China’s recent blockchain-based venture, mBridge, is raising eyebrows as it potentially challenges the hegemony of the US dollar in the world of foreign exchange. This innovative initiative could potentially pave the way for the digital yuan to act as a viable alternative to the dollar in substantial corporate transactions. However, critics express apprehension over the potential for sanctions evasion, tax avoidance, and money laundering regulations circumvention.
The Rising Challenge to the Dollar’s Dominance
It is estimated that the dollar is involved in a whopping $6.6 trillion worth of daily foreign exchange transactions, according to the Bank for International Settlements (BIS). This firmly cements the US dollar as the most traded currency in the exchange market, involving itself in nearly 90% of all global foreign exchange transactions.
However, China’s latest project, mBridge, poses a significant challenge to this dominance. This blockchain project is the third phase of a cross-border payment initiative involving multiple Central Bank Digital Currencies (CBDCs) that started in 2019. The project is expected to have a basic functioning product by the end of 2023.
Collaborative Effort Behind mBridge
The creation of mBridge is a collaborative effort by several significant financial institutions. These include the BIS Innovation Hub Hong Kong Center, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.
The partners of mBridge successfully conducted a pilot trial in August and September 2022, which facilitated 164 cross-border transactions worth $22.1 million. This figure indicates that the CBDCs issued on mBridge during the pilot facilitated nearly double the amount in cross-border value.
Concerns and Confidence Regarding mBridge
While some officials worry that mBridge could give China a significant head start in revolutionizing wholesale payments across borders, others are concerned about the potential for digital alternatives to dollar-based settlement to facilitate evasion of sanctions, taxes, and rules on money laundering.
However, according to Eswar Prasad, author of ‘The Future of Money’, the US government is confident in the dollar’s dominance and there’s ‘little reason’ to be alarmed. He believes these initiatives will leave China’s currency ‘short of being in a position to seriously rival the dollar’.
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