The beginning of the multilateral central bank digital currency bridge to subvert the international payment system

Multilateral central bank digital currency bridge projects have been very popular recently.

On November 3, when the Hong Kong Fintech Week was held, with the support of the Hong Kong Innovation Center of the Bank for International Settlements, the Digital Currency Research Institute of the People’s Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand and the Central Bank of the United Arab Emirates jointly issued a multilateral central bank digital currency bridge The project use case manual briefly introduces the project application scenarios and test progress.

Since the People’s Bank of China participated in February 2021, this project has received a high degree of attention. Today we also briefly talk about what is the multilateral central bank digital currency bridge project?

Development History

The multilateral central bank digital currency bridge project was originally a bilateral pilot project between the Bank of Thailand and the Hong Kong Monetary Authority.

In 2017, the Hong Kong Monetary Authority began to study the central bank’s digital currency project and named the project LionRock, the Lion Rock. The Lion Rock is a famous mountain shaped like a lion in Hong Kong, and Hong Kong has also spread word of mouth the “Lion Rock Spirit” that is positive and inspiring.

In August 2018, the Bank of Thailand announced its central bank digital currency (CBDC) project called Inthanon, in which eight commercial banks in the country participated. The author checked relevant information and found that Inthanon seems to represent a mountain Doi Inthanon in Chiang Mai, Thailand. It is the highest mountain in Thailand.

In May 2019, the two CBDCs of Hong Kong and Thailand conducted a “mountain and mountain alliance” and launched the Inthanon-LionRock project, which aims to study the application of CBDC in cross-border payments.

In September 2019, the first phase of the Inthanon-LionRock project was launched and completed in December of that year. This stage is mainly about technology opening. Both parties have successfully developed a proof-of-concept prototype based on Distributed Ledger Technology (DLT) with a total of 10 participating banks from the two places.

In November 2020, the second phase of the Inthanon-LionRock project was launched. At this stage, the two parties are discussing commercial use cases in cross-border trade settlement and capital market transactions.

In February 2021, the Inthanon-LionRock project entered the third phase of research and development. The Central Bank of China and the UAE Central Bank joined, and the Inthanon-LionRock project ushered in expansion, from the original two parties to the four parties. At the same time, the Hong Kong Center under the Innovation Hub of the Bank for International Settlements also supports the project. The name of the project was officially renamed “m-CBDC Bridge” (m-CBDC Bridge), which is what we call the multilateral central bank digital currency bridge.

In September 2021, the Quartet released the first phase report of the multilateral central bank digital currency bridge project. At this time, the convenience and efficiency that the project has brought to cross-border payments can be initially seen.

In November 2021, the Sifang Central Bank released a use case manual for the multilateral central bank digital currency bridge project, introducing 15 potential application scenarios and test progress of the project, involving international trade settlement, cross-border e-commerce, supply chain finance, etc.

For the convenience of reading, we will refer to the multilateral central bank digital currency bridge project as mBridge for short.

What is the principle?

In September 2021, the Hong Kong Innovation Center of the Bank for International Settlements released a phased summary report of “Inthanon-LionRock to mBridge: Building a multi CBDC platform for international payments” (hereinafter referred to as the “Report”).

The report shows that mBridge was born in the Inthanon-LionRock stage, and the technical principles and some concepts are inherited from Inthanon-LionRock. mBridge will also uphold the three major principles of non-harm, compliance and interoperability, with the overall goal of “designing and iterating a new generation of efficient cross-border payment infrastructure in response to pain points such as high cost, low speed and complex operability.”

The disclosure reports, Inthanon-LionRock prototype block chain is a network layer Ethernet Square co-founder Joseph Lubin ConsenSys founded companies built on Hyperledger Besu, whether or not the network may have so strong compatibility between the main network and Ethernet Square Sex, there is a potential foreshadowing. Will mBridge be linked with Ethereum’s rich ecosystem in the future?

mBridge’s system construction has a three-tier system:

Layer 1 is the core layer: this layer contains the blockchain ledger technology (blockchain ledger) and its related data, and is also the implementation layer of smart contract logic programming. 

Layer 2 is the back-end application layer: provide identity recognition, permission access, routing functions, wallet signature, key management, foreign exchange mechanism, etc. for the first layer. 

Layer 3 is the front-end layer: This layer provides an interface for accessing the core system and provides end users with required functions.

The beginning of the multilateral central bank digital currency bridge to subvert the international payment system

In terms of technical principles, mBridge still uses the foundation of the Inthanon-LionRock project. A “corridor network” is adopted. All participating banks run their own nodes in the domestic network and the corridor network. Only the central banks of various countries have the core right to manage the nodes. The use of blockchain and distributed ledger technology enables the entire link to be sufficiently secure.

On the corridor network, through tokenized assets, parties can conduct transactions in a peer-to-peer manner without the need for an intermediate account. In this way, the platform can seamlessly exchange between different currencies and different jurisdictions. Provide tokenized PvP (Payment vs Payment) transfer.

In cross-border payment, as much digital currency exchanged by both parties, the corresponding amount will be mapped on the corridor network, and the mapped product is also called “depository receipt”. From the perspective of the core layer, the Bank of China can understand the digital currency operations on the corridor network in great detail.

To put it simply, the bank of country A needs the digital currency of country B and exchanges it for 100 million. There will be 100 million depositary receipts on the corresponding corridor network. Depository receipts in the corridor network are universal, which can make it possible to join MBridge currencies can be exchanged more efficiently. If the bank of country C needs 50 million digital currency of country B, the bank of country A can directly complete the transaction on the corridor network through depository receipts. It is worth mentioning that, after all, depository receipts are just certificates and cannot be directly circulated. Currency circulation in various countries still needs to be exchanged for corresponding digital currencies. This scenario is more suitable for wholesale digital currency applications.

What effect will mBridge achieve in the end? 

The report draws two pictures to show how mBridge has improved the efficiency of cross-border payments. The traditional cross-border payment mode of correspondent bank:

The beginning of the multilateral central bank digital currency bridge to subvert the international payment system

In multilateral transactions, this model needs to go through multiple nodes, different countries and there are hidden policy restrictions. This is also the most popular SWIFT model. Although SWIFT has launched SWIFT GPI, SWIFT Go and other products in recent years to improve the settlement efficiency of the entire network, from a few days to a few minutes, the underlying logic remains unchanged, and the transaction efficiency is more efficient. Regulatory risks are still poor.

The mBridge transaction model is as follows:

The beginning of the multilateral central bank digital currency bridge to subvert the international payment system

Multilateral can directly implement point-to-point transactions on the corridor network, eliminating intermediate links, and its transaction speed can reach the second level. Since many intermediate links are omitted, costs can be significantly reduced, foreign exchange operational risks can be eliminated, transparency can be improved, and supervision efforts can be reduced.

The author briefly believes that under the SWIFT model, intermediary agencies are only the transmission of information, and specific transaction execution requires bilateral banks to operate in accordance with the unified messaging system. And mBridge cannot be called the digital currency version of SWIFT. It has a certain nature of exchange. Central banks of various countries rely on the corridor network to exchange depositary receipts and digital currencies back and forth. Through smart contracts, countries formulate corresponding trading rules and regulatory policies. 

According to the summary of the newly released mBridge application manual, mBridge can bring a cross-border payment experience with low cost, easy operation, no exchange risk, high transparency, and low reporting burden.

Possible impact

For the Central Bank of China, mBridge is an important breaking point in the global cross-border payment revolution and an important entry point for reshaping the global payment system.

At the G20 meeting in 2020, the 20 countries agreed to strengthen cross-border payments as a priority that should be resolved. The “Enhancing cross-border payments: building blocks of a global roadmap Stage 2 report to the G20” issued by the Bank for International Settlements in July 2020 clearly pointed out the current cross-border payment problems and proposed 19 solutions.

Among them, there are only three directions for exploring new payment technologies, systems and arrangements, including considering new multilateral cross-border payment platforms and deployment, observing the development of global stablecoins, and exploring CBDC.

The beginning of the multilateral central bank digital currency bridge to subvert the international payment system

Of these three roads, the first one is a bit of a re-creation of SWIFT. For example, Europe launched INSTEX; the second is to observe the development of stable currencies such as Meta (Facebook) Diem and USDT; the third is projects such as mBridge .

In addition to banning stablecoins, the Chinese government has introduced CIPS. Under the original SWIFT system, it is actually very difficult to break through. And mBridge started from zero, the world’s first cross-border settlement platform built around digital currencies. Regardless of whether it is successful or not, the People’s Bank of China is doing card positions.

In contrast to the United States, due to the strong position of the US dollar, SWIFT is currently in its favor, so there is no need to build a multilateral cross-border payment platform. The United States is very cautious about CBDC, and to some extent does not even want to launch CBDC. At the end of 2019, the US Treasury Secretary stated that the Federal Reserve will not issue digital currencies within 5 years. In the middle of this year, the Federal Reserve also said that it will release the US version of the CBDC research report in the summer, but it has not yet released it.

In terms of stablecoins, both US officials and technology giants are exceptionally supportive. Most of the larger stablecoins are anchored to the more stable U.S. dollar, such as Diem and USDT. In terms of payment ecology, Square, PayPal, Visa, Mastercard, etc. all support the development of cryptocurrencies to varying degrees.

It is not easy for mBridge to succeed. A KPMG report shows that it will take at least 10 years for mBridge to be widely used. In addition to facing the challenges of stablecoins around the world, the development of mBridge is directly related to the degree of enthusiasm for CBDC in all countries around the world. If all countries launch CBDC, recognize and join mBridge, it will be half, and the rest is the game and Run-in.

Of course, with the help of mBridge’s open, fair, and transparent environment, perhaps the internationalization of the RMB can be accelerated, but currency competition is behind the competition of comprehensive national strength and global influence. mBridge will be a reflection of national strength.

Reference materials: 

“Multilateral Central Bank Digital Currency Bridge Research Project Use Case Manual” 

“Deep Science: G20 Cross-border Payment Roadmap” WalletsClub

“Eliminate pain points and explore new channels for cross-border payments-analysis of multilateral central bank digital currency bridge research projects” Zhongyi Finance.com 

“Zou Chuanwei: Exploring the Application of Multilateral Central Bank Digital Currency Bridge in Cross-border Payment” Zou Chuanwei 

“Analysis of Multilateral Central Bank Digital Currency Bridge Project” Jiang Huaicong 

“Inthanon-LionRock to mBridge: Building a multi CBDC platform for international payments” Hong Kong Innovation Center of the Bank for International Settlements

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