mBridge: The Cross-Border Settlement System Handed Over to Central Banks of China, the UAE, Hong Kong, Saudi Arabia, and Thailand

This year's BRICS Summit in Kazan saw many discussions on members using local currencies to settle trade, but it disappointed those waiting

Bank for International Settlements mBridge Cross-Border Settlement System Handed Over To Participating Central Banks

The Bank for International Settlements (BIS) has officially handed over the reins of its mBridge cross-border settlement system to the central banks of China, the United Arab Emirates (UAE), Hong Kong, Saudi Arabia, and Thailand, marking a significant milestone in their efforts to streamline international payments.

This move comes just a week after the BRICS (Brazil, Russia, India, China, and South Africa) Summit in Kazan, where member states expressed a keen interest in establishing their own independent payment system. While the handover of mBridge is not directly linked to BRICS, the timing and the involvement of three BRICS central banks in the working group have certainly raised eyebrows.

mBridge is a blockchain-based cross-border payment system that enables central banks to tokenize their CBDCs and use them for atomic settlement. This system aims to significantly reduce the time and costs associated with cross-border payments while enhancing efficiency.

China played a leading role in the mBridge working group, and recently, there have been reports of plans to open-source the blockchain-based software used in the system. This decision could further facilitate the adoption and integration of mBridge by other central banks and payment networks.

As three of the central banks involved in mBridge (China, the UAE, and Saudi Arabia) are also members of BRICS, the possibility of mBridge serving as a foundation for a BRICS payment system cannot be entirely dismissed.

However, BIS boss Agustín Carstens has categorically denied any suggestion that the bank is withdrawing due to links to BRICS, stating that the decision was made because the project is now mature enough to be handed over.

“mBridge is not the BRICS Bridge, and I have to say that categorically. mBridge was not created to cater (to) the needs of BRICS. It was put together to satisfy broad central bank necessities,” Carstens asserted.

During his speech at the Santander International Banking Conference, Carstens also addressed the importance of ensuring that any projects undertaken by the BIS do not facilitate the violation of sanctions.

“Whatever projects we put together should not be a conduit to violate sanctions,” he stated.

BRICS members have been discussing the need for an alternative payment system and de-dollarization since around 2010. However, these calls have become more urgent following Russia’s invasion of Ukraine and the subsequent imposition of sanctions by the United States and its allies.

Russian President Vladimir Putin has strongly condemned the freezing of $300 billion of his country’s currency reserves, describing it as “theft.” He has also warned that the United States will regret using its currency and the payment system it largely controls as a weapon, predicting that it will accelerate the process of de-dollarization.

Considering the strained relationship between the United States and China in recent years and their ongoing tit-for-tat trade war, BRICS has at least two influential members who stand to benefit greatly from an alternative payment system.

With China already being the largest economy in the world on a GDP PPP basis, the successful launch of an alternative payment system to challenge SWIFT and the use of USD in international trade would pose a significant challenge to U.S. power.

While BRICS members have openly stated their goal to de-dollarize, the greenback is expected to continue playing a crucial role in international trade for the foreseeable future.

The United States boasts the deepest capital markets, and the USD is still involved in 90% of all FX transactions. Additionally, central banks hold approximately 46% of all reserves in USD, making it the undisputed king of currencies.

China, Russia, and other BRICS members have a long way to go before any of their currencies can challenge the dollar in a meaningful way. Nevertheless, any independence they can achieve in this regard will contribute to their efforts to fully de-dollarize and neutralize the ability of the West to impose sanctions or dictate terms in international commerce and trade.

Although the complete de-dollarization process may take an extended period of time, BRICS members are steadily advancing towards this goal, and the pace of their march is likely to accelerate in the years to come.