The creation of a cross-border payments system using blockchain and distributed ledger technology was a hot topic at the Kazan summit of Brics nations in October. One advantage of this digital system is immediate settlement, which circumvents the need for western messaging systems such as Swift.
A paper published by the Russian central bank at the summit stated, ‘Introducing DLT solutions or a new multinational platform based on modern technologies, which would include a financial messaging component and allow to conduct settlement via tokens backed by national currencies, CBDCs, at the discretion of each participating country – this approach would allow a greater degree of decentralisation.’
Project mBridge
The Bank for International Settlements’ Innovation Hub, together with the People’s Bank of China, Hong Kong Monetary Authority, Bank of Thailand and the Central Bank of the United Arab Emirates developed Project mBridge to tackle some of the key inefficiencies in cross-border payments, with no involvement from Russia. The Saudi Central Bank (SAMA) joined the project in May 2024. There are around 30 observer central banks, including the Federal Reserve Bank of New York, Banque de France and the Reserve Bank of Australia.
The BIS is owned by 63 central banks that account for 95% of the world economy. The Central Bank of the Russian Federation is a shareholder, although membership was suspended in March 2022 following Russia’s full-scale invasion of Ukraine.
The project has made good progress, but it is still years from being put into practice, according to Agustín Carstens, general manager of the BIS. Its ability to avoid the need for western messaging systems means it is of particular interest to two members of the Brics group, now known as Brics+. It has been enlarged in 2024 to encompass Egypt, Ethiopia, Iran and United Arab Emirates.
Western sanctions have heavily constrained Russian and Iranian access of to the global financial system. As a result they are engaged in a constant search for alternative cross-border payments and settlement systems to bypass the sanctions. Two members of the mBridge project, China and the United Arab Emirates, are members of the enlarged Brics group. So the possibility exists that, via these countries, mBridge technology and expertise could be ‘cloned’ and passed to Russia and Iran.
In October, the BIS announced it would leave mBridge and hand over authority to the national central bank members, declaring them capable of taking the project forward to realisation. In a statement on 31 October, Carstens clarified that mBridge cannot be used as a means to bypass sanctions. He said: ‘With respect to political aspects, the noise out there, mBridge is not the “Brics bridge” – I have to say that categorically. Project mBridge was created by central banks for central banks.’
He confirmed that ‘the BIS does not operate with any countries, nor can its products be used by any countries that are subject to sanctions’. He stressed that central banks observe this rule and as such will not make products available to sanctioned countries.
Project Agorá
The BIS has shifted its focus to project Agorá as the central ‘technological marketplace’ for sanctions-observant institutions. This project will explore whether tokenised deposits can be used to carry out cross-border wholesale transactions, thus enhancing cross-border settlement among commercial banks.
The project is in safe hands from the public as well as the private sector. It is under the leadership of the BIS, Banque de France on behalf of the Eurosystem, Bank of Korea, Bank of Japan, Bank of Mexico, Swiss National Bank, Bank of England, and Federal Reserve of New York. The Institute of International Finance is the private sector convener.
Building Agorá as the fully sanctions-compliant repository of central bank expertise on cross-border payments is a sensible move, to which western governments should give full support. But more measures to buttress confidence in western sanctions-proofing are needed.
The BIS is no longer actively associated with mBridge, but it has been instrumental in its development. More information from the BIS and national central banks on ring-fencing mBridge would be a useful confidence-boosting measure. The western central banking system needs to play its part in efforts to overcome the world’s geopolitical challenges. As in other spheres, the BIS can help guide the way.
Herbert Poenisch is Senior Research Fellow, Zhejiang University, and former Senior Economist, Bank for International Settlements.
This topic was further explored in OMFIF’s Future of payments 2024 report.
