When it comes to other channels for the BRICS to de-dollarise its trade and financial flows, some cite the m-Bridge project. This focuses on the use of central bank digital currencies to improve cross-border payment mechanisms and is being led by the BIS Innovation Hub and representatives of central banks from China, the UAE and Thailand.
We asked our Head of Regulatory Analysis, Teunis Brosens, what he thought on the subject, and here are his views:
“What potential role do CBDCs have to play for de-dollarisation? First, we have to distinguish retail from wholesale CBDCs.The retail variety, such as the ECB’s ‘digital euro’, are generally intended for domestic retail transactions, and as such are of little relevance for dollar transactions. Wholesale CBDCs are a different story. They are aimed at facilitating large-value and often cross-currency and cross-border transactions. The business case for such wholesale CBDCs is clear. Current cross-border payments tend to rely on the correspondent banking network. This makes them slow, cumbersome, and expensive. A solution that can deliver instant, 24/7, and cheap cross-border payments, would be welcomed by many.
“The nature of the existing correspondent banking system also means that a US bank is often involved. Even if the transaction is not denominated in dollars on either end, the transaction is typically routed via dollars and hence a US bank. This supports dollar dominance in the current world of global payments. Wholesale CBDC has the potential to disrupt this. On a unified wholesale CBDC platform, transactions could be cleared directly between two currencies, without the intermediate step of going via the dollar and a US bank. This could impact SWIFT-based global payments but could also e.g. facilitate “delivery-vs-payment” settlement of securities.
“So, is wholesale CBDC about to de-dollarise global payments? Here the well-known wisdom applies that we tend to overestimate short-term changes but underestimate the long-term impact. Wholesale CBDC platforms research and piloting has been ongoing for quite a few years already, with projects led by the public and private sectors. Yet while the business case is clear enough, putting things into practice is more complicated. It is worth pointing out here that the main problem is not a technical one. The technology to host the required platform is well-developed, and it does not even need to be on a blockchain or “distributed ledger”, as was the hype until a few years ago.
“Rather, the problem to be solved here is one of organisation and governance: how to get all banks, central and commercial alike, on one platform. Central banks need to vet and license platforms, and be willing to issue reserves on it, or at least to allow circulation of tokens fully backed by their reserves. Commercial banks need to pledge liquidity to the platform. A legal framework needs to be worked out and agreed by all participants. For all these reasons, progress on wholesale CBDC platforms takes longer than one would expect based on the moderate technical challenges involved.
“But, when wholesale CBDC platforms start to process currency transactions of real significance, the impact on dollar use in global payments could become material. It is not hard to think of important central banks in the world that might be interested in enabling cross-border payments without involving the dollar. The m-Bridge project now has more than thirty ‘observing’ members from the global central banking community. Yet the fact that this project took three years to reach minimum-viable-product status, also shows that we have to wait a few more years for any impact to make itself felt.”
