(Bloomberg) -- The Bank for International Settlements is debating whether to shut down a pilot cross-border payments platform after Russia’s President Vladimir Putin identified the underlying technology as a tool to circumvent sanctions and potentially undermine the dollar’s dominance in the global financial system.
The mBridge project — which promises to allow sending money around the world without relying on US banks — was among topics discussed by central banks and finance chiefs at last week’s annual meetings of the International Monetary Fund and World Bank in Washington, according to people informed about the talks. Shutting it down was among the options, the people added, asking not to be named discussing confidential deliberations.
Agustin Carstens, the BIS general manager whose term ends in June, said on Saturday at an event of the Group of 30 in the US capital that “we cannot directly support any project for the BRICS because we cannot operate with countries that are subject to sanctions — I want to be very clear about that.”
The US has been increasingly using the dollar’s role as a key conduit of financial transactions worldwide to implement international sanctions, in particular after Russia’s invasion of Ukraine. This has prompted attempts to seek alternatives that would be safe from US interventions, even though the dollar remains the main currency of international trade and there are little signs this will change anytime soon.
This hasn’t stopped countries such as China and Russia from trying. mBridge promises to allow sending money around the world outside of the current system of correspondent banks, which is heavily reliant on the dollar and therefore potentially the target of US sanctions. Instead, it establishes direct digital links between the central banks of participating nations.
The platform initially was developed by the central banks of China, Thailand, Hong Kong and the United Arab Emirates under the BIS’s Innovation Hub, and recently reached the “minimum viable product” stage, meaning it’s ready for testing in the real world.
The UAE’s central bank said a first cross-border payment of ‘digital dirham’ worth 50 million dirham ($13.6 million) was sent to China through mBridge in January. In June, the BIS invited private lenders and other monetary institutions to join and perform actual transactions.
Adding to the concerns of Western policymakers is the fact that China supplied the platform’s key technological backbone.
According to one senior policymaker, allowing China to have the upper hand in the development of such a delicate project was a mistake. Other officials confirmed the discussions, highlighting the importance of choosing carefully which nations are allowed to lead changes to the global financial plumbing.
BRICS Bridge
At last week’s BRICS summit in Kazan, Russia, Putin pitched the creation of BRICS Bridge for the group, which would be based on technology comparable to mBridge’s. This would allow their economies to become independent of the US-supervised financial system, he argued.
Putin’s embrace is pushing officials to quickly reconsider the whole endeavor. Still, it’s unclear whether a BIS shutdown of the mBridge project could effectively stop participating central banks from putting the technology to use. Some countries might decide to carry on even without the Basel-based institution, according to a person familiar with the project.
At the same time, while building out the BRICS Bridge architecture might be technically feasible, Putin’s plan could face opposition from the group’s other members which aren’t under US sanctions.
While many participants favor a greater use of national currencies in bilateral trade, countries like India, South Africa and the UAE do not want to subvert today’s dollar-based financial system. In the communique of last week’s BRICS summit, the group expressed concerns about the negative impact on the global economy of “illegal” sanctions and called for the reform of the IMF and the World Bank, but stopped short of referring to BRICS Bridge.
“At this stage it is hard to imagine a widespread development and adoption of BRICS financial tools globally,” said Agathe Demarais, a senior policy fellow at the European Council of Foreign Relations. “In the long run, there is no doubt that mechanisms like BRICS Bridge could be useful for China, Russia or others to hide sensitive transactions from western authorities.”
--With assistance from Eric Martin, Laura Noonan and Tony Halpin.
(Updates with UAE transaction in seventh paragraph)
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