A surprise new twist in Putin’s currency wars

That its participation ended not with a bang, but a whisper, hints at the high-stakes politics surrounding project mBridge. It is being piloted by several central banks to transact across borders using digital money backed by their national currencies. That sounds reasonable enough. But as The Economist reported last week, the platform the BIS helped to develop is being eyed by Russia’s president, Vladimir Putin, as a model to create a BRICS Bridge system that would allow Russia to evade financial sanctions imposed by America by side-stepping the dollar and America’s banking system. “We are forced to look for alternatives," he said at the BRICS summit in Kazan in Russia on October 24th. Adding to the concerns about mBridge, China is the lead technology partner in the project, responsible for its coding and software.

Mr Putin’s apparent desire to mimic mBridge, perhaps with the assistance of China and others, has intensified opposition by some Western officials who have long been frustrated that the BIS, a Switzerland-based organisation known as the central bank for central banks, was involved in the project. Mr Carstens insisted that “whatever products we put together should not be a conduit to violate sanctions" and tried to distance mBridge from controversy: “mBridge was not created to cater (to) the needs of BRICS." Few, though, will have failed to notice the timing of the BIS’s withdrawal from the project a week after Mr Putin’s summit.

An early iteration of the mBridge experiment took place in 2019 in response to competitive pressures on the traditional banking network brought about by the rise of crypto currencies. Until now, the project to make cross-border payments faster and cheaper has been jointly developed by the BIS’s “Innovation Hub" with the central banks of China, Hong Kong, the United Arab Emirates (UAE) and Thailand. Saudi Arabia joined the platform in June, when mBridge was said to have hit “minimum viable product" (MVP) status. An Emirati official said last week that mBridge had since settled hundreds of transactions worth billions of dollars and that the UAE’s transaction volume on the platform had risen by more than a third in the past month.

Technically the project has been remarkably successful. It has been able to cut transaction times from days to seconds and their marginal cost to near-zero. Mr Carstens argued that mBridge “has been so successful that we can declare that we have graduated out" of the project and that the BIS left the platform “not because it was a failure and not because of political considerations." But the global financial system is riven with politics. Having seen how America used financial sanctions against Russia after it invaded Ukraine in 2022, many countries have a political incentive to avoid transacting through American banks. What mBridge offers is more impressive, a potential economic incentive for doing so. It could be more efficient.

Last week, while Mr Putin was pressing the BRICS to build their own imitation of mBridge, two other big meetings were taking place. In Beijing, BIS officials were continuing to promote mBridge to bankers at an annual conference hosted by SWIFT, a network used by some 11,000 banks for cross-border payments. Meanwhile, in Washington, at meetings of the IMF and World Bank, BIS officials were reportedly canvassing opinion as to whether they should shutter their controversial creation. Doing so may not have, in fact, been possible because the project is jointly-owned by the BIS and the five central banks and it would probably be trivial for the central banks to recreate it. Instead, the BIS is ending its involvement with the platform and leaving the other participants to “carry it on by themselves", as Mr Carsterns puts it.

The BIS’s decision to cut mBridge loose is by no means a clear win for Western central bankers worried about losing their influence over the world’s financial plumbing. The Economist reported last week that the BIS had slowed work on the platform and that new members were unlikely to join. Yet by walking away from mBridge, the BIS has now relinquished its veto over admitting new countries. The platform’s now-smaller steering committee said on October 31st that the project team “remains fully committed" and will continue efforts to advance the platform from MVP to “full production".

The mBridge team says that the project’s governance structure, which gives participants equal say, will not change and that the platform will continue to abide by international standards on financial crime and sanctions. It is not yet clear whether the project’s 31 observer members, which include Western central banks, will continue to have access to information about the platform. It is, however, likely that mBridge will now become “fully Chinese-led, with even less transparency than before," says Josh Lipsky of the Atlantic Council, a think-tank. “China has invested too much into this over years to just walk away and they will see benefits in being able to develop the system as they see fit."

That mBridge lives on beyond its partnership with the BIS reinforces the urgency for Western central banks to come up with a better alternative to the current system—one that delivers the efficiencies of digital currencies, while maintaining the enforceability of sanctions. When asked about the possibility of digital money being transacted on Chinese payment rails over the weekend, Andrew Bailey, the governor of the Bank of England, said that “the best way to avoid a fragmentation of the rails" is to innovate.