Project mBridge, also known as the Multiple Central Bank Digital Currency (mCBDC) Bridge, is an ambitious worldwide project that has the capability to disrupt cross-border payments. It’s a multi-CBDC system based on distributed ledger technology (DLT) that facilitates low-cost, peer-to-peer, and real-time cross-border payments and foreign exchange transactions.

Who’s Behind It

The effort is a collaborative effort by the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre and a coalition of central banks and monetary authorities including:

• Hong Kong Monetary Authority (HKMA)
• Bank of Thailand (BOT)
• Digital Currency Research Institute of the People’s Bank of China (PBC DCI)
• Central Bank of the United Arab Emirates (CBUAE)
• The Saudi Central Bank recently joined as a full participant.

The project further incorporates an observing members list of other central banks and monetary authorities from across the globe, demonstrating vast interest. Some of the distinguished observing members are:

• Asian Infrastructure Investment Bank (AIIB)
• Bangko Sentral ng Pilipinas (Central Bank of the Philippines)
• Bank Indonesia
• Bank of France
• Bank of Israel
• Bank of Italy
• Bank of Korea
• Bank of Mauritius
• Bank of Namibia
• Central Bank of Bahrain
• Central Bank of Brazil
• Central Bank of Chile
• Central Bank of Egypt
• Federal Reserve Bank of New York (USA)
• International Monetary Fund (IMF)
• The World Bank

That G7 nations’ central banks like the U.S., France, and Italy are keeping an eye on the under-development project suggests that they are keen on this emerging payment infrastructure but still maintain their own CBDC domestic development.

Project Objectives and Mechanics

The primary objective of Project mBridge is to address the critical pain points of the current cross-border payments system, which are:

• High cost: Cross-border transactions usually take many intermediaries into account, and thus the transactions are expensive.
• Low speed: The current system, largely built around correspondent banking networks, can be slow, and it may take payments days to settle.
• Operational inefficiencies: The process is inefficient and non-transparent, with inferior visibility.
• Financial inclusion: Cross-border payments may be costly to some individuals and businesses because of the cost and complexity.

By sharing a common platform on DLT, Project mBridge is meant to present an enhanced, more efficient, and lower-cost alternative. It will present a bilateral, direct connection between involved banks with fewer intermediary layers required.

Supported by a custom-built DLT by the name of “mBridge Ledger,” the project works as follows:

1. Shared Platform: All of the participating commercial banks and central banks are on a shared platform.
2. Issuance of CBDCs: All of the central banks issue their own wholesale CBDC onto this shared platform.
3. Real-Time Settlement: The moment a cross-border payment is made, the money is settled instantly between the two parties in their respective CBDCs. The platform automatically carries out the foreign exchange (FX) transaction, ensuring an instant “payment versus payment” (PvP) settlement.
4. Security and Compliance: The DLT infrastructure is built to provide greater security, transparency, and traceability of transactions. It also provides mechanisms to allow for compliance with legal and regulatory processes of each jurisdiction.

How Project mBridge Evades SWIFT

Project mBridge’s DLT-based platform is special in a very fundamental sense. It’s a distributed ledger for linking commercial banks and central banks. Instead of sending a message and then relying on some other system to settle, mBridge makes messaging and settlement a single step.

Here’s how it works:

• SWIFT: A message is sent, followed by settlement via correspondent banks.
• mBridge: The settlement of transactions is made directly on the mBridge DLT through wholesale CBDCs. No other messaging system like SWIFT is needed.

By facilitating direct, peer-to-peer payment amongst involved banks, the platform minimizes the number of intermediary banks. It thereby makes transactions far cheaper, accelerates the payment mechanism to near-real-time (seconds instead of days), and increases transparency.

Progress and Findings

Project mBridge has progressed in incremental phases:

• First Research and Prototype: The project began with a proof-of-concept phase, taking into account the technical feasibility of a multi-CBDC platform.
• Pilot Phase: A critical milestone was a pilot with actual-value transactions. During the fourth quarter of 2022, 20 commercial banks in the four pioneer participating jurisdictions used the platform for over 160 payment and FX transactions worth a total of over $22 million. This demonstrated the platform’s capability for the settlement of actual corporate transactions.
• Minimum Viable Product (MVP) Phase: The project had reached its MVP stage around mid-2024. The BIS has since formally handed over the platform to the partner central banks for operational use. The platform is live and working for early adopter use, and the project team is inviting other central banks and private sector institutions to get on board. The underlying “mBridge Ledger” is made compatible with the Ethereum Virtual Machine (EVM) to enable the creation of smart contracts and new financial applications.
• Legal and Governance Framework: A complete legal and governance framework, including a “rulebook,” has been developed to address the decentralized nature of the platform. It defines rules for operation of the participants and is intended to support compliance against legal and regulatory requirements, such as AML/CFT (Anti-Money Laundering and Counter-Financing of Terrorism) rules.

Risks and Challenges

While the project promises many benefits, it also faces significant risks and challenges. The text mentions “enormous risks involved,” and here are some of those:

• Cybersecurity Risks: A single shared platform, even a decentralized one, creates a central point of attack for sophisticated cyber threats. The integrity of the system and the security of a nation’s currency could be at risk if the mBridge Ledger were to be compromised.
• Governance and Geopolitical Conflicts: The decentralized nature of the platform requires a robust governance framework to ensure all participants abide by the rules. Disputes could arise over which jurisdiction’s laws apply or how to handle sanctions and other geopolitical issues, especially since the platform could be seen as a way to evade traditional financial systems.
• Monetary Sovereignty: While designed to promote monetary sovereignty, the platform could also introduce new risks. If a country’s currency becomes highly integrated into the mBridge system, it could be exposed to spillover effects from other member economies.
• Fragmented Digital Ecosystem: The success of mBridge could lead to a fragmented global financial system, with different platforms and standards competing against each other. This digital fragmentation could make it harder for countries to interoperate and could leave some nations behind.

Geopolitical Implications and Broader Context

Apart from its technical and economic goals, Project mBridge is also seen to have significant geopolitical connotations. It is a prominent non-Western effort at creating a new international system of payments.

• Reducing Dependence on the US Dollar: Through transactions in local currencies using CBDCs, the platform would reduce reliance on the US dollar and the SWIFT messaging system for cross-border trade.
• Sanction Evasion: Some consider it to present a chance for participating nations to render commerce and financial transactions less vulnerable to unilateral economic sanctions, which are usually imposed through the US-dominated financial system. It can be considered a direct response to the “weaponization of money” of the global financial system.
• Multipolar Financial System: In the long run, Project mBridge is a step eventually towards a more multipolar world financial system where there is more dominance of several currencies and payment systems for foreign trade. The alignment of the project with the goals of the BRICS grouping (Brazil, Russia, India, China, and South Africa) further supports its position in this geopolitical shift.

mBridge is one element of a broader BIS Innovation Hub initiative to update cross-border payments. Some of the other most important projects are:

• Project Nexus: A project to link current domestic instant payment systems worldwide, with an emphasis on how various national systems can interoperate with each other instead of building one new platform.
• Project Rialto: This endeavor aims to improve cross-border payments by exploring a modular foreign exchange (FX) settlement layer, which can be combined with platforms like mBridge.

All these projects show how BIS is adopting a multi-track strategy to deal with cross-border payments challenges, with mBridge being a case of a new, shared platform model.