Can digital RMB bypass SWIFT in the future?

Recently, the Ukraine-Russia war that has attracted global attention has spread to the financial field.

According to reports, the United States, the European Union, the United Kingdom and Canada issued a joint statement announcing a ban on several major Russian banks from using the SWIFT international settlement system.

In this regard, Mobile Payment Network immediately interpreted it (for details, see: The US, Europe, Britain, and Canada are sanctioning Russia, not SWIFT), and provided popular science in subsequent reports (for details, see: The past, present, and operation mechanism of SWIFT). Therefore, readers should have a general understanding of what SWIFT is, its operation mechanism, and why it is so important.

However, some people have raised more interesting questions, such as: Can digital RMB and CBDC bypass SWIFT in the future?

Let me first give you my answer: Yes.

Multilateral Central Bank Digital Currency Bridge Project

In November 2021, during the Hong Kong Fintech Week, with the support of the Bank for International Settlements Hong Kong Innovation Center, the Digital Currency Research Institute of the People's Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand and the Central Bank of the United Arab Emirates jointly released the Multilateral Central Bank Digital Currency Bridge Project Use Case Manual, which briefly introduced the project application scenarios and testing progress.

This project was a cross-border payment project explored by the Hong Kong Monetary Authority and the Bank of Thailand when they were studying CBDC in 2019. It was called Inthanon-LionRock. When it developed to the third stage, the People's Bank of China and the Central Bank of the United Arab Emirates joined, becoming four participants. At the same time, the Hong Kong Innovation Center of the Bank for International Settlements also supported the project, so the project was officially renamed "Multiple Central Bank Digital Currency Cross-Border Network" (m-CBDC Bridge), which is what we often call the multilateral central bank digital currency bridge.

The core goal of the Multilateral Central Bank Digital Currency Bridge research project is to establish a "corridor network" connecting the digital currency systems of multiple central banks, enable the same distributed ledger to support multiple central bank digital currencies, build a point-to-point message transmission system, and help provide efficient, convenient and low-cost cross-border payment services.

In the Multilateral Central Bank Digital Currency Bridge research project, central banks of various countries can achieve: 1) implement cross-border simultaneous settlement through smart contracts; 2) be compatible with different central bank digital currency systems and designs; 3) alleviate the impact of overseas circulation of their own digital currencies on the monetary sovereignty of other countries.

From the perspective of MobilePay, the construction of mBridge looks like a digital currency version of SWIFT, and it has more advantages under the distributed ledger structure.

On the one hand, mBridge is not only an information transmission channel, but also can directly realize point-to-point transactions. Although SWIFT has monopolized the communication between the financial industry for more than 40 years, it is much more efficient than the early telex transaction system, but SWIFT itself is only a transmission system for cross-border settlement and clearing information. It can improve the efficiency of financial information interaction, but it cannot directly speed up the efficiency of "clearing and settlement". There are still transaction frictions such as bank deposits and time differences in the operation of payment systems in various countries. But mBridge is different. It itself has a certain exchange nature. Central banks of various countries rely on the corridor network to exchange depositary receipts and digital currencies back and forth. Through smart contracts, countries formulate corresponding transaction rules and regulatory policies. Therefore, its transaction speed can reach seconds and greatly reduce the cost of cross-border transfers.

Traditional SWIFT agent bank cross-border payment transaction model (left) and mBridge transaction model (right)

On the other hand, mBridge is a decentralized system based on distributed ledgers. The importance of SWIFT is self-evident, but it is still a centralized organization, which is why the United States, the European Union, etc. can sanction you in this way if they say they don't want to play with you anymore. With the rise of blockchain technology in recent years, decentralization coincides with clearing security. The design prototype of mBridge is based on the blockchain network layer, using the PoA consensus mechanism. The central banks participating in the cross-border payment network are all validating nodes. When verifying transactions, more than 2/3 of the validating nodes need to sign the block before the transaction can be confirmed. This makes it impossible for a certain node to control the entire network and have the power of "life and death", realizing a more decentralized cross-border payment governance structure. The stability and mutual trust relationship of the system established on this basis can be maximized.

In other words, under the model of multilateral central bank digital currency bridge, CBDC transactions can indeed bypass SWIFT and greatly improve transaction efficiency. I believe this is also the significance and original intention of the mBridge project.

Although it is possible, there is still a long way to go.

Although my answer is yes, this answer is based on the corresponding premise.

On the one hand, both parties to the transaction need to be under the model of a multilateral central bank digital currency bridge. mBridge is like a "consortium chain" of a blockchain. It must be a node on the chain to realize the corresponding functions. In other words, the countries on both sides of the cross-border payment need to have their own "central bank digital currency" and join mBridge. At present, there are only four participants in the mBridge project. In order to achieve more and wider applications, more central banks of countries need to participate. Not to mention that central banks around the world have different attitudes towards CBDC and the research progress is also uneven. Whether others recognize mBridge and join it is the most critical issue. This is also closely related to the country's economic strength and the degree of recognition of national currencies such as the RMB.

On the other hand, mature and standardized transaction rules and regulatory policies are needed. The mBridge project adheres to the three principles of non-harm, compliance and interoperability, with the overall goal of "designing and iterating a new generation of efficient cross-border payment infrastructure for pain points such as high cost, low speed and complex operability". By fully considering technical, policy, legal and commercial issues, it continues to absorb new central banks, commercial banks and non-bank institutions, and further experiments with design choices and technical trade-offs in a safe environment. According to a report released by the Hong Kong Innovation Center of the Bank for International Settlements, a total of 22 domestic and foreign financial institutions and organizations participated in the testing of the mBridge project, covering transactions in four jurisdictions and 11 industry scenarios, with a total transaction volume of more than 2 billion yuan. Although mBridge has made some progress, the entire transaction is a pilot test environment, and the top-level transaction rules and regulatory policies still need to be further improved. Whether it is the implementation of CBDC in the country or international cooperation, it takes time and scenarios to test.

A report by KPMG shows that it will take at least 10 years for mBridge to be widely used, which just shows that the project has a long way to go.

Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, once said that in the future, the Currency Bridge project will combine new business use cases to expand a wider range of application scenarios, improve the availability, compatibility and diversity of the Currency Bridge, and explore flexible docking with more systems to achieve a win-win situation for all parties.

Of course, CBDC cross-border payments are not limited to the mBridge model. There are also other solutions, such as the Jasper-Ubin project of the Monetary Authority of Singapore and the Bank of Canada, which is a combination of the blockchain projects of the two central banks. The networks of these two projects are built on two different distributed ledger platforms.

In addition, it is worth noting that cross-border payment solutions based on private stablecoins have a strong interest incentive mechanism. Once they are approved by regulatory authorities, they are likely to quickly occupy the market through their global business ecosystem and obtain enough international user data. Therefore, the development of stablecoins has also brought uncertainty to central bank digital currencies, especially as some countries are cautious about CBDCs.