Dubai: The UAE Central Bank is taking on a major role in a digital initiative on cross-border payments.
The ‘mBridge’ project brings together the Bank of International Settlements Innovation Hub in Hong Kong, the Hong Kong Monetary Authority, the Bank of Thailand and the Digital Currency Institute of the People’s Bank of China, apart from the UAE regulator.
The platform can be an alternative to the complexities and inefficiencies in the traditional banking system. The payments will be based on distributed ledger technology (DLT) and can deliver real-time, cheaper and safer cross-border payments and settlements. The cost of these operations to users can also be reduced by up to half, according to a project report published today.
The common prototype platform for mCBDC settlements was able to complete international transfers and foreign exchange operations in seconds, as opposed to the several days normally required for a transaction to be completed using the existing network of commercial banks and operate in a 24x7 basis.
Payments, FX transactions and other operations usually route through the networks of large global banks, which serve as bridges between jurisdictions. The system is generically known as “correspondent banking”.
While serving a critical economic role, these networks and arrangements can be complex, sometimes fragmented, and involve operational inefficiencies. For example, banks work in different time zones, subject to the operating hours of national payment systems. Also, legally required safeguards to combat money laundering, tax evasion or terrorism financing are repeated by financial institutions in the network.
According to the BIS’s most recent Annual Economic Report, mCBDCs - which join national digital currencies in common interoperable platforms - offer the greatest potential for improving today’s systems’ limitations. They provide central banks with a “clean slate” start, and not burdened by legacy arrangements or technologies.
How mBridge works
The mBridge project builds upon the initial investigation by the central banks of Hong Kong and Thailand (Project Inthanon-LionRock), which proved the viability of a common CBDC platform between two jurisdictions.
The current phase of the project broadens the geographic and diversity of currencies, adding the Digital Currency Institute’s experience with rolling out the e-CNY pilot in China, and learnings from the UAE Central Bank developing a single-currency blockchain solution with Saudi Arabia (Project Aber).
Going forward, mBridge will continue to explore existing limitations of the current platform, related to privacy controls, liquidity management and the scalability and performance of DLT in handling large transaction volumes. The project’s next phases are expected to include trials in a controlled environment with commercial banks and other market participants.
“We look forward to bringing our regional experience with developing CBDCs and cross-border payment infrastructures in the Gulf region to a more global context with mBridge,” said Saif Al Dhaheri, Assistant Governor – Strategy, Financial Infrastructure, and Digital Transformation at the UAE regulator. “And collaborating with other central banks to implement a robust, efficient and secure cross-border CBDC infrastructure.”