A key part of the rationale behind mBridge is the observation that traditional correspondent banking is often slow, expensive and complex. The project aims to solve these problems with its purpose-developed permissioned distributed ledger technology (DLT) called the mBridge ledger, or mBL, that supports instant peer-to-peer and atomic cross-border payments and FX transactions using wholesale CBDCs.
MBridge recently took an important step forward with the completion of its minimal viable product (MVP) stage and the decision by Saudi Arabia to join the project.
MVP milestone
Reaching the MVP stage took several years. First, the participants in the project built the mBridge ledger. In 2022, they successfully carried out a pilot with real-value transactions. Since then, the mBridge project team has been exploring if the prototype platform could evolve to become an MVP.
According to BIS, the four founding participant central banks and monetary authorities have each deployed a validating node, while commercial banks have conducted more real-value transactions in preparation for the MVP release. Meanwhile, the project steering committee has created a “bespoke governance and legal framework,” including a rulebook, designed to match the platform's decentralized nature.
The MVP platform can undertake real-value transactions (subject to jurisdictional preparedness) and is compatible with the Ethereum Virtual Machine (EVM), a decentralized virtual environment that executes code consistently and securely across all Ethereum nodes. MVP thus is suitable as a testbed for new use cases and interoperability with other platforms.
Saudi Arabia joins
The arrival of Saudi Arabia to mBridge represents an interesting turn of events. On the one hand, it shows the deepening of Riyadh’s relationship with China given Beijing’s dominant role in the initiative. On the other, it boosts the credibility of the project considering Saudi Arabia’s importance an oil exporter. The Kingdom possesses roughly 17% of the world’s petroleum reserves and is one of the largest net exporters of petroleum.
The Gulf Research Center notes that Saudi Arabia is both China’s top crude oil supplier globally and its largest trading partner in the Middle East and North Africa. Further, Beijing is Riyadh’s top trading partner and crude oil customer. China is also a key investor in the Saudi Vision 2030 economic diversification project.
One possibility now that Saudi Arabia has joined mBridge is that the platform will be increasingly used for commodity settlement that bypasses the U.S. dollar. In Nov. 2023, the People's Bank of China and the Saudi Central Bank signed a local currency swap agreement worth RMB 50 billion ($6.9 billion). In December 2022, Chinese President Xi Jinping told Gulf Arab leaders that Beijing would work to buy oil and gas in renminbi, but as of last November, it had not yet used the currency for Saudi oil purchases.
The role of the private sector
While the participating countries in mBridge have attracted a lot of attention, the private sector has a crucial role to play in the project. Having entered the MVP stage, mBridge is now inviting private sector firms to offer use cases and solutions to develop the platform and maximize its potential. It has invited them to apply on its official website.
We reckon that when it comes to digital payments, whether in traditional fiat currency or with a CBDC, China has plenty of experience, and given its leading role in mBridge, Chinese companies are likely to play an active role in the project. To that end, on June 18, Tencent announced that it had been involved in mBridge since September 2023 and is now participating in the validation of cross-border-payments use cases at the MVP stage. Its goal is to enhance the quality of cross-border clearing and settlement services.
It seems that Tencent sees mBridge as an opportunity to boost its global cross-border payments service, Tenpay Global, which has been growing but has a smaller footprint than Ant Group’s Alipay+. “Tenpay Global provides a validation use case based on cross-border e-commerce export trade payment collection for Tencent's participation in Project mBridge at the MVP stage. This facilitated Tencent's successful completion of cross-border fund settlements at various nodes of the mBridge, showcasing significant advantages in both the efficiency and cost‑effectiveness of cross-border payments," Royal Chen, Vice President of Tencent Financial Technology, said in a news release.
Next steps
While MBridge has made clear progress, some important questions remain about its viability. First, one has to wonder if the benefits that mBridge purports to offer are significant enough to offset the costs of building and maintaining new payments infrastructure. According to China’s Digital Currency Research Institute (DCRI), mBridge transactions take seven seconds and cut cross-border payment costs by 50%. While those figures sound impressive, it should be noted that DCRI played a key role in developing the technology that underpins mBridge. It has a vested interest in the project’s success.
Second, the BIS has not committed to a timeline for mBridge’s formal launch, which suggests some uncertainty on the part of the Switzerland-based organization. As BIS is the de facto organizer of mBridge and also the most neutral party involved in the project, its word carries weight.
Finally, a narrative continues to circulate about mBridge serving as a platform to dethrone the U.S. dollar in the global financial system since it does not support dollar payments. It is unclear to what degree this narrative is accurate.