According to a recent Bloomberg report, the Bank for International Settlements (BIS) is evaluating the potential shutdown of Project mBridge, a cross-border CBDC payments platform developed in partnership with the central banks of China, Hong Kong, Thailand, and the UAE. Saudi Arabia joined the initiative when mBridge launched as a minimum viable product in June.
Sources indicated that the matter was discussed during last week’s International Monetary Fund (IMF) and World Bank meetings, amid concerns over Russia’s increasing interest in a similarly named project called BRICS Bridge.
During a Group of 30 event in Washington on Saturday, BIS General Manager Agustín Carstens emphasized, “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,” referencing the involvement of Russia and Iran, both members of BRICS+.
mBridge Functionality and China’s Involvement
mBridge facilitates cross-border payments for commercial banks via their central banks, utilizing wholesale central bank digital currencies (wCBDCs). Its design promotes direct local currency transactions, avoiding the need for US dollars.
Traditionally, banks utilize correspondent banks or maintain nostro accounts in foreign countries for cross-border payments, which can be costly due to capital tie-up. mBridge’s design offers significant savings by eliminating the need for nostro accounts or correspondent banking.
However, a challenge arises from the fact that the US dollar is often used as an intermediate currency due to optimal foreign exchange (FX) rates against it. Consequently, local currency transactions may yield less favorable FX rates, limiting their appeal.
The current landscape features 180 currencies, each with optimal rates against the dollar, resulting in 180 currency pairs with strong supply and demand. Directly converting currencies, however, involves 16,110 pairs, leading to thinner trading and less attractive rates.
An alternative could be selecting an intermediate currency other than the US dollar, but BRICS countries have shown little interest in pursuing this. This FX cost issue is critical to mBridge’s feasibility, as FX costs comprise a significant portion of cross-border payment expenses. While state-owned Chinese firms may feel compelled to use local currencies, other businesses will likely prioritize cost-effective options.
China leads the mBridge technical working group and has contributed proprietary components, including a blockchain consensus mechanism. Bloomberg’s coverage raised concerns regarding China’s prominent role in the project, particularly given that Hong Kong’s involvement, coupled with the UAE central bank representative’s previous tenure at the Hong Kong Monetary Authority, results in strong ties to China across three of the four central banks. However, mBridge originally emerged as a joint initiative between Hong Kong and Thailand, making its location at the Hong Kong BIS Innovation Hub and China’s involvement logical.
Debate around mBridge’s future is not unexpected. In April of this year, the BIS has launched Project Agorá, another cross-border CBDC project that supports correspondent banking and does not include any BRICS members.
At SIBOS last week, two key updates regarding mBridge highlighted the ongoing discussion surrounding its future. First, there were discussions about potentially integrating mBridge with SWIFT and possibly incorporating the US dollar in future plans. Second, there are intentions to open-source the mBridge software. While this could alleviate concerns regarding reliance on China, it may also simplify the process for sanctioned nations to develop their own versions without BIS involvement.
