The Rise of mBridge: How CBDCs Could Challenge SWIFT and the Dollar’s Dominance

The Rise of mBridge: The two countries’ central banks agreed on Tuesday to increase cooperation and facilitate cross-border transactions in local currencies.

Every month, nations take steps to avoid using the dollar in bilateral commerce. Last week, India and Nigeria reached a similar deal.

De-dollarization is a fact, as the Russian president reiterated during his recent official visit to China. Check out our article, “Putin cuts a dollar short.”

Little information has surfaced about how the two Asian countries want to facilitate trade. We do know that Thailand and China are collaborating on the mBridge project (which involves building many CBDC bridges).

Some believe that the international CBDC transaction project has the potential to shatter the SWIFT network’s monopoly. The Bank for International Settlements (BIS) collaborates with China, Hong Kong, Thailand, and the United Arab Emirates central banks on this project.

China is concerned about its economy’s reliance on Western-controlled payment networks. Remember that Iran and Russia were isolated from the SWIFT network. Two countries are openly hostile to the dollar.

Some may wonder why China is working on the mBridge project when they have already used the CIPS (China’s Cross-border Interbank Payment System).

CPIS has grown at an accelerated rate since its inception in 2015. 2023 it processed over 123 trillion yuan, up from 2 trillion in 2017 to 10 trillion in 2021. It already connects over 1,500 banks across 114 countries.

CIPS, being a yuan payment system, does not (yet) threaten the SWIFT network’s monopoly. SWIFT is a more global communications system that acts as an intermediate for payment systems based on national currencies. It is used by more than 11,000 banks worldwide.

The mBridge project attempts to develop an international payment network in CBDCs that eliminates the requirement for a messaging system such as SWIFT. Banks would communicate directly with their central bank. In China, mBridge is integrated with the e-CNY CBDC system.

Some US officials are concerned that the mBridge network will give Beijing an advantage in leveraging CBDCs to modernize international payments.

The United States is concerned that other currencies would overshadow the dollar, accounting for half of the nearly 32 trillion dollars exchanged internationally annually.

According to Josh Lipsky, head of the GeoEconomics Center at the American think tank Atlantic Council, the fact that mBridge is being developed under the aegis of the BIS raises concerns in Washington. China is rapidly abandoning the dollar.

Two sources with direct knowledge of the project confirm that the initiative’s technological foundation is a Chinese-built blockchain. It specifically employs Ethereum’s Solidity smart contract language.

Its purpose is to compete with the existing system. Payments now occur in two stages: the message and money movement. For example, if I wish to pay someone in China, my bank must have a Chinese bank account (Nostro) and send a fast message requesting payment to the recipient.

After receiving the communication, the Chinese bank transfers the funds to the beneficiary, usually in another bank. A national Chinese transfer is required as a third step in this situation.

Furthermore, if my bank does not have a Nostro account with a Chinese bank, the payment will have to be routed through another bank with a Chinese account, incurring additional fees and requiring a fourth step.

With mBridge, banks will no longer require a bank account in a Chinese bank. Banks would immediately acquire e-CNY (yuan CBDC) on mBridge and transfer it to the Chinese recipient’s bank.

Eliminating messages means banks no longer need to keep foreign accounts stocked with liquidity, lowering the cost of cross-border transactions.

For it to work, mBridge’s exchange rates must be extremely competitive. If not, the savings made on Nostro accounts would be reversed.

However, competitive exchange rates necessitate large volumes. This is one reason why the dollar is so important to the international monetary system.

Since the Bretton Woods agreements, the dollar has been the global standard against which all other currencies are measured. When a Peruvian corporation transfers funds to a Kazakh client, the transaction is not completed using a Sol/Tenge pair. The sol is first changed into dollars, then converted to tenge.

It isn’t easy to see how mBridge and low-volume CBDCs may revolutionize international payments.

In contrast, Bitcoin is a prospective standard with tremendous volumes. According to unchained, they have accounted for the equivalent of $25 billion in the last 24 hours.

Bitcoin has the significant advantage of being both a currency and a payment mechanism—two in one. Furthermore, due to its decentralization, it is a stateless system, which is an important parameter. Who says mBridge won’t be utilized for political reasons as well?

Central banks may struggle to keep control over international payments, but it is unlikely that they can outperform Bitcoin, a technological marvel.

And, with current severe geopolitical tensions escalating into a trade war, the globe requires a global payment system impervious to political whims more than ever. Not CBDCs.

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