China’s Blockchain-based Project Threatens US $7T Dominance

• China’s latest project threatens the US dollar’s dominance over foreign exchange flows.
• Critics expressed concern over evading sanctions, taxes, and rules on money laundering.
• The US government is said to be confident in the dollar’s dominance, and there’s little reason to be alarmed.

China’s newest blockchain project challenges the US dollar’s dominance of global money, and daily foreign exchange (FX) flows. The project “mBridge” could make it easier for China’s yuan to be used as a dollar alternative by enabling its digital form to settle large corporate transactions, according to Bloomberg.

MBridge is the third phase of a multi-CBDC (Central Bank Digital Currency) initiative for cross-border payments that began in 2019 and will likely have a basic working product by the end of 2023. The project was developed by the BIS Innovation Hub Hong Kong Center, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.

Currently, the dollar features in an estimated $6.6 trillion of daily foreign exchange transactions, according to the Bank for International Settlements (BIS). The US dollar is considered the single most traded currency in the exchange market and is involved in nearly 90% of global FX transactions.

The partners of mBridge ran a pilot trial in August and September 2022 that enabled 164 cross-border transactions worth $22.1 million. According to the project report, this amount suggested that the CBDCs issued on mBridge during the pilot facilitated nearly double the amount in cross-border value.

Officials who were monitoring mBridge were reportedly worried that it would help give China a head start on revolutionizing wholesale payments across borders, while others expressed concern that digital alternatives to dollar-based settlement could make it easier to evade sanctions, taxes, and rules on money laundering.

Ross Leckow, deputy head of the BIS and coordinator of mBridge, said, “Each participant commercial bank involved in testing on the mBridge platform is obliged to comply with applicable laws and regulations, including those related to tax compliance, money laundering, and sanctions enforcement.”

According to Bloomberg, the project has 23 international observers, including the US Federal Reserve.

Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, believed that this project raised questions about China’s ambitions to reduce reliance on dollar-based settlement systems.”

Eswar Prasad, author of “The Future of Money,” stated that America’s government is confident in its dollar’s dominance and there’s “little reason” to be alarmed. He said these initiatives will leave China’s currency “short of being in a position to seriously rival the dollar.”