Project mBridge: Revolutionising Cross-Border Payments with Multi-CBDC Technology

Overview

Project mBridge is an ambitious initiative spearheaded by the BIS Innovation Hub Hong Kong Centre in collaboration with several central banks, aiming to transform the landscape of cross-border payments through the deployment of central bank digital currencies (CBDCs). This project seeks to address longstanding inefficiencies in the current international payment systems, such as high costs, slow transaction speeds, and operational complexities.

Founding and Participating Central Banks

mBridge was founded through the joint efforts of the central banks of Thailand, Hong Kong, China, and the United Arab Emirates. These institutions, along with the BIS Innovation Hub, are the core driving forces behind the project. Recently, the Saudi Central Bank has joined as a full participant, further expanding the project's reach.

As of mid-2024, the project has garnered attention from 26 observing central banks and major international organizations, including the International Monetary Fund (IMF) and the World Bank. Notable observers include:
- Asian Infrastructure Investment Bank
- Bangko Sentral ng Pilipinas (Philippines)
- Bank Indonesia
- Bank of France
- Bank of Israel
- Bank of Italy
- Bank of Korea
- Central Bank of Bahrain
- Central Bank of Chile
- European Central Bank
- Federal Reserve Bank of New York's New York Innovation Centre
- Saudi Central Bank
- etc.

Technological Foundation

The technological backbone of mBridge is the mBridge Ledger, a specialized blockchain platform designed to support real-time, peer-to-peer cross-border payments and foreign exchange transactions. This platform allows participating central banks to issue and exchange CBDCs directly, thus reducing reliance on traditional correspondent banking networks, which are typically fraught with delays and high costs.

The mBridge Ledger is designed with modularity and scalability in mind, facilitating seamless integration with existing domestic payment systems and enabling future enhancements. This approach ensures that the platform remains adaptable to evolving technological and regulatory landscapes.

Pilot and Results

In 2022, mBridge conducted a significant pilot involving real-value transactions among 20 commercial banks from the founding jurisdictions. The pilot successfully demonstrated the platform's potential by facilitating over $22 million worth of payments and foreign exchange transactions. These tests validated the hypothesis that a multi-CBDC platform can significantly enhance the efficiency, speed, and transparency of cross-border payments.

Future Directions

As mBridge progresses towards a minimum viable product (MVP), the project's roadmap includes several key focus areas:

1. Automated Interoperability: Enhancing the platform's integration with domestic payment systems to ensure seamless transaction flows.
2. Liquidity Management: Introducing tools for transaction queueing and priority management to optimize liquidity.
3. Data Privacy and Governance: Developing robust frameworks for data privacy and regulatory compliance.
4. Expanding Participation: Inviting more jurisdictions and private sector participants to join the platform and explore new use cases 

Conclusion

Project mBridge represents a pioneering effort to reimagine the future of cross-border payments using CBDCs and blockchain technology. By fostering greater collaboration among central banks and leveraging cutting-edge technological solutions, mBridge aims to create a more efficient, cost-effective, and transparent international payment ecosystem. As the project advances, it holds the promise of setting new standards for global financial connectivity and inclusion.

Project Icebreaker

A collaborative effort between the Bank for International Settlements (BIS) and the central banks of Israel, Norway, and Sweden. The project aimed to study the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments was successfully finalized.

The project tested the technical feasibility of conducting cross-border and cross-currency transactions between different experimental retail CBDC systems. It employed a hub-and-spoke model, breaking down a cross-border transaction into two domestic payments, facilitated by a foreign exchange provider active in both domestic systems. This approach means that retail CBDCs never need to leave their own systems.

Project Icebreaker's model allows multiple foreign exchange providers to submit quotes to the system's hub, which then automatically selects the cheapest option for the end user. This competitive setup reduces the risk of insufficient liquidity in the desired currency pair, which can result in higher fees or transaction delays. The hub-and-spoke model also minimizes settlement and counterparty risk by using coordinated payments in central bank money and completes cross-border transactions within seconds.

The project offers a model for countries considering developing a domestic CBDC and extending it to cross-border transactions. It also provides central banks with a deeper understanding of the technologies and technical and policy choices available for implementing retail CBDCs. The project emphasizes scalability, interoperability, and simplicity, requiring minimal technical requirements to integrate domestic systems running on different technologies.

E-CNY: Main Objectives, Guiding Principles, and Inclusion Considerations

e-CNY, also known as the digital yuan, is a digital representation of China's fiat currency Yuan. Unlike financial assets such as stocks or bonds, e-CNY serves as a direct claim on the central bank and is designed to function as a legal tender. Notably, e-CNY is not a blockchain-based cryptocurrency, distinguishing it from other digital currencies like Bitcoin or Ethereum.

The implementation of e-CNY is expected to significantly benefit Chinese financial institutions and technology companies involved in its distribution and management. Major banks such as the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and the Agricultural Bank of China (ABC) are central to the e-CNY ecosystem and stand to gain from its widespread adoption. Additionally, payment platforms like Ant Group (owner of Alipay) and Tencent (owner of WeChat Pay), which are integral to China's digital payment infrastructure, could experience substantial growth as e-CNY becomes increasingly integrated into the financial system.-CNY (digital yuan) is a digital version of China’s fiat currency rather than a financial asset like stocks or bonds.

I. Main Objectives and Vision of e-CNY

The development of China’s e-CNY system aims to create a digital version of the renminbi that meets the public’s demand for cash in the digital economy era. This system will support the development of retail payment infrastructures and improve payment system efficiency alongside digital economy developments in China.

1. Enhancing Central Bank Payment System Efficiency

Technological innovation, especially within the digital economy, is the key driver of economic development. More secure and inclusive retail payment infrastructures as public goods provided by central banks are needed. As an important financial infrastructure, the e-CNY system will further fulfil the diversified payment needs of the general public and improve the efficiency of financial infrastructures. Additionally, since e-CNY transactions are settled upon payment, businesses and related parties can improve their cash flow while enjoying more convenient payment services.

2. Providing a Backup to the Retail System

Big tech companies have become critical retail payment infrastructures, and any failure can dramatically impact payment system operations and potentially introduce systemic risks. The e-CNY, as a direct claim on the central bank backed by sovereign credit and legal tender status, can provide a reliable backup to the retail system supported by commercial bank deposits. It offers diversified payment products, improving payment efficiency and safety.

3. Ensuring Equal Access and Financial Inclusion

As digital technology and electronic payments advance, cash usage in retail payments has been declining. However, it is the mandate of the central bank to ensure the public’s direct access to cash and to maintain the consistency of the unit of account in the digital economy era by digitalizing cash. The e-CNY system will enhance financial services accessibility, offering fiat money to a broad population in various scenarios.

4. Echoing International Initiatives and Enhancing Cross-Border Payments

Cross-border payment involves various contentious issues such as monetary sovereignty, foreign exchange policies, and regulatory requirements. Although technically ready for cross-border use, e-CNY is currently designed mainly for domestic retail payments. Looking ahead, the People’s Bank of China (PBoC) will actively respond to G20 and other international organization initiatives to improve cross-border payments and explore the applicability of CBDC in cross-border scenarios. The PBoC will explore pilot cross-border payment programs and work with relevant central banks and monetary authorities to establish exchange arrangements and regulatory cooperation mechanisms on digital fiat currency, adhering to principles of “no disruption,” “compliance,” and “interconnectivity.”

II. Guiding Principles of e-CNY Design and Data Governance

1. Guiding Principles

Compliance with Laws and Regulations

The institutional design of the e-CNY system strictly complies with regulations on renminbi administration, anti-money laundering, combating the financing of terrorism (AML/CFT), foreign exchange administration, and data and privacy protection. The operation of e-CNY is included within the regulatory framework.

Safety and Convenience

The e-CNY is a value-based, quasi-account-based, and account-based hybrid payment instrument, with legal tender status and loosely-coupled account linkage. This adaptability supports various online and offline payments, minimizing challenges due to limited technological literacy and telecommunications coverage. The e-CNY operational system is secure, usable, scalable, and concurrent, ensuring business continuity.

Openness and Compatibility

The PBoC leverages the advantages and expertise of authorized operators, promoting technological competition and updates in line with the principle of evolving with the times to avoid excessive system operational risk concentration. The e-CNY system supports interoperability with traditional electronic payment systems, connecting digital wallets of different operators and e-CNY wallets with bank accounts, thus enhancing payment instrument interoperability.

2. E-CNY Design

The e-CNY system employs a two-tier architecture where the PBoC is responsible for issuance, disposal, inter-institution connections, and wallet ecosystem management. The PBoC prudently selects commercial banks with significant capital and technological strength as authorized operators to provide e-CNY exchange services. Other commercial banks and institutions, under PBoC’s centralized management, collectively provide services for e-CNY circulation. This two-tier system taps into the resources, talents, and technology of authorized operators, fostering a market-driven system that promotes innovation and competition. The familiarity of the public with accessing financial services via commercial banks is expected to increase public acceptance of e-CNY.

3. Data Governance

The e-CNY system follows the principle of “anonymity for small-value and traceability for high-value transactions,” prioritizing personal information and privacy protection. It aims to provide anonymous small-value payment services based on the risk features and information processing logic of current electronic payment systems. To prevent misuse of e-CNY in illegal activities such as tele-fraud, internet gambling, money laundering, and tax evasion, transactions must comply with AML/CFT requirements. The e-CNY system collects less transaction information than traditional electronic payment systems and does not provide information to third parties or other government agencies unless stipulated by law.

III. Relationship between e-CNY and Financial Inclusion

A digital gap remains in payment services, particularly in remote areas with poor telecommunications network coverage, limiting some people's ability to benefit from digital financial technology. Illiteracy and the inability to use smartphones also hinder the disadvantaged from accessing digital financial services. Moreover, small and medium-sized banks and micro-finance institutions, focused on local businesses, face digital transformation challenges due to limited technological capabilities.

Issued by the PBoC and primarily serving domestic retail payments, the e-CNY is a public good that enhances financial inclusion.

1. Broadening Accessibility of Payment Services

The design of loosely-coupled account linkage allows the underbanked population in poor and remote areas to apply for digital wallets without opening a bank account, expanding financial service coverage. The offline payment function of e-CNY enables individuals in areas with poor network coverage to access basic financial services, enhancing financial inclusion.

2. Lowering Costs and Improving Affordability

The PBoC does not charge authorized operators or individual users, and operators do not charge users for exchange services, reducing the real economy’s burden and optimizing the business environment.

3. Enhancing Payment Efficiency

e-CNY transactions are settled upon payment, significantly enhancing payment efficiency and improving liquidity for businesses and related parties. The programmability of e-CNY, achieved through smart contracts, enables conditional payments, guaranteed payments, and other complex use cases, fostering financial inclusion and innovation.

4. Supporting Fair Competition in the Retail Payment Market

e-CNY provides a level playing field for accessibility and infrastructure, promoting innovation and competition among different payment service providers. As a claim on the central bank, e-CNY breaks down institutional and platform barriers in the payment market, enabling payments in all use cases, broadening retail payment service accessibility, and enhancing social welfare.

References

Working Group on E-CNY Research and Development of the People's Bank of China (2021): “Progress of Research & Development of E-CNY in China”.