MBRIDGE AND THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE

(Part 1 of 2)

Jennifer Montoya Madrigal[1] , OBELA[2] .

The financial architecture is undergoing a process of transformation. With the weakening and loss of confidence in the US dollar, the President of the People's Bank of China said on 23 March 2009 that the world needed a new reserve currency, given the instability of that currency in the foreign exchange market, as a result of the crisis of September 2008. The Chinese Government called for a new international reserve currency, once again, in 2013 after public fiscal impasses in the US Congress.  

The result was a project at the Bank for International Settlements (BIS) to study a multi-currency international reserve mechanism that would allow trade, mainly in non-Western blocs such as the BRICS and ASEAN. In this context, the mBridge Project emerged in 2021. Participants included the Bank for International Settlements (BIS) Innovation Hub, the central banks of China (PBOC), Hong Kong (HKMA), Thailand (BOT) and the United Arab Emirates (CBUAE). The project, with its potential to revolutionise cross-border transactions, aims to facilitate real-time cross-border transactions through Central Bank Digital Currencies (CBDCs). This article will present the mBridge project.[3] , how it works and its evolution to date, and the possibility of its use in Latin America.

mBridge is a platform for real-time cross-border payments via CBDC between central banks and some commercial banks. It provides infrastructure for central banks to create their own CBDC. The platform eliminates the need for traditional systems, such as SWIFT, thereby reducing transaction costs, credit and exchange rate risk and speeding up operations from days to seconds. As the principle of monetary sovereignty governs it, it would allow countries to avoid sanctions on dollar transactions.  

The project has gone through several phases. The first was the Inthanon Project, carried out from 2017 to 2019 by the BOT. The objective was to modernise the Thai interbank system through Corda technology (based on blockchain), which enabled high-value settlements with CBDC (wholesale) only between banks and regulated entities within Thailand. The project completed testing in 2019 and was declared victorious, but did not go into production because the Thai central bank decided to take it to an international scale. 

In the second phase, central banks used previous lessons, and the BOT partnered with the HKMA to conduct bilateral transactions. In 2019, they launched the Inthanon-LionRock Project. The objective was to create the first cross-border payment system based on CBDCs, without intermediaries between the Thai baht and the Hong Kong dollar (e-THB and e-HKD), using hybrid blockchain technology. The completed tests in 2021 showed a transaction cost reduction of between 50% and 70%, achieved instantly through direct currency conversion. 

The success of Phase 2 demonstrated the possibility of multilateral transactions at the global level. It led to Phase 3, the mBridge Project, properly speaking, which would now move from being a tool for bilateral payments to a new global financial infrastructure not directly linked to the West. In 2021, the People's Bank of China (PBOC), the Central Bank of the United Arab Emirates (CBUAE) and the BIS joined the project. The latter played an important role, as it made its infrastructure and research from the HUB Innovation centre available to the project. This collaborative effort also helped to design the network's operating rules, which prevented any one country from dominating the project.

In 2021, the central banks of the mBridge, the BIS and 20 commercial banks began technical testing. They evaluated the digital currency exchange infrastructure on a new multi-currency platform using transactions carried out between commercial banks through the four CBDCs. All four central banks agreed in advance on conversion rates, availability in digital currencies and compliance with clauses (Smart Contracts). The approved security mechanism was the use of unique cryptographic fingerprints (hash) for each transaction, which are unmodifiable after the transaction, allowing participants to track any operation without revealing sensitive details. In the case of commercial banks, they had to be authorised by the member central bank, have a digital wallet (node) on the mBridge network and CBDC availability at their central bank. In addition, to increase transparency and showcase the project, other central banks and financial institutions were invited as observers.

The pilot phase began in 2022, testing real-life cross-border payments between companies and bank settlements. These included interbank transactions (bank-to-bank without the need for correspondent accounts or clearing houses), commercial payments (between companies and suppliers) and automatic currency conversions (spot FX without the dollar as an intermediary currency).

In 2023, the project consolidated as an Advanced Multilateral Pilot. In June, it was declared at the Minimum Viable Product (MVP) stage, when it completed commercial transactions and proved to be a feasible system. By the end of 2023, more than 12 million USD had been created on the platform, facilitating more than 160 transactions worth over 22 million USD. In 2024, the Central Bank of Saudi Arabia (SAMA) joined, and Russia might participate in the future. On behalf of its corporate customers using CBDCs issued on the mBridge platform by their respective central banks. The pilot promotes multi-CBDC experimentation by establishing real value directly on the platform and behalf of corporate customers. 

In conclusion, mBridge is the first operational project for international payments based on CBDCs. However, the volume of transactions is still limited and does not allow for large-scale transactions. Given that each country's regulations are different, central banks must adapt the platform to have a greater reach. In addition, some countries might be reluctant to use it for fear of reprisals against them, as President Trump has suggested towards BRICS countries if they increase their bilateral trade in local currencies or yuan. Given the level of progress of the project, it is likely to consolidate, despite Trump's threats, creating an alternative architecture that could connect Latin America with Asia, primarily through the growing role of Brazil and its strategic link with China.  

The second part will analyse the role of mBridge in the international financial architecture. It will examine how this system could reduce the use of the dollar in global trade as a means of exchange and payment. In addition, we will review the difficulties that a new international architecture not dominated by the West might face and its benefits.