mBridge’s success would signify a transformative shift in global finance, challenging the traditional dominance of Western financial structures
Image Source: Getty
In an excessively integrated global economy, cross-border payments are a necessity. International payments, however, with their high transaction cost, delays, transaction opacity, and limited financial inclusivity, have struggled to keep pace with fast-growing economies. To overcome these bottlenecks, the Bank of International Settlements (BIS), an international financial institution serving central banks, came up with a viable solution—a cross-border, decentralised, multiple central bank digital currency (mCBDC) platform named mBridge. Although mBridge is backed by the BIS, its momentum is largely driven by the aspirations of China. Participating countries seek to reduce reliance on the United States (US) dollar by creating alternative financial systems that sidestep traditional Western-dominated infrastructures, such as The Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Launched in 2021, the mBridge project is spearheaded by the BIS, also in collaboration with the other four central banks from China, Thailand, the United Arab Emirates (UAE) and Hong Kong. Saudi Arabia, the largest oil producer in the world, also joined mBridge as a full participant in June 2024, and as of August 2024, there are more than 31 observing members. The project has recently reached its Minimum Viable Product (MVP) stage, successfully demonstrating the ability to process payments across borders using digital money. Built on distributed ledger technology (DLT), the platform directly connects to the central bank digital currency (CBDC). CBDC is similar to a cryptocurrency, except it maintains stable values and is regulated by each country’s central bank. This development makes significant strides towards enhancing transparency, security, and reliability in trade across different zones. It has the potential to reshape international financial systems by enabling faster, more secure, and more cost-efficient peer-to-peer payments as well as foreign exchange transactions. Additionally, mBridge promises to enhance economic sovereignty by giving countries more control over their financial transactions, mitigating the risk of sanctions or other forms of economic pressure. In the long run, mBridge represents a potential shift toward a more multipolar global financial system, where digital currencies backed by local economies can play a much larger role in international trade.
Participating countries seek to reduce reliance on the United States (US) dollar by creating alternative financial systems that sidestep traditional Western-dominated infrastructures, such as The Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Notably, another cross-border payment system, known as the BRICS Bridge, is being pushed by Russia as a means to reduce reliance on the US dollar and the euro. Although still in development, the BRICS bridge is intended to incorporate certain features from mBridge. Some speculate that, over time, one of these projects may overshadow the other, particularly since Thailand is the only mBridge participant that is not a part of BRICS. Consequently, China has been advocating for Thailand’s inclusion in BRICS, a move that could influence the development and alignment of these payment frameworks in the future.
China has been making strides in expanding its trade, by establishing the bilateral clearing and settlement infrastructure needed to facilitate transactions in yuan. Between 2003 and 2023, its share of world trade has more than tripled from four percent to 13 percent (Figure 1). So did cross-border trade settlement in yuan, climbing from less than one percent to over three percent in the last decade, making the renminbi (RMB) the third-most-used currency in SWIFT trade finance settlements.
Figure 1. China’s Share of World Trade
Global oil transactions, traditionally dominated by the US dollar due to a 50-year petrodollar deal between Saudi Arabia and the US, give the dollar a significant influence over the global energy market. As the world’s largest importer of crude oil, China has been working actively to steer the oil trade away from the dollar in favour of the yuan, giving rise to a strategy called petroyuan. This shift underscores the importance of China’s growing economic ties with oil-rich nations, particularly countries in the Middle East and Russia, as a key variable in assessing the long-term potential for broader adoption of the RMB in global trade.
As the world’s largest importer of crude oil, China has been working actively to steer the oil trade away from the dollar in favour of the yuan, giving rise to a strategy called petroyuan.
Russia and China now conduct about 92 percent of their trade settlements in Russian rubles and the Chinese yuan. Meanwhile, China’s trade with the Middle East has also been growing at a fast rate, more than tripling over the past two decades. Its imports from the region grew 3.7 times to US$ 217 billion, while its exports surged 3.1 times to US$ 169 billion between 2009 and 2023. Saudi Arabia, China’s largest trading partner in the Gulf has seen its trade surplus with China increase from US$ 5-10 billion in 2015-2016 to as high as US$ 20-40 billion over the last three years (Figure 2). The partnership has strengthened further as the US petrodollar deal expired and the kingdom expressed its desire to open oil trade using the yuan. As the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), and amid growing geopolitical tensions with the West, Saudi Arabia’s shift has inspired other regional countries to follow suit, signalling a significant geopolitical and economic realignment.
Figure 2: China’s trade with the Middle East
Despite the increasing trade figures, several bottlenecks have continued to hinder major oil-exporting countries from embracing yuan-based transactions. While the yuan’s potential in facilitating international trade is significant, its effectiveness relies on other countries’ willingness to accept the currency for payments, which in turn, is influenced by countries’ ability to utilise those proceeds. First, countries often face difficulty storing, using, and converting the billions of yuan accumulated through existing bilateral or international channels. Second, there is the challenge of providing enough renminbi to other major oil-importing nations, such as India. Third, the lack of transparency in yuan transactions, tightly controlled by China, serves as a deterrent. Lastly, concerns about the currency’s stability, including the risk of devaluation compared to the US dollar, further complicates the transition to yuan-based trade.
Concerns about the currency’s stability, including the risk of devaluation compared to the US dollar, further complicates the transition to yuan-based trade.
These dynamics shift with the introduction of the BIS-backed mBridge project. This initiative connects central bank digital currencies, offering a viable pathway for China to enhance its use of the RMB in global trade, complementing its long-term objective of internationalising its currency. The mBridge project aims to bolster the international standing and influence of the Chinese yuan, while improving its global liquidity by making cross-border payments easier and more accessible. Consequently, with the RMB now more widely accepted in international trade and finance, there will be more opportunities to utilise the currency. For instance, recent developments revealed that Russia has been facing a shortfall of Chinese yuan in its reserves, primarily due to China’s cautious approach in light of potential secondary Western sanctions. Here, mBridge presents a promising remedy by offering a secure and efficient digital channel for yuan-based transactions that mitigates exposure to geopolitical risk. Although achieving a meaningful scale may still be through these channels, strengthened bilateral relationships could facilitate an increased use of the RMB in global trade.
In essence, the push for mBridge can be dubbed as both a geopolitical and economic strategy aimed at circumventing potential sanctions imposed by Western countries. CBDCs facilitate trade and financial transactions beyond Western control, reshaping the flow of capital and commerce by allowing participating nations to settle transactions in their local or digital currencies. This shift leads to a multi-currency world, where emerging economies have a greater influence on global financial systems, fostering more resilient and diverse financial networks that are less vulnerable to unilateral economic sanctions. Whether CBDCs can genuinely replace the greenback as the dominant currency in global trade, and whether they can create a new multipolar financial system parallel to SWIFT, remain open questions for the long term. One clear and immediate beneficiary of this shift, however, is China. If mBridge is successful and gains widespread adoption, it could align with China’s long-term goal of increasing the global use of the RMB. This would provide China with greater leverage in international economic policy and potentially reduce reliance on the US dollar for trade settlements. Ultimately, mBridge’s success would signify a transformative shift in global finance, challenging the traditional dominance of Western financial structures and enabling a more decentralised and inclusive global economy.
Manini is a Research Assistant with the Centre for Economy and Growth at the Observer Research Foundation
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Manini is a Research Assistant at the Centre for Economy and Growth, ORF New Delhi. Her research focuses on the intersection of geopolitics with international ...
Read More +
PREV
