BEIJING – The demand for fast, inexpensive and accessible cross-border payments is gathering pace as central banks are banding together to make financial transactions more seamless. However, several issues have to be addressed to harmonize systems.

During a panel session at the ongoing Sibos 2024 here, speakers discussed the ambitious Project mBridge, a multi-central bank digital currency ( CBDC ) platform that uses distributed ledger technology for instant wholesale cross-border payments and foreign exchange transactions.

Formally launched in 2021, mBridge involves close collaboration between the Bank of International Settlement’s Innovation Hub, Hong Kong Centre, Bank of Thailand, Central Bank of the United Arab Emirates, Digital Currency Institute of the People’s Bank of China, and Hong Kong Monetary Authority. The Saudi Central Bank joined the project as a full participant this year.

The year 2024 has been a milestone for mBridge as it has reached its minimum viable product ( MVP ) stage after extensive development.  Participating central banks have reached a consensus with participating commercial banks to conduct real-time transactions on a continuous basis.

Between April and September 2024, the platform facilitated real-value cross-border payments and FX transactions in four CBDCs – China’s e-CNY, Thailand’s e-THB, the United Arab Emirates’ e-AED, and Hong Kong’s e-HKD – issued by the corresponding central banks. These transactions were undertaken by 35 participating commercial banks in over 10 industry use cases.

Pre-funding payments

Despite the project’s initial successes, a few issues have to be ironed out such as ensuring sufficient liquidity. “Since there are no market makers and market for liquidity management, banks have to pre-fund their payments on mBridge for their customers. This is different from traditional payments and settlement, where the correspondent bank has done this. There is no need for them to do the pre-funding,” Alisara Mahasandana, deputy governor of the Bank of Thailand, shares at the Sibos panel session.

“A bank needs to manage liquidity both on the CBDC and fiat currency. Also, since there is no established foreign exchange market for the CBDC, banks need to exchange from one currency to another currency for fiat currency and then converting it to the CBDC.”

Mahasandana goes on to say that banks will need to have an additional process to adhere to the exchange control and anti-money laundering requirements of each country to support the transaction on mBridge. “This is different from the traditional system where the correspondent bank and Swift have done the job for the banks, pre-validating the transactions against exchange control regulations,” he notes.

Another area that needs to be sorted out is ensuring reliable technical architecture and infrastructure. “The cross-border connection faces high fluctuations, placing extremely high demands on the stable consensus mechanism. To address this challenge, mBridge has updated its consensus algorithm to increase blockchain performance in unstable network environments,” explains Changchun Mu, director-general at the Digital Currency Institute of the People’s Bank of China.

Moreover, a flexible governance structure must be established for mBridge. “We are thinking in the future how to formalize even further the legal structure going forward. The main item is that we want to be compliant with international standards and also any other central bank’s specific requirements to make a formalized governance proper legal structure,” says Shu Pui Li, adviser to the governor of the Central Bank of the United Arab Emirates.

This pointed was also underscored by Colin Pou, executive director at the Hong Kong Monetary Authority, saying: “The legal framework must be robust enough to provide the certainty, and also accommodate diversity, to facilitate participation and collaboration so that all the parties can participate on a fair and equal basis.”

As of October 2024, Project mBridge project has was 32 observing members comprising of central banks, international organizations and multilateral development banks.