A CBDC Alternative to SWIFT?

There are more ongoing cross-border CBDC trials with cute names than one can possibly keep track of (such as Cedar, Icebreaker, Jasper, Mariana and many more). But one stands out: the mBridge project.

Why? For the following reasons:

– It involves 23 central banks, including the BIS (the official organization for central banks)

– It is designed to bypass the US dollar-based global financial system

– It is almost ready to go live

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading, and host of the CoinDesk Markets Daily podcast. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.

Assuming it meets its target schedule, mBridge is set to become the first functioning blockchain-based payment platform involving official entities. Its nucleus is in Asia, but organizations from all continents are also involved. And while it is unlikely to knock the dollar off its global reserve currency perch, it could end up impacting international flows, trade agreements and the power of sanctions.

Let’s dive into the where, why and what of mBridge:

CBDC frictions

Wholesale CBDCs (which involve the exchange of value between banks, rather than between people) have often been touted as a potential solution to the frictions of cross-border trade. These include transaction costs, currency illiquidity, opacity and documentation.

The problem is, the frictions are often due to differences between systems, both financial and commercial. Changing these systems, many of which are deeply embedded in a country’s economic governance, is going to be difficult, to say the least, especially since there is as yet no agreement on how they should change. Even if governments are convinced that a wholesale CBDC is in their best interests, any application would require profound modifications to accounting and documentation processes.

As yet, there are no unified regulatory frameworks. What’s to guarantee that a CBDC from one jurisdiction will be treated as “good money” by another? How can the CBDC of one country spread through the financial system of a trading partner? If it can’t, how would swaps work? Beyond bank…