, particularly those involving smaller nations and currencies, can extend to days.
The widespread liquidity and relatively stable value of the dollar have engendered a global reliance on this currency. As a result, the US enjoys substantial economic and political advantages. This reliance mandates that a significant proportion of cross-border financial activities flow through US-regulated banks, subjecting them to US regulations, sanctions, and tax mandates.
Nevertheless, the process of moving dollars across borders is often intricate and time-consuming. Settlements are typically confined to US working hours and can be hindered by holidays in the involved nations. This presents an opening for platforms like mBridge to streamline these processes.
Proponents of mBridge envisage blockchain technology as a catalyst for transforming these transactions. A digital rail facilitated by blockchain could potentially expedite the cross-border movement of funds.
Focus on Trade Finance
The mBridge project places a particular emphasis on trade finance, aiming to address challenges in this arena. Approximately $564 billion worth of goods and services circulate among the participating entities, underscoring the economic magnitude of this initiative.
The project is designed to facilitate large transfers and foreign-exchange transactions directly between participating commercial banks. This is achieved after the banks exchange traditional currency for tokenised currency at their respective central banks. Employing distributed ledger technology akin to the foundation of Bitcoin, these transactions could be executed almost instantaneously, transcending temporal and geographic limitations.
Preliminary trials conducted in August and September of the previous year involved mBridge’s partners and commercial banks from the respective nations. The trial facilitated approximately 160 transactions, amounting to a total value of $22 million.
The operational mechanism of mBridge entails that a Chinese company could remunerate a UAE vendor by having its bank issue a digital e-yuan token through the People’s Bank of China on the mBridge blockchain. Subsequently, this token could be swiftly credited to the vendor’s bank in the UAE, and in turn, be converted into dirhams, the local currency.
The Technological Backbone
Clarification is sought regarding the technological underpinning of the mBridge project. While certain sources assert that the foundational blockchain is of Chinese origin, Ross Leckow contradicts this assertion. He emphasises that mBridge is a collaborative endeavour, incorporating input from the four central banks and the BIS. Leckow underscores that the project’s scalability relies on the collective contribution of all participants and is not the product of a singular entity.
Additionally, he highlights that each participating commercial bank adheres to relevant laws and regulations, including those related to taxation, money laundering, and sanctions enforcement. The project encompasses a total of 23 international.
