The summit of Brics economies taking place later this year is likely to cover the perennial efforts to lessen the dominance of the US dollar in the global economy. The Brics group’s founding members — Brazil, Russia, India, China and South Africa — have good reasons to seek alternatives to the dollar (such as US trade sanctions on Russia and China), but the grouping has yet to offer a viable alternative reserve currency.
Another option likely to be mooted is a Brics blockchain-based payment system, say experts, which would connect member states’ financial systems using central bank digital currencies. Thailand, which is seeking membership of the group, could offer some advice when the group meets in Kazan, Russia, at the end of October.
According to the Atlantic Council, a US think tank, there are now 134 countries and currencies unions exploring the use of CBDCs, up from just 35 in 2020. In south-east Asia, Thailand has been an early pioneer of the alternative payment scheme, although the focus has been more on boosting banking efficiency and cutting cross-border trade costs rather than undermining dollar dominance.
The Bank of Thailand started exploring the use of CBDC for domestic use cases in 2018 when the banking system was undergoing rapid digitalisation of its services, and then started looking into cross-border possibilities with other central banks in the region. In 2019 it linked up with the Hong Kong Monetary Authority and launched the joint Inthanon/Lionrock project, exploring payment possibilities between the two economies which are significant trade partners, with two-way trade reaching $13.7bn in 2023, up 7 per cent.
As the third phase of the expanded Thai/HK CBDC project, mBridge was conceived in 2021, with the involvement of the BIS Innovation Hub, along with the Central Bank of the United Arab Emirates and the digital currency of the People’s Bank of China.
“With the mBridge project, our aim is to explore the viability of distributed ledger technology and a new business model using multi-CBDC, without corresponding banks, to address current pain points of cross-border fund transfers and FX transactions by making cross-border payments cheaper, faster, more transparent and safer from reduced settlement risk, which are in accordance with the mandate of the G20 Roadmap for Enhancing Cross-Border Payments,” says Kasidit Tansanguan, director of the digital currency unit at the Bank of Thailand.
For Thailand, the CBDC focus has been on eliminating the need for correspondent banks, generally the domain of western banking giants. The correspondent banking system is slow and expensive, while many international banks have been reducing their physical presence in regions such as south-east Asia, adding to the inconvenience of using them. The mBridge platform, by circumventing the need for correspondent banks, promises to decrease cross-border transfer times from three to five days to just seconds and enable direct peer-to-peer linkages between participating banks while reducing resettlement risks and supporting the use of local currencies.
“The intention is for businesses to have greater flexibility in using local currencies as one option to help mitigate exchange rate risks,” says Tansanguan. In other words, it avoids the use of the US dollar as an intermediary currency. However, to what extent use of CBDCs in cross-border trade could wean the world off it dependence on the greenback remains unknown. The CBDC projects to date are small-scale.
In an mBridge pilot conducted in August and September 2022 with the participation of 20 commercial banks from four countries, some 164 transactions worth $22mn were successfully carried out, and in June 2024 mBridge had reportedly reached minimal viable product stage, although no data on this has been published. According to the Atlantic Council, the US dollar in 2023 still accounted for 58 per cent of foreign reserves holdings worldwide and 88 per cent of all foreign exchange transactions.
Experts acknowledge that the expansion of the mBridge project, now under the management of BIS Innovation Hub, will depend on how many central banks join the project in the future, and how many financial systems have the digital infrastructure to do so. There are other platforms underway which are not mutually exclusive. “We are also part of Project Nexus and Swift’s second phase of an industry-wide sandbox testing its CBDC interlinking solutions,” says Tansanguan.
