International financiers have pulled support for a revolutionary paytech system being rolled out in the Middle East after it became embroiled in Russian plans to evade sanctions intended to snuff foreign trade flows supporting its invasion of Ukraine.
The Bank for International Settlements, a global association of central banks, said on 31 August that it had pulled support for mBridge, a system it has spent four years building to allow states to finance cross-border trade outside the current, dollar-based financial system by using direct, peer-to-peer swaps of national digital currencies, cleared through central banks.
Countries in the BRICS group of nations – which now includes Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates (UAE) – have been building a similar system to trade with Russia and Iran beyond the reach of sanctions.
Promising China shelter from financial retaliation should it invade Taiwan as well, tension mounted over such technology developments last month when the UAE, Iran and Egypt put their weight behind the scheme upon becoming members of an expanded BRICS block. Saudi Arabia also declared its unequivocal support for initiatives underway at BRICS, which originally counted among its members only Brazil, Russia, India, China and South Africa.
BIS chief Augustin Carstens said that it had pulled support for mBridge just months after declaring successful completion of a pilot between the central banks of UAE, China, Hong Kong and Thailand. Saudi Arabia had just joined them.
The BIS retreat was not a response to political pressure, he said, yet claimed that all its central bank members agreed their technology “should not be a conduit to violate sanctions”.
BIS was “graduating” from the scheme because it had been a huge success and the organisation’s help was no longer required. However, he said, it was still so immature that it would take many years before fruition.
BIS members include the central banks of all BRICS nations bar Russia and Iran, most of whom have declared their own effort to build an mBridge-like cross-border payments system intended either for sanctions evasion or de-dollarising the global economy, which would achieve the same ends.
Most of the world’s foreign exchange is done in dollars cleared through systems over which the US holds sway. US weaponisation of that power has irked BRICS members whose economies enjoy Russian trade, and they have decried it an insult to their sovereignty.
But a joint declaration made by BRICS members after their annual summit in Russia last month primarily pledged support for reforms of the existing financial system that are already underway, and not its dismantling, despite many statements to the contrary.
They have meanwhile established a fragmented web of bilateral cross-border financial systems to conduct trade without dollars. But bilateral systems are inefficient, costly and not scaleable, making them even less attractive than the current system. The BRICS payment system and mBridge would solve those problems by allowing bilateral transactions through a common system.
BRICS finance ministers and central bank officials, including those of the group’s recent MENA members, expressed enthusiasm for a BRICS payments system in another joint statement from the October summit.
BIS officials had meanwhile imagined mBridge becoming a global system for direct exchange of local currencies, much as BRICS hoped, and this summer declared it had reached the status of a minimum viable product, having conducted real trades between commercial banks in the Middle East and Asia, and invited wider international participation.
A pilot conducted under the umbrella of a Brazil-led G20 initiative to reform the cross-border payments system, mBridge encapsulated the trajectory of the entire global financial system as it seeks to make such transactions less painful than they have become, to wide consternation, after decades of haphazard evolution between incompatible data systems and legal jurisdictions.
But after years of repeated calls for the US to make the dollar system much more efficient that trade in alternative systems become financially unviable, the G20 seems to have tempered its ambitions to do just that.
US Treasury official Nicholas Tabor said early this year that, with the Biden administration’s backing, the G20 had decided to aim for “low-hanging fruit”, delivering tangible improvements to the existing system soon, and making a lower priority of more novel, alternative systems. For the most part, that involved squaring global regulatory differences, establishing data standards, and making the numberless variety of independent payment systems interoperable.
Robert Wade, professor of political economy at the London School of Economics, said that the BRICS system’s potential for settling trade beyond US reach made it attractive to countries that wanted to keep doing business with sanctioned states.
“As long as the US uses its control over the dollar system as a weapon, big countries outside the West will give high priority to growing alternative payment systems,” he said.
But it would be a decade or more before alternative schemes could carry a share of international trade large enough to undermine US power. The US would meanwhile upgrade the dollar system to make competition unviable, added Wade.
Cal Evans, managing associate of UAE-based digital finance consultancy Gresham International, cited the Gulf region’s self-image of people from a lineage of traders who will do business with anyone as the basis for its support for BRICS .
“Countries like Saudi Arabia, UAE, and others are happy to work with both G20 and BRICS. A lot of MENA countries are showing their willingness to work with different trade groups,” he said. “This will not really change anything. The only impact could be if BRICS makes good its plan to remove reliance on the US dollar as a settlement instrument.”
Private companies were meanwhile already trading cross-border with digital assets. BRICS members were encouraging this, while the US didn’t share the passion, he said.
Prince Faisal bin Farhan bin Abdullah, Saudi foreign minister, pledged deeper ties with BRICS members “in all fields”, in a speech at the BRICS summit, according to the state news agency. But it has yet to officially join the club. UEA firms have meanwhile been subject to sanctions over trade with Russia.
The BIS, like Russian, Saudi, UAE and US departments and officials approached by Computer Weekly, was not prepared to comment.