Just as Project mBridge goes from pilot to live deployment, it risks being tripped up by misinformation.
Trouble began at a recent summit for BRICS nations hosted in Kazan, Russia. The Russian president, Vladimir Putin, pushed for the group to back a ‘BRICS Bridge’, an imagined cross-border payment platform.
Putin’s terminology was deliberate, as it obviously referenced mBridge, whose founding quartet of central banks and monetary authorities are from China, Hong Kong, Thailand and the United Arab Emirates, with coordination provided by the Bank of International Settlements.
Russia is not a part of mBridge. The participation of BIS, of which Russia is not a member, ensures its exclusion. But some media outlets, including ‘trad-media’ Bloomberg and ‘crypto media’ Coindesk, muddied the waters by reporting that the BIS might exit the project, out of fears it is being used to subvert US-led financial sanctions against Russia. The mBridge project was also conflated with vacuous calls within BRICS countries for their own currency.
The language of these articles elides mBridge with Putin’s remarks and BRICS currency fantasies, insinuating connections that do not exist.
The articles do raise a legitimate question, though: should Western policymakers view mBridge as a threat?
Today’s pain points
Let’s take a step back. The issues in cross-border payments that mBridge addresses are common, particularly for low-income countries that aren’t well covered by correspondent banking networks. There are many entities competing to solve these problems, including commercial banks, fintech companies, and crypto startups.
Correspondent banking enables a seller in one country to get paid for goods or services by a buyer somewhere else. In theory, a buyer’s bank can send a payment straight to the seller’s bank, using SWIFT messages to communicate all the details of the transaction. The sender bank must initiate some compliance checks first, though, to prevent money laundering or terrorist financing. That adds cost and slows things down, but it’s not a big deal when representing well-known corporate customers.
Even within the developed world, though, those two banks may not have a direct relationship, and will rely on a third bank to connect them. And in smaller markets, the numbers of intermediary banks can be several. Each one must replicate all of those compliance procedures. The fees and the time add up. And for companies or banks that can’t easily access dollars, the FX costs on top can be considerable. Many parts of the world are effectively cut off from cross-border payments.
Governments like those in Beijing and Moscow may have their political drivers for reducing their reliance on SWIFT-enabled payments, which is subject to US power, including sanctions and confiscation of assets.
But there are also lots of companies and banks that need a better solution than the status quo.
Tech-driven solutions
Digital technology has given rise to many attempts to build businesses that want to solve for these frictions. SWIFT itself is upgrading its tech to be faster and cheaper, but it preserves the correspondent model, with its stacks of compliance costs. In Southeast Asia and India, governments are trying to connect domestic payment rails using mobile wallets and QR codes – but so far this mostly serves travelers and remittances.
There is the nebula of fintech payment players, all overlapping, some connecting companies, tech platforms, and banks, others getting lots of local licenses to reach the last mile. They seek to improve the status quo.
The biggest challenges come from blockchain technology. Some like Ripple want to use native payment tokens to move value among users. Telegram is using its crypto token, Ton, to facilitate peer-to-peer payments among users of the messaging app.
Recently, the action has moved to stablecoins, which were invented to park crypto money in instruments tied to the dollar or other underliers. Many payments companies are experimenting with using stablecoins to move money peer-to-peer, enabling an exit on either end into fiat. Stablecoins represent USD onchain, a sort of Eurodollar, which if regulated (with regard to things like reserves and transparency) could end up extending the influence of the greenback – although not necessarily the power of the Federal Reserve or the US Treasury.
Meanwhile, commercial banks are advancing tokenized payments, to ensure the deposits that back their fractional-reserve models can also thrive in a ‘Web3’ world.
CBDC projects
And finally we come to central-bank digital currencies. Many countries are trialing these. China is pushing domestic retail CBDCs, the eRMB, but it is an outlier: most countries regard wholesale, cross-border payments as the only worthy use of CBDCs.
There have been several BIS-supported pilots to use distributed-ledger technology to facilitate payments using multiple CBDCs: Project Jura (France and Switzerland), Project Dunbar (Singapore, Malaysia, Australia and South Africa), and mBridge. But of these, only mBridge is now live.
It is also the one whose technical design was drawn by the People’s Bank of China, via a unit called the Digital Currency Institute.
This has drawn the attention of people in Washington, DC, and presents a political vulnerability for mBridge. A Chinese-designed DLT platform for P2P payments that avoid correspondent banks looks to many in the US like a tool to evade sanctions.
The technology can be used that way – let’s be honest. But there’s more to mBridge. (And there are other ways to avoid sanctions.)
How mBridge works
China’s infrastructure is a permissioned DLT whose members include central banks and national commercial banks. Only the central banks participate in the blockchain’s consensus process, operating validator nodes. (The commercial banks’ nodes merely update their ledgers.)
Importantly, each central bank relies on its own databases to compute and store data. They run their own systems.
This is distributed-ledger tech at its most logical: it is a means of enabling trust among players that don’t otherwise trust one another. The mBridge participants have drawn up legal documentation to provide those banks with certain rights and obligations in the system, but the operations are mostly run by smart contracts.
The next step, which mBridge participants say they are working on, is deploying zero-knowledge proofs, a cryptographic means of validating information without showing it. This will enhance trust and make it possible to connect mBridge to other DLT platforms, or even SWIFT.
Dollar relevance?
Is mBridge a Trojan Horse for the renminbi to displace the dollar? Not necessarily. The platform provides payment-versus-payment among local currencies. But it’s currency-neutral, and the project members are working on solving for FX costs. That would make mBridge more attractive to commercial banks facilitating transactions – but they would still in many cases prefer to do so in dollars. Ditto for using mBridge CBDCs to settle securities transactions conducted onchain.
The existence of mBridge doesn’t change the efficiencies of using dollars. Nor does it address the underlying reasons for ongoing dollar demand: national balances of payments. China needs dollars to maintain its export economy. Were it to boost domestic consumption, or were the US to impose capital controls, things might change. But Chinese demand to invest its surpluses in open capital markets leads it time and again back to US financial assets, and that means dollars.
Similarly, although China and its partners may price oil or other goods in renminbi as a political gesture, the closed nature of China’s capital account means there is very little international use for renminbi, other than barter. Project mBridge doesn’t change this reality.
Undermining the BIS
In today’s heated environment, it’s understandable why some people in the US fear mBridge. It’s a Chinese design, it can avoid Western sanctions, and it fosters the use of native currencies. If more countries join, and as mBridge extends into supporting local payment regimes and public blockchain networks, it could eventually grow into a serious competitor to the SWIFT-based correspondent banking system. In this strange Cold War, where it’s ‘hot’ in Ukraine, finance is another battlefront, one where the US will naturally want to maintain its advantage.
Forcing the BIS to disown the project would be one way to hobble it now, before it metastasizes into a real threat. Without the BIS, it would be harder to attract more central banks. This wouldn’t kill mBridge, but it would limit its reach and cap its liquidity.
But the US should consider the second-order effects of doing so. If mBridge gains traction, it won’t be because of geopolitics. It will be because it solves real pain points in correspondent banking. MBridge delivers instant payment, without the need for processing, duplicative compliance checks, or pre-funding of trades. Smart contracts can automate monitoring and reporting. Commercial banks can better manage their cash flows and liquidity. They can provide access to many customers in poorer nations for whom the status quo is prohibitively expensive. The platform could support future commercial initiatives.
Simply defending the status quo isn’t feasible when such options are available. Other CBDC projects could emerge from anywhere. Already millions of people rely on Tether dollar-fixed stablecoins for cross-border remittances – is this the direction the US wants to go?
America’s options
Blockchain technology is available to everyone. Its use can be driven underground, but so long as the status quo is a bad deal for enough people, they will seek alternatives.
The US could make two choices besides trying to suppress mBridge. First, it could work with the blockchain industry to regulate stablecoins or tokenized deposits, and push these as the optimal tools. This has a lot of merit, as it would support private-sector initiatives. The private sector will always react to commercial needs better than a group of central banks. Stablecoins or tokenized deposits regulated for safety and transparency in reserves can win trust. Washington would have to accept that dollar stables are beyond its immediate regulatory reach, much as Eurodollars are, but it would sustain global demand for dollars. (Whether this is actually in the US interest is a separate debate.)
The second option – admittedly, not a realistic one – is to apply to join mBridge! Call Beijing’s bluff! Okay, that’s not going to happen. But the US could simply see mBridge for what it is: a solution that many countries will want, so even though mBridge has features that make the US uncomfortable, opposing it will probably just make other countries keener to use it.
Decentralized, like it or not
Let’s close. We are in a new Cold War, but it is hard to understand what’s going on for two reasons.
First, unlike the US-Soviet competition, the US and China remain heavily integrated. Both sides are trying to disentangle themselves from depending on the other, be it for dollars or semiconductors or rare-earth metals. But the more they rearrange supply chains, the costlier it gets.
Second, there is a lot more room for mid-tier powers to carve their own path. In the first Cold War, other countries got sucked into the Russian or the American bloc, like it or not. Today these countries have more latitude. They form shifting groups as suits their immediate needs. BRICS is one, mBridge is another, but some shared members doesn’t make them the same. It’s also natural they look to tools that support decentralization, such as blockchain; they don’t need either the US or China to do so.
This is the world the West lives in. It requires looking at each moving part on its own; nuanced policymaking can become a competitive advantage. A group or activity may seem like a friend or a foe, but extrapolating that to the national level is impossible: the UAE is part of mBridge, and it relies on the US military for security; and it’s part of BRICS, along with its enemy, Iran. Simple good/bad labels cannot apply.
The challenges of complexity apply to China as well as to the West. It’s not Bloomberg that landed mBridge in political trouble: it was Putin! The PBoC can’t be happy with the Russian president’s attempt to tie mBridge to his reckless agenda. With friends like these…
