The Central Bank Digital Currency (CBDC) revolution is beginning in earnest as Saudi Arabia becomes a full member of the mBridge project. Saudi Arabia joining the platform will give it access to immediate, low-cost, cross-border currency transactions, which it will use to sell oil to China, giving rise to the petroyuan.
With Saudi Arabia’s membership in mBridge, the question is not if but when we will see a shift to using CBDC for oil purchases that signals a move away from the US dollar. China is Saudi Arabia’s biggest customer for oil, and the yuan is the strongest contender to displace the dollar given increasing trade between the nations.
This pivot will not be restricted to China’s yuan. Look for other countries with CBDCs from BRICS or the global south to have minor roles in a gradual shift away from the US dollar. It isn’t just the dollar use in oil that will be impacted; mBridge will break SWIFT’s monopoly on cross-border payments and sanctions enforcement.
If this seems far-fetched, remember that in November 2023, China already used its digital currency to purchase US$90 million of oil at the Shanghai Petroleum and Natural Gas Exchange. China’s intent to bring the digital yuan onto the global stage to support yuan internationalization is unquestionable.
What are CBDCs?
CBDCs are a digital form of a national currency issued by the central bank. What is important to understand is that they are not cryptocurrencies but the digital versions of national currencies that have the full legal backing of the issuing central bank.
According to the Atlantic Council, 134 countries and currency unions, representing 98% of global GDP, are now exploring the development of a CBDC.
The motivations for central banks to investigate CBDCs include increased payment efficiency, as CBDCs can allow for near-immediate payment between payer and payee. This quality is particularly important for international transactions, which are generally considered costly and slow.
Other benefits of CBDCs include increasing financial inclusion and national payment systems’ overall safety and robustness.
What is mBridge and Why is Reaching MVP Important?
MBridge is a revolutionary cross-border payment platform that just announced on June 5th that it has reached the Minimum Viable Product (MVP) stage.
MBridge enables cross-border payments using a common platform based on distributed ledger technology (DLT) upon which multiple central banks can instantly issue and exchange their respective central bank digital currencies (multi-CBDCs).
What makes mBridge so revolutionary is that it will make cross-border transfers nearly immediate, cheap, and universal when compared to traditional cross-border transfers carried on the SWIFT network.
Project mBridge was launched in 2021 by the Bank for International Settlements’ Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, and the Hong Kong Monetary Authority.
MBridge has been refined for three years and has undergone rigorous testing, including live trials in which some US$22 million in value was sent across the platform. The platform is a key component of China’s plans to use the digital yuan in international trade.
Its launch into MVP status is important as it signals that it is ready to accept trial users who will work with the existing systems to refine them. MBridge will likely start operation sometime in mid-2025 and usher in a new era of CBDC transfers.
MBridge’s Impact on Sanctions and SWIFT
MBridge represents a major change in the cross-border transfer of money. Currently, most transfers are made using the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network.
While the SWIFT system is the backbone of global currency transfers, users and even central bankers have complained that it is slow, with payments taking anywhere between one and five days, and costly. The World Bank found that the average cost of sending $200 from one country to another was around $12.50 or 6.25%.
SWIFT is also responsible for maintaining bans on countries or entities that appear on sanctions lists. Russia’s partial ban from using SWIFT in 2022 as part of the US’s sanctions package or Iran and Cuba’s full ban are examples.
The Center for Economic Policy Research calculates that more than one in four countries are subject to sanctions by the UN or Western governments, and 29 percent of global GDP is produced in sanctioned countries.
MBridge, an alternative to SWIFT, is considered a “sanction buster” and will deal with sanctions differently. Rather than actively enforcing sanctions on users at a platform level, where SWIFT does, mBridge will allow central banks to monitor and enforce their own sanctions lists.
US-Saudi Arabia Security Pact Lapses
Adding to this story’s intrigue are reports, labeled as “fake news” that Saudi Arabia can now sell oil in any currency it wishes following the lapse (June 9) of the Kissinger-negotiated 1974 security pact with the kingdom.
The basic framework of the 1974 arrangement was that the U.S. would buy oil from Saudi Arabia and provide the kingdom with military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries to finance America’s spending.
The claims of “fake news” are based on the fact that the security arrangement does not specify that Saudis must only sell oil for US dollars. This is true as the agreement was “under the table” and not officially documented.
Another contention is that Saudi Arabia has historically sold oil for currencies other than the dollar. While true, it is indisputable that most of Saudi’s oil sales since 1974 have been in US dollars.
Counterbalancing the claims of “fake news,” Saudi Arabia joined mBridge four days before the security agreement lapsed. This can be seen as a twist of fate or a clear signal to Washington that business as usual is over. The latter is more likely as I don’t believe in coincidence.
While Washington is negotiating a new “Strategic Alliance Agreement” with Saudi Arabia, it is mired in delay due to the requirement that the kingdom have diplomatic ties with Israel during the war in Gaza. With Saudi Arabia’s need for US weapons for its intervention in the Yemeni civil war, it is hard to see them alienating the US.
Readers will note that as a precaution over fake news, I’ve broken this section out separately and don’t use it as a specific claim for creating the petroyuan.
MBridge, The Petroyuan, and De-dollarization
MBridge will profoundly affect de-dollarization if digital yuan payments for oil become the norm.
These payments will not “dethrone, topple, or unseat” the dollar but will have a profound impact nonetheless. MBridge the digital yuan and digital currencies of Brazil, Russia, India and South Africa do not need to “topple” the dollar to be disruptive. It is also important to note that the Chinese government, which holds US3.2 trillion in foreign currency reserves, has never stated that it sought to topple the dollar.
China’s crude imports from Saudi Arabia in 2023 were approximately US$63 billion. For perspective, SWIFT transferred some US$150 trillion in 2023, of which roughly 59% were in US dollars. This mismatch shows how the global impact of the petroyuan will be small in real terms but large on the geopolitical stage.
With the petroyuan, China will have used its yuan to purchase a commodity once available only in dollars. It will have done this on a system using a CBDC it designed and mBridge, an international partner transfer system it promoted. With the first digital yuan for oil trade, it will have broken free of the dollar, and if you think that doesn’t count for much, wait until it happens and Washington protests.
Watch trade dump the dollar
So, while the global impact of the petroyuan will likely be modest and de-dollarization a slow process, that doesn’t mean it won’t be disruptive. Never underestimate the power of competition and underdogs. To illustrate this, let’s look at another example of how mBridge is disruptive by reducing the use of the dollar as an intermediary.
Take China as an example. Currently, 77% of all foreign currency trade into China, carried by SWIFT, requires two-step foreign exchange, with the dollar used as an intermediary adding expense to the transaction.
For example, a Brazilian company importing refrigerators from China must first convert reals into US dollars, which are then converted into Chinese RMB as the second step. As a result, Brazil’s refrigerators cost more.
MBridge will allow transfers between developing nations not well served by the dollar-based financial system. Putting currencies from BRICS or other developing nations on mBridge will likely increase market liquidity due to interventions from central and commercial banks seeking to promote direct trade between these nations.
Asia is leading in the development of CBDC, and if trade between Hong Kong, Korea, Japan, and China were to be conducted with CBDC without the dollar, the dollar’s use on roughly 20% of China’s US$5 trillion in trade could be impacted.
Expect de-dollarization to be slow until it isn’t.
The notion that slow de-dollarization isn’t worth bothering with, or worse, that it denotes nothing is happening, is a grave strategic error. It is like ignoring a leak in a car tire because it is too slow to be bothered with, a decision that is dangerous at high speed.
Most pundits focus on a “red herring” question with an obvious answer: “Will the dollar be dethroned or toppled?” The only answer to this question is “no,” but they are missing the subtle and profound changes mBridge, CBDC, and BRICS nations will bring to payments in trade and the solidification of regional non-dollar alliances.
The question pundits never seem to ask is: “Would a non-dollar currency transfer system with lower costs, faster transfers, and sanction resistance be appealing to some nations?“ With 70 nations actively touting de-dollarization programs, how could it not?
De-dollarization will be slow until one day, likely triggered by an economic shock or calamity, it won’t be. That’s when many who ignored the “slow leak” will look at CBDC and systems like mBridge and wonder what happened.
It’s hard to imagine that the dollar will maintain “business as usual.” The dollar will inevitably find itself in the position of Willy Lowman from Arthur Miller’s “Death of a Salesman:” “[The dollar] is riding on a smile and a Shoeshine. And when they start not smiling back — that’s an earthquake.”
History Only 