October 31, 2024

By Our Correspondent

Bloomberg reported yesterday that the Bank for International Settlements (BIS) is contemplating the potential termination of Project mBridge, a cross-border central bank digital currency (CBDC) payments platform developed in partnership with the central banks of China, Hong Kong, Thailand, and the UAE. Saudi Arabia joined the initiative in June, coinciding with the launch of mBridge as a minimum viable product. Sources cited by Bloomberg indicated that this matter was addressed during last week’s meetings of the International Monetary Fund (IMF) and the World Bank.

A significant concern is Russia’s persistent interest in creating a similarly named BRICS Bridge. During a Group of 30 event in Washington on Saturday, BIS General Manager Agustín Carstens stated, “we cannot directly support any project for the BRICS because we cannot operate with countries that are subject to sanctions — I want to be very clear about that.”

Both Russia and Iran are members of BRICS+. Design of mBridge facilitates cross-border payments for commercial banks through their central banks, utilizing wholesale central bank digital currencies (wCBDCs). This design promotes direct payments in local currencies, thereby avoiding the necessity of using US dollars. In the realm of cross-border payments, banks typically rely on correspondent banks or maintain nostro accounts at the destination, which can be costly due to the capital they require. Consequently, the mBridge design presents both advantages and disadvantages.

A primary benefit is that banks are not required to maintain nostro accounts at the destination or engage in correspondent banking, resulting in significant cost savings. Conversely, a major reason for the prevalent use of the US dollar as an intermediary currency is that nearly all currencies achieve their optimal foreign exchange rates against the dollar. This implies that local currency payments may involve less favorable exchange rates, which explains their limited adoption thus far.

China leads the mBridge technical working group and has developed several proprietary components, including a unique blockchain consensus mechanism. A Bloomberg article expressed concerns regarding China’s significant involvement in the project. This involvement is further amplified by Hong Kong’s participation and the fact that the representative from the UAE’s central bank has spent a considerable portion of his career at the Hong Kong Monetary Authority. Consequently, three out of the four central banks have strong connections to China. Nevertheless, the initiative originated as a collaboration between Hong Kong and Thailand, making its establishment at the Hong Kong BIS Innovation Hub and China’s involvement logical.

The ongoing debate surrounding this topic is not unexpected. It is believed that there are many challenges faced by the BIS, concluding that if mBridge demonstrates its viability, the central banks may choose to move forward with or without the BIS, contingent upon their agreements with the organization.