mBridge Update
The world's most significant W-CBDC project gets an update
Source: DALL-E 3
The Bank for International Settlements Innovation Hub (BISIH) has released an update on the mBridge project. To recap, as outlined in a previous post, mBridge is a consequential wholesale Central Bank Digital Currency (W-CBDC) initiative involving the central banks of China, the UAE, Thailand, and Hong Kong. Among multilateral CBDC projects, mBridge and Project Dunbar are the most substantial. China's participation in mBridge is particularly significant given its economic prowess, pivotal role in international trade, and the advanced stage of its retail CBDC project, the e-CNY.
The mBridge project is poised to advance to the next phase, aiming to become a Minimum Viable Product ready for commercial release in 2024. The collaboration has expanded to include four founding central banks and 25 observing members, among which are notable institutions like the IMF and the World Bank.
Source: BISIH
Developments are accelerating with the e-CNY as it begins to be utilized in international trade, potentially challenging the dominance of the petrodollar in this space.
Last month, according to China Daily, PetroChina successfully executed the first crude oil transaction using the e-CNY, which was settled at the Shanghai Petroleum and Natural Gas Exchange (SHPGX). This follows the SHPGX's earlier settlements of two LNG trades in conventional yuan rather than e-CNY, involving transactions between France's Engie and the China National Offshore Oil Corporation (CNOOC), as well as between France's TotalEnergies and CNOOC.
Ledger Insights reported that the Bank of China and the First Abu Dhabi Bank, the UAE's largest bank, have entered into a cooperation agreement concerning digital currencies at a recent Belt and Road Summit. In August, the UAE—alongside Saudi Arabia, Iran, Ethiopia, Egypt, and Argentina—became a member of the BRICS group.
From my perspective, mBridge carries with it four key implications:
Sanctions
The geopolitical impact of mBridge is profound: it has the potential to enable trade beyond the traditional US/EU sphere, circumventing reliance on systems like SWIFT, which is based in Belgium. It is important to note that mBridge intends to adhere to international standards, including AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism) regulations.
Mr Richard Turrin, author of “Cashless”, an excellent book on the e-CNY which I wholeheartedly recommend, shared an intriguing post on LinkedIn:
MBridge's biggest impact will be on sanctions, as it sets up a decentralized blockchain (DLT) system that is sponsored by the supporting central banks and is not responsible for sanctions enforcement.
Each of the central banks supports a node on the platform and the platform simply transfers CBDCs between accounts. Sanctions are enforced by the individual commercial banks that use the system before they are put on the mBridge network. The users enforce sanctions, not the network!
Compare this with SWIFT which enforces sanctions on all network participants. Sanctions are built-in to the network, unlike mBridge. This is a revolution in payment transfers as the network is politically neutral.
I haven't found this detail in the report, but indications from the reports suggest mBridge has a decentralized governance structure, which corroborates this understanding.
Integration with China’s retail CBDC (R-CBDC) project, e-CNY
China is currently at the forefront of retail Central Bank Digital Currency (R-CBDC) with its e-CNY project. This year, in a pilot in Changshu, Jiangsu, government employees were paid with e-CNY. Additionally, a SIM card-based hard wallet compatible with the e-CNY app was launched, facilitating offline transactions.
For Chinese financial institutions, the mBridge project would serve as a strategic extension to the domestic e-CNY system, providing a holistic approach to managing liquidity. It would facilitate streamlined cross-border transactions, foster a unified infrastructure for both domestic and international finance, and possibly enhance policy formulation through shared insights between W-CBDC and R-CBDC environments.
DLT-based and EVM-compatible
The recent update reveals that mBridge utilizes a specialized, permissioned Distributed Ledger Technology (DLT) known as the mBridge Ledger (mBL), designed for instantaneous peer-to-peer and atomic cross-border payments and FX transactions using wholesale CBDCs. Notably, this DLT is EVM-compatible, employing Solidity for smart contract development.
Let's pause to recognize the magnitude of this: DLT is at the core of what is arguably the world's leading W-CBDC project, and elements of Ethereum technology are integral to its architecture.
Aren’t you glad you learned Solidity now?
It's a formidable nod to DLT's capabilities and the influence of open-source innovation, illustrating how cryptocurrency's pioneering technologies are integrating into the sphere of regulated finance.
The adoption of such technologies isn't just about the present; it's about setting a precedent. COBOL's integration into early banking systems, a language that continues to underpin mainframe computing, demonstrates the lasting impact of such decisions. Today's choice of DLT and smart contract languages like Solidity could dictate the future pathways of these global platforms in regulated finance.
Solving the cross-border payments quagmire
Cross-border payments were described by the CPMI recently as ‘slow, expensive, opaque and difficult to access for many users’. Estimates by Oliver Wyman and JP Morgan suggest that mCBDCs have the potential to significantly reduce the annual transaction costs of cross-border payments from $120 billion to $20 billion.
The existing cross-border payment framework, reliant on correspondent banking, is in dire need of modernization. A bank-to-bank, peer-to-peer payment system presents a logical progression. Through mCBDC systems like mBridge, cross-border payments could become quicker, more secure, and less costly.
Conclusion
The development of mCBDC projects like mBridge signifies a pivotal shift toward a more multipolar world order, underscoring a period of significant transformation in global affairs. As mBridge progresses and converges with the established conventions of international finance, it has the potential to foster the creation of an entirely new ecosystem—one underpinned by DLT.
