Today at Hong Kong Fintech Week, central bank participants in the MBridge cross-border payment initiative discussed the central bank digital currency (CBDC) project. The examples mentioned in the first use case for commercial payments and other potential applications seem to encourage the internationalization of the digital yuan.

The recent MBridge pilot program involved central and commercial banks from Hong Kong, China, Thailand and the United Arab Emirates making international corporate payments. The project is hosted at the BIS Innovation Center in Hong Kong.

As a quick summary, MBridge is a multi-CBDC project involving a single blockchain infrastructure, with each central bank hosting its own node and controlling its digital currency. It is a multi-CBDC wholesale payment infrastructure in which only central and commercial banks participate, and is primarily intended for cross-border payments.

Expanding the reach of the digital yuan, eCNY

Each country has a different role, with China leading the technical work and the United Arab Emirates spearheading the business side with use cases.

UAE advisor Shu-Pui Li discussed the use case of international trade. Speaking about the recent pilot, Li mentioned that some transactions were for oil and gas payments. “Chinese (corporate) bodies that pay the UAE are happy to use eCNY (digital yuan),” Li said. “And companies in the United Arab Emirates are more than happy to receive eCNY.”

He gave another example of a company from the United Arab Emirates that buys vaccines from China and normally pays in US dollars. “They pay to Hong Kong, so they are flexible to pay eHKD or eCNY,” he said.

According to Li, 60% of China’s trade with MENA passes through the United Arab Emirates. China is also the United Arab Emirates’ main oil and gas customer and 300,000 Chinese nationals work in the country.

Li discussed two other use cases, for infrastructure financing and as an alternative to correspondent banks, though it was not clear whether the other central banks backed them.

On the issue of infrastructure financing, Li mentioned One Belt One Road, China’s foreign investment initiative. It is controversial in the West because some countries will not be able to pay China, creating a dependency. “We are talking about hundreds of these projects on One Belt One Road,” Li said. “And the United Arab Emirates can play a very important role in financing One Belt One Road infrastructure.”

Mr. Li discussed a third use case, using a CBDC cross-border payment infrastructure as an alternative to correspondent banking. By using blockchain, there is no need for intermediary banks as there is today in cross-border payments. Eliminating the middleman can save costs and payment delays.

But an infrastructure like MBridge also creates an alternative to the SWIFT payment messaging system, which has been used to enforce Western sanctions. “For robustness, we need highly resistant robustness,” said Mr. Li. “We cannot tolerate any interruption. At the moment, we see that happening,” Mr. Li said.

On a practical level, there are also signs of eCNY ambitions. For example, the Bank of Thailand and the United Arab Emirates did not allow foreign banks to hold their national digital currencies overnight. But the People’s Bank of China and the Hong Kong Monetary Authority allowed it.

the road ahead

China started its eCNY project in 2014, and activity accelerated with Facebook’s introduction of Libra in 2019. A few months later, we wrote about the potential of a digital renminbi (RMB) to expand the international reach of the Chinese currency.

In October 2020, China officially launched its first retail CBDC pilots, emphasizing the home use case. Five months later, MBridge for cross-border payments was announced as an extension of the Thai-Hong Kong Inthanon-LionRock project. The first plans shared a year ago highlight MBridge’s grand ambitions. And the recent article on the MBridge project makes it clear that this is more than just research and is aiming to go into production.

During today’s talk, there was active canvassing for more central banks to join. Mu Changchun, who heads the China Digital Currency Institute, explained that central banks do not need to have an existing CBDC to join the project. MBridge can connect directly to a real-time gross settlement (RTGS) system to convert central bank reserves into digital currency.

No matter how many central banks sign on, the message is clear. In the near future, cross-border payments will be much more fragmented compared to the recent past dominated by SWIFT. Rising geopolitical tensions act as an accelerator.