Hong Kong Monetary Authority (HKMA) published a report to announce the success of and key findings from its central bank digital currency (CBDC) project, mBridge, on Oct. 26.
The Bank of International Settlements Innovation Hub (BISIH) Hong Kong Center, the Bank of Thailand, the People’s Bank of China, and the Central Bank of United Arab Emirates jointly penned the report, which is titled” Project mBridge: Connecting economies through CBDC” to report key findings and results of the project.
mBridge is a six-week cross-border CBDC pilot between Aug. 15 and Sept. 23, 2022. The report’s authors and 20 commercial banks in the four jurisdictions conduct over 160 payment and foreign exchange transactions of $22 million in actual value via the mBridge platform.
The report claims it will use its findings from the project, policy, legal and regulatory analysis to innovate the CBDC platform to progress towards a minimum viable product and, ultimately, a fully-fledged CBDC system.
International and regional trade identified as mBridge’s first business use cases
The project identified international trade settlement as the first business use case by supporting the growth of local FX markets in the project’s participating jurisdictions. The report claims it resolves inefficiencies inherent in cross-border payments involving a network of banks scattered across varying time zones and operating hours, credit, and liquidity risks that may render settlement funds unavailable in the event of illiquidity or insolvency.
Additional inefficiencies the report claims mBridge can resolve include settlement delays and lack of access to the global financial system among emerging markets and developing economies.
The report states that mBridge also supports regional trade, which is settled mainly in foreign currencies. It is achieved by replacing CBDCs, thus cutting back the high transaction costs and reliance on settling trade with foreign currencies.
Key lesson 1: Limited number of FX PvP transactions
The report observed a limited number of FX payment versus payment (PvP) transactions throughout the project instead of one-way payments. It concluded that liquidity provision, management functions, and introducing FX market makers and measures to facilitate FX price discovery should be integrated into the platform.
Key lesson 2: mBridge integration with wholesale payment systems
The other finding is that mBridge can easily integrate seamlessly with domestic wholesale payment systems, saving time and enabling straight-through processing. Therefore, the report concludes that the ability of central banks to integrate their respective CBDCs, payment systems, issuance, and redemption processes into mBridge would be vital to the project’s success.
The report also included input from participants on ways to improve mBridge, including building interoperability with domestic systems and APR connectivity for straight-through processing, to involve more jurisdictions, currencies, and use cases. Finally, a more comprehensive legal governance structure as the platform moves towards production.