Commentary: How Cross-Border Digital Payments Can be Simplified by Project mBridge

In 2021, the People’s Bank of China (PBOC) joined the international Project mBridge, focusing on cross-border payments using central bank digital currencies (CBDCs). This project involves several international monetary authorities and has reached the minimum viable product stage with significant growth in transaction values recently. [para. 1] During the SWIFT International Banking Operations Seminar, Lu Lei, PBOC's deputy governor, outlined three guiding principles for mBridge: No Disruption, Compliance, and Interoperability. [para. 2]

The “No Disruption” principle emphasizes respecting individual jurisdictions' currency sovereignty and promoting mutual trust among involved parties. Distributed ledger technology plays a role in this principle by enabling jurisdictions to operate their own nodes, thereby balancing rights and responsibilities in cross-border transactions. The main objective is to avoid new barriers and costs while reducing existing frictions in international monetary, financial, and trade systems. Additionally, mBridge seeks to address undersupplied cross-border payment needs, particularly in e-commerce and remittances, areas typically avoided by banks due to high compliance costs and low profit margins. Collaborating with ASEAN and Belt and Road economies is suggested to enhance cross-border payment and currency services in these often underserved regions. [para. 3][para. 4][para. 5][para. 6]

The second principle, Compliance, requires adherence to the regulations of all transacting parties as well as international standards against money laundering and terrorism financing. The mBridge platform, developed by multiple monetary authorities, enhances supervisory efficiency and embraces jurisdictional variations through the Lego-Brick Approach, providing regulatory flexibility. Despite aiming to reduce compliance costs, the principle does not advocate for regulatory relaxation. Instead, it highlights leveraging RegTech to reinforce compliance while addressing geopolitical risks. This strategy supports RegTech innovation, particularly in emerging market economies. [para. 7][para. 8]

The third principle, Interoperability, focuses on integrating CBDC systems with traditional payment systems, achieved by mBridge. This integration is vital for the growth of the international monetary system and alleviating concerns about currency substitution. The mBridge platform supports Payment versus Payment (PvP) settlement using central bank money, aimed at improving post-trade processing and mitigating Herstatt risk. [para. 9][para. 10][para. 11]

Despite its progress, mBridge faces several unresolved issues requiring further exploration, such as how transactions on the platform are categorized in jurisdictions with capital controls and the application of foreign exchange rules and rates. Coupled with this, further regulatory collaboration and improvements in foreign exchange trading and processing efficiency remain areas for enhancement. The principles of interoperability offer new prospects for the international monetary system and present intriguing topics for future research. [para. 12][para. 13][para. 14]