The mBridge Project
The mBridge project (short for Multiple Central Bank Digital Currency Bridge) is an initiative aimed at creating an international payment system that uses Central Bank Digital Currencies (CBDCs). This project is the result of collaboration between several central banks. In this article, we will discuss this project and its associated controversies. Before diving into the main topic, we will cover the underlying concepts, and at the end, we will focus on the lessons this project holds for us.
Table of Contents
International Payment Systems and Their Limitations
International payment systems refer to the infrastructures and processes that enable financial transactions between individuals, businesses, or governments in different countries. The most well-known and widely used international system is SWIFT (The Society for Worldwide Interbank Financial Telecommunication). These payments include the transfer of money, currency, or assets that are used in different countries and, therefore, play an important role in international trade, remittances, investments, and tourism. Essentially, without such systems, transactions between countries would be impossible.
Fundamental Issues with Cross-Border Payments
Currency Exchange:
Since different countries use different currencies, cross-border payments often require currency conversion. This process can involve exchange rate fluctuations and fees.
Intermediaries:
Cross-border payments are often facilitated by intermediaries like banks, which make transferring money between countries possible. Each intermediary usually charges fees for its services, making the process slower and more expensive.
Regulations and Compliance:
Cross-border payments are subject to various and often complex legal and regulatory requirements, such as Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations. Compliance with these regulations adds layers of complexity to cross-border transactions.
Settlement Systems:
Financial institutions use specific settlement systems and processes for payments. These systems vary by region and are crucial for ensuring accurate transfers of funds between countries and financial institutions.
Challenges of Traditional Payment Systems
High Costs:
Due to intermediaries and currency conversion fees, cross-border payments can be expensive.
Slow Processing Speeds:
In traditional systems, payments may take several days to process because of the involvement of multiple banks and time zone differences, as humans on both ends need to review and comply with conditions and regulations individually.
Limited Transparency:
Tracking the status of cross-border payments can be challenging due to the often-limited transparency in this process, especially when multiple intermediaries are involved. Even systems like SWIFT remain partially hidden within local workflows.
Restricted Access:
Some individuals and businesses, particularly in developing countries, face significant barriers and limited access to cross-border payment services, which can limit their ability to participate in global markets. For instance, an artisan producing traditional crafts in a rural area might struggle to scale production and integrate into supply chains despite demand for their products.
The Necessity of Independent Blockchain-Based Financial Exchange Systems Like mBridge
The development of independent financial exchange systems on blockchain platforms is gaining increasing importance due to their potential to transform financial infrastructures. Here, we briefly review the fundamental necessities for implementing such systems:
Decentralization
Eliminating Intermediaries:
Traditional financial systems rely on intermediaries such as banks, clearinghouses, and payment processors. Blockchain-based systems can operate in a decentralized manner, enabling direct peer-to-peer transactions without intermediaries. This reduces costs and increases efficiency.
Enhanced User Control:
Blockchain allows users to have greater control over their assets and transactions since there is no central authority managing the system. Each participant generates their own asset keys and gains direct, real-time access to exchanges.
Transparency and Security
Immutable Ledger:
One of blockchain’s fundamental features is its distributed and immutable ledger, which ensures that every transaction is permanently and transparently recorded and available for stakeholders to review. This reduces fraud, duplication costs, and manipulation of financial records.
Improved Auditing Capabilities:
Every transaction on a blockchain can be tracked, creating a complete audit trail. This transparency builds trust in the system and makes financial activities easier for regulators and participants alike to monitor.
Cryptographic Security:
Blockchain systems use advanced cryptography to secure transactions, making them highly resistant to hacking and breaches of privacy, thus ensuring the protection of data and documents.
Cost Efficiency
Reduced Transaction Fees:
Traditional financial systems often incur high transaction fees due to multiple intermediaries. Blockchain eliminates or reduces these intermediaries, leading to lower transaction costs, especially for cross-border payments.
Automation via Smart Contracts:
Blockchain platforms support smart contracts, which automatically execute, validate, or record agreements without human intervention. This reduces administrative overhead and speeds up processes such as settlement, lending, and escrow services.
Faster Settlement
Real-Time Transactions:
Blockchain-based systems can process transactions in real-time or near real-time, reducing multi-day delays associated with traditional banking systems to just hours or even minutes. In this way, every transaction, whether settlement, payment, or guarantee issuance, is completed from agreement to execution in the shortest time possible.
Continuous Payment and Settlement Operations:
Unlike traditional banking systems limited to working hours and disrupted by official and unofficial holidays, blockchain exchanges can operate 24/7 globally.
Cross-Border Financial Inclusion
Borderless Access:
Blockchain-based financial systems can operate globally without intermediaries such as commercial banks or regulators, making it easier for individuals and independent businesses to participate in the global economy. This is particularly important for regions where access to traditional financial services is limited or prohibitively expensive.
Lower Barriers to Entry:
The decentralized nature of blockchain allows individuals with limited access to formal financial systems (e.g., those without bank accounts) to benefit directly from cryptocurrencies and decentralized financial (DeFi) services using just a smartphone.
Resilience and Redundancy
Distributed Network Architecture:
Blockchain systems are more resilient to failures compared to centralized systems because they operate on a distributed network of nodes. If a technical fault or attack affects one part of the network, the system can continue functioning without disruption.
Censorship Resistance:
An independent blockchain-based financial system is less prone to government or institutional interference, providing financial sovereignty to individuals and businesses in regions with political instability or currency controls.
Planning and Innovation
Decentralized Financial Systems:
Blockchain enables the development of DeFi applications that offer decentralized financial services such as lending, borrowing, trading, and insurance. This opens up new opportunities for innovation and customization in the financial industry.
Customizable Financial Products:
Programmable financial assets on blockchain allow users to create customized financial instruments, tokenize real-world assets, and develop complex financial strategies without relying on traditional financial institutions.
Regulatory Compliance and Trust
Built-In Compliance Mechanisms:
Blockchain systems can embed compliance protocols directly into the network through smart contracts, ensuring adherence to legal requirements like identity verification and anti-money laundering (AML) processes without external enforcement.
Transparency for Regulators:
Blockchain transparency can also help regulators track illicit financial activities, enabling better oversight without undermining the decentralized nature of the system.
Interoperability with Traditional Systems
Bridging Legacy Financial Systems:
Independent blockchain-based financial systems can integrate with traditional financial institutions, facilitating hybrid models where assets are tokenized, or fiat currencies can seamlessly exchange with digital assets. This allows smoother transitions to decentralized financial ecosystems.
Central Bank Digital Currencies (CBDCs):
Blockchain-based systems can be designed to interact with CBDCs, providing a way for traditional financial systems to connect with decentralized networks while maintaining regulatory control over monetary policies.
Data Privacy and User Anonymity
Privacy-Preserving Technologies:
Blockchain platforms can leverage privacy-preserving technologies such as Zero-Knowledge Proofs to ensure sensitive financial data remains private while enabling transaction verification. This is critical for both personal privacy and commercial confidentiality.
Pseudonymity:
While blockchain transactions are transparent, users can operate under pseudonyms. This provides a layer of anonymity that is beneficial for users who prioritize privacy.
Introduction to the mBridge Project
This project is the result of collaboration among several central banks, including the central banks of China, Hong Kong, Thailand, the UAE, and Saudi Arabia, under the leadership of the BIS Innovation Hub in Hong Kong. The platform operates on the mBridge Ledger blockchain network and is designed to align with the jurisdictions, legal requirements, and governance needs of the participating countries.
The mBridge project is part of a broader movement where countries are exploring the use of CBDCs to modernize financial infrastructures. It has the potential to pave the way for establishing new global standards for international digital payments. The project has undergone various stages of development and is continuously evolving. Currently, prototypes of the project are being tested with real-world transactions.
The project ensures that every transaction complies with the regulations of the involved jurisdictions. The platform is designed to integrate regulatory compliance into the system by embedding rules in the ledger, including identity verification and anti-money laundering protocols. Transactions across different jurisdictions must meet the regulatory requirements set by each country’s central bank. Compliance is ensured through smart contracts and pre-programmed conditions.
Each transaction on mBridge is recorded on the blockchain, creating a transparent and auditable trail. Regulators can easily trace the flow of funds and ensure compliance with international regulations. This system enables efficient regulatory oversight while protecting individual users’ privacy through secure cryptographic techniques.
Typically, the process begins when a financial institution initiates a cross-border transaction using its digital wallet. The CBDC is transferred from the sender’s digital wallet (in their local currency) and converted to the receiver’s CBDC (in their local currency) via the mBridge platform. The transaction is verified by the respective central banks involved in the transfer, ensuring regulatory compliance. Once verified, the transfer is completed, and the CBDCs are settled in real time.
Although mBridge focuses on central bank digital currencies, it is designed to be interoperable with existing financial systems and infrastructures. This ensures that mBridge can coexist with traditional payment methods like SWIFT, enabling a smoother transition from legacy systems to blockchain-based systems.
Technical Structure and Features of the mBridge Project
In this section, we will review the structure and technical features of the mBridge project:
Blockchain Infrastructure
Distributed Ledger Technology (DLT):
The mBridge network operates on a distributed ledger, meaning transaction records are stored across multiple nodes in a decentralized network. Each participating central bank sets up multiple nodes where transactions are recorded and verified. This technology minimizes reliance on intermediaries and enables real-time settlement.
Interoperability and CBDC Conversion:
The mBridge platform facilitates interoperability between different central bank digital currencies. This allows countries to conduct international transactions using their respective digital currencies, avoiding the need for intermediary fiat currencies like the US dollar.
Consensus Algorithm:
mBridge relies on a consensus mechanism to ensure the validity and integrity of the distributed ledger. Each transaction must be approved by the majority of nodes (operated by central banks) before being added to the ledger. The consensus model ensures security, data integrity, and trust among participating entities. Additionally, the issuance, redemption, and payment of CBDCs are executed through smart contracts written in Solidity. This code is shared among participating central banks and is open-source.
The project employs the “Dashing” consensus algorithm, a Byzantine Fault Tolerance (BFT) protocol that uses relative validity proofs to reduce the time needed to reach consensus and improve overall protocol performance. Pseudonymous addresses and encrypted payment metadata packages are used to protect privacy and confidentiality in transactions. The platform also offers APIs based on the global ISO 20022 financial messaging standard to support interoperability and reduce friction when onboarding new institutions.
Cryptographic Security
Transactions are secured using advanced cryptographic algorithms to prevent unauthorized access, tampering, or fraud. Users’ private keys are required to sign transactions, ensuring that only authorized participants can initiate and approve transactions.
Multi-Jurisdictional Architecture
Central Bank Nodes:
Each participating central bank runs its own node on the mBridge network. These nodes are responsible for issuing their respective CBDCs on the platform, verifying transactions, and maintaining the ledger. The decentralized nature of these nodes ensures that no single entity has full control over the network, allowing each central bank to retain its independence in issuing and managing its own digital currency.
Smart Contracts for Automated Settlement:
mBridge employs smart contracts, which are self-executing agreements with terms directly written into code. By implementing predefined rules and conditions, these smart contracts facilitate the automated and near-instant settlement of cross-border payments. They also automate complex processes like compliance checks, currency exchanges, and transaction validations, reducing the need for manual intervention.
Real-Time Gross Settlement (RTGS)
mBridge includes real-time gross settlement (RTGS) capabilities, where payments are processed and settled individually in real time without batching. Once recorded on the ledger, transactions are considered final, eliminating settlement risk. The real-time settlement feature in mBridge is specifically designed to handle the complexities of cross-border transactions, including the involvement of different currencies, jurisdictions, and time zones.
Interoperable Digital Wallets and Multi-Currency Exchange
Users on the mBridge platform, whether banks, businesses, or financial institutions, access the system via interoperable digital wallets. These wallets allow users to hold multiple CBDCs, transact with them, and interact with other participants on the network. Using a single platform, users can transfer and exchange CBDCs without relying on intermediary currencies or services.
In other words, this system includes multi-currency exchange capabilities to facilitate transactions between different CBDCs, essentially functioning as a multi-currency exchange. Users can instantly swap one CBDC for another using the mBridge platform without needing intermediary currencies like the dollar or euro.
Main Objective: Breaking Monopoly
There are several cross-border and international payment systems, but in practice, only one system truly works: SWIFT, which has no rivals and is heavily monitored by the United States. Even minor political and economic tensions, without necessarily leading to sanctions or retaliatory actions, can quickly disrupt SWIFT and similar systems, or at the very least cause significant delays. This was clearly seen during the trade war between China and the United States, where even without direct interference by SWIFT, intermediary banks began conducting additional inquiries for each transaction. Often, intermediaries and SWIFT, under pressure from governmental authorities, especially the U.S., turned simple operations into unnecessarily complex ones.
The U.S. has tools to cripple SWIFT without even applying direct pressure: the dollar, the world’s dominant currency. For example, the U.S. could instruct SWIFT to temporarily require all dollar-denominated transactions related to country A’s citizens to be reviewed at a U.S.-based bank before being completed. Such a measure would cause at least several days of delays, increase transaction costs by several percentage points, and potentially result in financial losses for the affected parties.
If sanctions were imposed, the situation would be even more severe—a scenario we, as Iranians, are all too familiar with.
Thus, breaking SWIFT’s monopoly—and, more importantly, the dollar’s—is the main objective. It’s worth considering that in tomorrow’s world, traditional fiat currencies as we know them might no longer exist, with cryptocurrencies instead becoming the primary medium of exchange. Projects and networks like mBridge are therefore essential.
Project Timeline
Concept Creation and Initial Research (2019–2020):
2019:
Central banks and the Bank for International Settlements (BIS) began exploring the potential of central bank digital currencies (CBDCs) to improve international payments. Initial discussions focused on how blockchain and distributed ledger technology (DLT) could address inefficiencies in existing payment systems.
2020:
The Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BoT) launched the Inthanon-LionRock project, the predecessor to mBridge. This project served as an initial pilot to leverage DLT for cross-border CBDC payments between Hong Kong and Thailand. In February 2020, the Inthanon-LionRock project completed its first proof-of-concept (PoC), demonstrating the feasibility of cross-border payments using a shared blockchain platform to facilitate transactions between the central banks of Hong Kong and Thailand.
In November 2020, following the successful PoC, the Inthanon-LionRock project expressed interest in developing a platform for multi-CBDC cross-border payments, which led to broader international collaboration with other central banks.
Transition to mBridge and Expansion (2021):
First Half of 2021:
Following the success of the Inthanon-LionRock project, the initiative was renamed mBridge and expanded to include the People’s Bank of China (PBoC), the Central Bank of the United Arab Emirates (CBUAE), the HKMA, and the BoT.
September 2021:
The BIS Innovation Hub published a report on mBridge outlining the objectives, challenges, and potential benefits of using CBDCs for cross-border payments. The report also highlighted the technical advantages of DLT and blockchain in reducing costs and improving efficiency.
October 2021:
The mBridge project entered the prototype testing phase with the participation of four central banks. The prototype platform was designed to facilitate cross-border transactions using each country’s respective CBDCs, with a focus on real-time settlement and regulatory compliance.
Cross-Border Transaction Trials (2022):
March 2022:
The mBridge platform entered the pilot phase, testing real transactions between participating central banks. This phase focused on evaluating the system’s capacity for real-time gross settlement (RTGS) and multi-CBDC interoperability.
September 2022:
The BIS and participating central banks released a report on mBridge, detailing the results of cross-border payment trials. The report highlighted the successful completion of over 160 transactions using CBDCs across financial institutions in four jurisdictions. The trials demonstrated the platform’s significant potential to reduce costs and improve transaction speed compared to traditional systems.
October 2022:
mBridge became a focal point in international financial forums like the G20, gaining global attention for its potential to transform cross-border payments.
Ongoing Development and Scaling (2023):
2023:
The mBridge project continued to evolve through further pilot programs and technical improvements. The platform expanded its capabilities to explore additional use cases, including trade finance, international remittances, and multi-jurisdictional compliance. Participating central banks worked to ensure scalability and enhance regulatory frameworks for CBDC interoperability across partner countries.
August 2023:
A report by the BIS Innovation Hub highlighted significant progress in the platform’s security, resilience, and regulatory alignment. Efforts focused on enabling the system to handle higher transaction volumes and better align with the specific regulatory requirements of each participating jurisdiction.
Further Development and New Membership (2024):
June 2024:
The Saudi Central Bank (SAMA) announced its intention to join the project and participate at a high level.
Expected Developments (Post-2024):
The project is anticipated to move into the scaling and operational deployment phase, potentially attracting additional central banks. As mBridge continues to mature, it could become a comprehensive framework for cross-border CBDC transactions, focusing on enhancing efficiency, reducing transaction costs, and improving financial inclusion.
Lessons for Iran
Our country is grappling with the most ruthless and unilateral sanctions in history; it would not be an exaggeration to say that we are trapped in a prolonged massive siege rather than mere sanctions. In this research paper on BRICS, de-dollarization, the lack of authenticity of fiat currencies, and similar topics, much has been said, presenting correct and scientific concepts and solutions.
Therefore, it is worthy and essential for us to join the mBridge project as soon as possible. Two neighboring countries in the Persian Gulf, as well as our major trading partner, China, are involved in it. This project offers us several benefits. The first benefit, which goes without saying, is economic and commercial. Currently, the UAE and China are the most important trade corridors for Iran. The country’s export and import access to these two countries relies on them, which occasionally refrains from cooperation due to sanctions. However, by joining this project, such excuses for these two countries would be minimized. Moreover, it opens up our trade doors to countries like Hong Kong and Thailand. Of course, joining such projects may require resolving issues such as the FATF (Financial Action Task Force) blacklist.
Another matter is political and diplomatic affairs. Saudi Arabia can undoubtedly be a very strategic partner for Iran in terms of political role, and the opening of economic doors—completely local and without the fear of sanctions—could accelerate the convergence of these two powerful neighbors. Good relations with Saudi Arabia (as well as the UAE) mean finding allies who are willing to negotiate and lobby with Western countries on our behalf when necessary. Furthermore, for example, this system could drastically reduce the costs associated with Hajj, as pilgrims and responsible organizations could undertake their pilgrimage using the mBridge wallet instead of dealing with the hassles of currency conversion to dollars or Saudi riyals. The outcome of this example would be a reduction in the allocation of travel currency and the issues of multiple exchange rates. This scenario would also hold true for Iranian tourists and traders whose destinations are the five countries involved in this project.
Continuing with these diplomatic matters, membership in such groups clearly sends a message to the world that Iran is a normal country seeking development that can engage within the frameworks of international norms. Restoring the country’s image is undoubtedly easier and more feasible through new avenues.
On the other hand, for the process of de-dollarization or more accurately, reducing dependence on universal currencies, we could not find a better or more appropriate starting point than this project (or similar projects). All the countries involved in this project are safe havens from which Iran can benefit to escape the conditions of sanctions. From a technical perspective, it is better and less costly to trade with all these countries using their own currencies and to encourage them to set prices for services and goods based on that.
However, the main lesson from these projects is that we should take the initiative and create projects even in a bilateral manner with each of our commercial and strategic partners, and even in those projects, instead of relying solely on central bank digital currencies, we could turn to independent digital currencies. It is straightforward to conduct our transactions in a network unique to ourselves by storing commonly used and valuable digital currencies while minimizing the technical issues and economic calculations related to the equivalence of fiat rates by not resorting to a third-party digital currency.
Consider this example: Right next to us, Azerbaijan, supported by NATO-member Turkey and Israel, as well as Russia, has put Armenia in a tight spot, intending to establish an illegal corridor that poses a greater danger to Iran than to Armenia. The most peaceful way to mitigate the dangers of these tensions at the Aras border is undoubtedly to enhance economic relations between Iran and Armenia; however, the challenges posed by sanctions make this difficult. If a similar project starts with Armenia or if both Iran and Armenia join the mBridge project, the economic leverage could change Azerbaijan’s equations. When Armenia’s trade balance increases, especially from Iran’s side, regional traders would not want to miss out on this new opportunity, and thus they would exert both direct and indirect pressure to facilitate relations with Iran and Armenia. This topic would automatically bring the aforementioned corridor to the negotiation table to serve the interests of all, not just Azerbaijan and Turkey.
Such projects could be established between Iran and untapped African markets. For example, the conflict in the Bab-el-Mandeb Strait does not only concern Yemen but also involves the important country of Djibouti. There is no need for us to undertake free infrastructural projects only to have them forget us at a critical moment and unilaterally cut their diplomatic relations with us. The right approach is to create economic and commercial benefits for such countries; projects of this kind could be the simplest possible solution.
Conclusion:
mBridge represents a blockchain innovation based on central bank digital currencies, aiming to facilitate trade, break monopolies, and reduce dollar dependency. While this article introduces the project, the main takeaway is the necessity of learning from and joining such initiatives. The least costly path to blockchain adoption and regulatory harmony starts with projects like these. Tomorrow’s world will be a blockchain-based currency world.
