The first of its type, Project mBridge’s recently released report outlines the advances in deploying cross-border central bank digital currency (CBDC). Moving on from exploratory to real-world conditions, four central banks have included 20 commercial banks to run 164 CBDC transactions from corporate clients.
Accounting for $22 million in cross-border CBDC value, mBridge report was finalized by Bank for International Settlements (BIS), Central Bank of the UAE (CBUAE), People’s Bank of China (PBoC), Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BoT).
What is Project mBridge?
So far, China has been at the forefront of developing CBDCs and incorporating it as a part of daily life for its citizens. However, the key point of CBDCs is making payments international, not locally constrained. This way, the frictionless nature of CBDCs, near-instant settlement speed and reduced cost, come front and center.
The mBridge Ledger blockchain is the trial infrastructure for the new international payment system, presently connecting four jurisdictions that link their respective central banks with corporate entities.
Expectedly, China’s CBDC has been making the bulk of these cross-border transactions. For instance, one-third of digital yuan pilot transactions on the mBridge came from Shenzhen-based companies. However, as a multi-CBDC testing bed, mBridge is just the precursor for the G20 digital economy.
From the US/EU/UK to Russia/India/China, G20 countries make ~80% of global GDP, 75% of international trade, and 60% of the world’s population.
Originally dubbed LionRock under the supervision of the Hong Kong Monetary Authority (HKMA), mBridge received G20 endorsement in October 2020 to set the CBDC roadmap, delivering mBridge as the first phase of testing for international CBDC deployment.
The mBridge protocol itself consists of five layers: 1) access layer for web front-end 2) application layer as wallet 3) data layer for file storage 4) blockchain layer for smart contracts and consensus 5) basic service layer for data transmission.
Project mBridge Insights
Titled “Project mBridge: Connecting economies through CBDC”, the report was released by the BIS Innovation Hub in collaboration with the four central banks. Having been in the experimentation phase for the last two years, mBridge finally went live in Q3 2022, running for six weeks.
The four central banks transferred $22 million on behalf of their corporate clients across 20 commercial banks. After the real-world multi-CBDC test run, the report delivered the following:
- Out of a total $22.1 in cross-border transactions, HK$13.2 million was in e-HKD, ¥23.6 million in e-CNY, 60.1?.? million in eAED and ?23.5 million in e-THB.
- mBridge successfully decreased cross-border transaction time from 3-5 days to mere seconds.
- mBridge reduced the cost of cross-border transactions significantly. Without CBDCs, in 2020, it was estimated that out of $23.5 trillion in cross-border transfers, 0.5% was expended on transaction charges.
The multi-CBDC platform enabled three payment types: 1) CBDC issuance and redemption between central banks and their domestic commercial banks 2) cross-border payment between commercial banks in their respective CBDCs and 3) cross-border payment-vs-payment foreign exchange (PvP FX) between commercial banks.
The third type is where CBDC maximally performs because it enables atomic FX transactions in local CBDC pairs. After all, a traditional payment-vs-payment (PvP) settlement happens only if the final transfer in another currency is executed.
Now that all processes can occur on a single platform, connected commercial banks can initiate transactions peer-to-peer, which greatly reduces transfer time and settlement risk. Of course, the starting points come from central banks’ M0 money supply.
It would then be up to governments to decide the extent to which CBDC transfer privacy is covered. This goes beyond the technical mBridge performance into the legal and social territory. Whatever these rules end up being, mBridge’s modular design is adaptive enough to integrate them.