China leads race to modernise global money flows

China leads race to modernise global money flows

mBridge digital currency project could greatly reduce reliance on US dollar and US banks

A sign indicating the acceptance of digital yuan (e-CNY) is seen at a shopping mall in Shanghai. (Photo: Reuters)
A sign indicating the acceptance of digital yuan (e-CNY) is seen at a shopping mall in Shanghai. (Photo: Reuters)

A new platform to expand the reach of China’s digital yuan and other central bank digital currencies is moving closer to reality, raising eyebrows among some defenders of a system long dominated by the US dollar.

The Beijing-backed digital prototype for sending money around the world without relying on US banks is advancing so quickly that some European and American observers now view it as an emerging challenger to dollar-denominated payments in global finance.

The mBridge project, which is being developed by China, Thailand, Hong Kong and the United Arab Emirates, will likely have a basic working product ready by year-end, four people familiar with the initiative said. 

mBridge is a joint effort with the Switzerland-based Bank for International Settlements (BIS) — a hub of global central-bank collaboration.

The stakes are enormous. The dollar features in an estimated $6.6 trillion worth of foreign-exchange transactions every day, while half of the approximately $32 trillion in global trade each year is invoiced in dollars, according to data from the BIS and the United Nations.

mBridge could eventually make it easier for the Chinese yuan to be used as a dollar alternative by enabling its digital form to settle large corporate transactions.

While the platform has been under development publicly since 2017, some American and European officials who monitor it are increasingly worried that it will help give Beijing a head start using digital currencies to revolutionise wholesale payments across borders.

A digital alternative to dollar-based settlement, critics say, could make it easier to evade sanctions, taxes and rules on money laundering, while fragmenting global payments into competing systems that further stoke geopolitical tensions.

Josh Lipsky, director of the GeoEconomics Center at the Atlantic Council, a US think-tank, said it has “raised eyebrows” in Washington that mBridge is taking shape at the BIS.

“Taken in isolation it may seem strange because this project raises questions about China’s ambitions to reduce reliance on dollar-based settlement systems,” Lipsky said. “But China, like dozens of other central banks, is working with the BIS because this is where some of the most advanced research in the field is happening.”

Ross Leckow, deputy head of the BIS Innovation Hub, which is coordinating the project, said there is no timeline yet for an operational system after the current stage of development. The next step, he said, is to see if the prototype can turn into a minimum viable product.

The Hong Kong Monetary Authority said there is a shared goal of launching a minimum viable product next year, adding that the effort builds on the “G-20 priority to experiment with using new technologies to deliver cheaper and safer real-time cross-border payments and settlements”.

Days vs seconds

The Bank of Thailand has praised the initiative’s goal of addressing “pain points” in cross-border transfers. It said mBridge could reduce cross-border transfer times for trade-finance transactions from as many as five days to “several seconds”, according to an e-mailed response to questions from Bloomberg. It would also “offer more benefit to end-users and commercial banks if there are more participating jurisdictions to join”.

The People’s Bank of China did not respond to written questions about mBridge, nor did the Central Bank of the UAE offer a response.

mBridge is among at least six ongoing projects at central banks examining how digital currencies, also referred to as CBDCs, could be used to improve cross-border payments. Even as development ploughs ahead, their viability as a comprehensive alternative to the correspondent banking system that now links lenders around the world remains in doubt.

Even so, mBridge is considered so advanced that the International Monetary Fund hosted discussions in April on how to bring such a critical platform eventually under the control and supervision of an international organisation, according to people familiar with the matter, who asked not to be identified discussing private information.

The IMF wants to avoid having the project morph from a technical solution to a geopolitical tool, one of the people said.

Federico Grinberg, a senior economist in the IMF’s monetary and capital markets department, said it was not planning on bringing any existing platform under international control or supervision, adding that the April discussions were “technical” in nature and did not refer to mBridge specifically.

“The IMF considers it essential that its wide membership is involved in this discussion given the disproportionate benefits of improving cross-border payments for emerging and lower-income countries,” he said.

The flow of digital money is a hot area of research because it can still be cumbersome to move funds over borders. Transfers require an orchestrated set of messages between private banks and central banks initiating and then confirming each step in the process. While many such transactions can settle within an hour, some can take days, especially if they involve smaller countries and currencies.

Because of the dollar’s liquidity and relatively stable value, companies around the world rely heavily on the greenback.

That affords the US significant economic and political advantages. Among other things, it means that an enormous proportion of cross-border financial flows must pass through banks licensed in the US that are subject to US regulation, its sanctions regime and tax system.

But moving dollars over borders is just as clunky, if not clunkier, as other transfers. Settlement typically happens during US working hours and can be held up by a holiday in any of the involved countries, providing an opening for a platform like mBridge — a name that refers to a multiple CBDC bridge.

The argument is that if the transactions happened on a digital rail enabled by blockchain technology, it could all be much easier.

Trade finance role

The mBridge project report says trade financing is among the biggest planned uses, with about $564 billion worth of goods and services flowing among the participants.

It is aimed at enabling large transfers and foreign-exchange deals directly between participating commercial banks after they have exchanged cash for tokenised currency at their central bank. And by using distributed ledger technology — similar to the foundation on which Bitcoin operates — those transactions could happen almost instantly, any time or day of the week.

In August and September of last year, mBridge’s partners and commercial banks in their respective countries conducted a pilot trial facilitating about 160 transactions totalling $22 million in value, according to the latest project report.

Using the system, a company in China could pay a vendor in the UAE by having its bank issue a digital e-yuan token through the People’s Bank of China on the mBridge blockchain, or ledger. There, this token could then within mere seconds be credited to the vendor’s bank in the UAE, which would in turn credit the vendor’s account with dirham, the local currency.

According to two people with direct knowledge of the project, the technological backbone of mBridge is a Chinese-built blockchain.

Leckow disputed that assertion, saying the project is a collective effort and “several distributed ledgers were created with input from the four central banks” and the BIS. The application “would not be scalable by any one single party without participation from the others”, he added.

He also said “each participant commercial bank involved in testing on the mBridge platform is obliged to comply with applicable laws and regulations, including those related to tax compliance, money laundering and sanctions enforcement.” The project has a total of 23 international observers, including the US Federal Reserve and the European Central Bank, according to the BIS.

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