(Kitco News) – Project mBridge was a key talking point at the recent BRICS summit in Kazan, Russia, with the bloc touting its ability to enable the transfer of wholesale central bank digital currencies (CBDCs) among member nations, aiding their de-dollarization efforts.
The project, which was launched by the Bank of International Settlements (BIS) in 2021, utilizes technology developed by the Hyperledger Foundation, and in June, it reached the status of minimum viable product, at which point private sector participation was opened.
Besides the BIS, the project's founding members include the central monetary authorities of China, Hong Kong, Thailand, and the UAE. Saudi Arabia joined as a full member in June, and the project now has over 25 observing members.
But with the tool’s potential to aid Russia in skirting the sanctions placed on the country for its invasion of Ukraine, the Bank for International Settlements (BIS) has now announced that it has “graduated out” of the project it has spearheaded since 2021.
During a fireside chat on Thursday at the Santander International Banking Conference 2024 held in Madrid, Spain, Agustin Carstens, General Manager of the BIS, responded to a question regarding media speculation that “Project mBridge could provide the basis for a BRICS initiative to circumvent sanctions,” with the questioner asking, “Is that plausible?”
“In the Innovation Hub, we try to be a catalyst for innovation,” Carstens said. “The way it works is that we talk with the community of central banks, identify their needs, and then develop projects. And we do them in partnership with central banks.”
“mBridge has been a project we have been involved with for four years,” he noted. “We have several central bank partners and many, many observers. I think the project has been a big success. It's a payment system where through wholesale CBDCs, you could facilitate tremendously cross-border transactions.”
“The project has been so successful that we can declare that we have graduated out,” Carstens said. “The BIS is leaving that project, not because it was a failure and not because of political considerations but instead because we have been involved for four years, and it is at a level where the partners can carry it on by themselves. That has happened already with other projects.”
“At the same time, I have to say that mBridge is not mature enough to start operating; it is many years away from that,” he added. “With respect to political aspects, the noise out there, mBridge is not the ‘BRICs bridge’ – I have to say that categorically. mBridge was not created to cater to the needs of the BRICs. It was put together to satisfy broad central bank necessities.”
In an effort to “set the record straight,” Carstens said the BIS “always [tries] to be good [a] good global citizen” and “does not operate with any countries, nor can its products be used by any countries that are subject to sanctions.”
“This will continue to be the case,” he said. “And all central bank members are in this mindset that we need to be observant of sanctions, and whatever products we put together should not be a conduit to violate sanctions.”
The comments from Carstens and the withdrawal of the BIS from project mBridge come as BRICS has been pushing the concept of de-dollarization and expanding its member ranks. With the recent additions to BRICS membership, nearly half of the members of Project mBridge are also involved in the bloc.
For that reason, Carstens also sought to promote a separate undertaking, Project Agorá, which could provide a basis for the “Finternet” concept of international financial architecture he introduced in April.
The Bank of France (representing the Eurosystem), Bank of Japan, Bank of Korea, Bank of Mexico, Swiss National Bank, Bank of England, and the Federal Reserve Bank of New York are the current participants in Project Agorá, which maintains the correspondent banking system.
Notably, no BRICS members are participating in Project Agorá.
“This is probably our largest Innovation Hub Project to date,” he said. “We have teamed up with six central banks and more than 40 private sector institutions, coordinated by the Institute for International Finance. I should mention that Santander is one of the participants.”
Carstens noted that the “specific aim of Project Agorá is to look at whether using tokenized deposits integrated with tokenized wholesale central bank money” could enable cross-border payments to be streamlined.
“This is an area ripe with inefficiencies, and where services in some jurisdictions have actually worsened in recent years due to the shrinkage of the correspondent banking system,” he said. “One important reason is that the system, by and large, rests on legacy systems. This implies long sequences of messages being sent back and forth, across national borders, using systems that do not necessary communicate with each other very well. The various regulatory compliance measures – which are particularly important in cross-border transactions – often require manual processes, which add delays and lead to errors.”
“In principle, using tokenized assets residing on unified ledgers could ease many of these burdens,” he added. “Transactions using tokenized assets can settle atomically – that is, immediately – with all parts of the transaction settling at once. Compliance with regulatory norms can be embedded programmatically inside the tokens. So they will be adhered to with certainty and without the need for manual intervention. So this is a big project, with big potential gains.”
Carstens highlighted that Project Agorá “has central banks and commercial banks working together to craft a structure that could form the basis for a future financial system,” a development he called exciting.
“I mentioned before the useful catalytic role for central banks in initiating technological innovation. But central banks cannot do it alone,” he said. “The two-tier banking system lies at the heart of today's financial system. The system needs money. But very little money comes from the central bank. Commercial bank money provides the bulk of it.”
“The two-tier banking system helps deliver two foundational principles,” Carstens noted. “The first is the singleness of money. This ensures that a euro is a euro, whether it is the banknote in my pocket or in my deposit at Santander or any other bank. The second is settlement finality, which comes about through the final settlement of all transactions on the balance sheet of the central bank.”
“We do not know what the financial system of the future will look like. But it is hard for me to imagine that it will not require a two-tier banking system,” he said. “This means that as well as tokenized central bank money – particularly in wholesale form – it will require banks to provide their customers with tokenized deposits. Project Agorá provides a powerful use case, and I hope that it will spur further innovation.”
