The following article is based on our recent FS Insider podcast: Richard Turrin on PetroYuan, Saudi Arabia joining mBridge CBDC Alternative to SWIFT. If you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
Summary: Richard Turrin, the best-selling author of Cashless, breaks down the recent move by Saudi Arabia to join the Chinese-led mBridge alternative to SWIFT, and how this will very likely lead to other countries diversifying away from US dollar for international payments and trade. Rich discusses the geopolitical and technological developments leading up to the mBridge system, how it works, and where it fits into China's broader efforts in facilitating a BRICS-led alternative trading bloc.
Understanding De-dollarization
De-dollarization refers to the gradual reduction in the dominance of the U.S. dollar in global payments and trade. According to Turrin, this process is not a radical shift but a slow and steady change. The International Monetary Fund (IMF) has documented a decrease in the dollar's share of foreign exchange reserves from about 72% to around 60% between 2000 and 2022, noted Turrin. This decline signifies a gradual move away from the dollar, although it remains a dominant global currency.
Turrin highlights that discussions around de-dollarization often evolve along two competing narratives: 1) the dollar is still king and there is no replacement or 2) the US dollar is in imminent danger of losing its reserve status. These two polarized views, he said, are both incorrect and, instead, investors must understand that de-dollarization is happening and will continue to unfold in a slow and gradual process in the years to come. There are many reasons for this, including geopolitical and technological factors.
The Role of Central Bank Digital Currencies (CBDCs)
Central to the discussion of de-dollarization is the concept of Central Bank Digital Currencies (CBDCs). Turin explains that CBDCs are digital forms of a country's currency issued by its central bank. Unlike cryptocurrencies such as Bitcoin or Ethereum, CBDCs have a stable value equivalent to the nation's physical currency. They facilitate digital transfers of money across borders without relying on traditional systems like the US-led SWIFT (Society for Worldwide Interbank Financial Telecommunication).
Project mBridge (standing for multiple CBDC bridge) is a new blockchain-based transfer system started in 2021 in collaboration with the Bank for International Settlements and several other central banks, including those of China, Hong Kong, Thailand, and the United Arab Emirates. As of the most recent update, Project mBridge now has more than 26 members and aims to create seamless cross-border transfers using CBDCs--bypassing SWIFT--while reducing transaction costs and times.
Here's what the BIS says on their website:
“Project mBridge continues its development and has reached the minimum viable product (MVP) stage, while broadening its international reach. The project aims to explore a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement…
The project aims to tackle some of the key inefficiencies in cross-border payments, including high costs, low speed and operational complexities. It also addresses financial inclusion concerns, particularly in jurisdictions where correspondent banking (which connects countries to the global financial system) has been in retreat, causing additional costs and delays. Multi-CBDC arrangements that connect different jurisdictions in a single common technical infrastructure offer significant potential to improve the current system and allow cross-border payments to be immediate, cheap and universally accessible with final settlement.”
The Emergence of the Petroyuan
A significant development that just took place as of June 2024 is Saudi Arabia's recent decision to join the mBridge project, signaling the potential rise of a so-called petroyuan. China, now Saudi Arabia's largest oil customer, is exploring the use of its digital yuan for oil transactions. This move could eventually lead to oil being traded in yuan instead of dollars, marking a significant shift in global trade practices.
Turrin points out that this is not just theoretical. In Shanghai, a major oil transaction worth $90 million was recently conducted using the digital yuan. This event underscores the practical feasibility of using China's digital currency in international trade and hints at a future where the yuan could play a more prominent role in global markets.
Implications for the Dollar and Global Trade
While the rise of the petroyuan and the broader de-dollarization trend do not spell the end of the dollar's dominance, they do indicate a shift towards a more multipolar currency system, Turrin said. This change could lead to increased competition and diversification in international trade and finance.
The technological advancements underpinning CBDCs and platforms like mBridge offer several advantages, including faster and cheaper transactions. Turrin explains that this new technology allows for peer-to-peer transfers without intermediaries, significantly reducing the time and cost associated with international money transfers. This efficiency is a key driver behind the adoption of CBDCs and the development of alternative payment systems.
The Geopolitical and Technological Dimensions
The geopolitical implications of these changes are profound. The reliance on SWIFT has exposed countries to political risks, as seen in the cases of Iran and Russia, which were cut off from the system due to sanctions. mBridge offers an alternative that is designed to be politically neutral, allowing central banks to enforce their own sanctions rather than having a centralized body like SWIFT impose them.
From a technological perspective, Turrin believes the adoption of CBDCs and systems like mBridge represents a significant leap forward. These innovations facilitate not only faster and cheaper transactions but also integrate with digital logistics, streamlining processes such as customs clearance and trade documentation, areas where China is heavily focused.
The U.S. Position on CBDCs
Despite the global momentum towards CBDCs, the United States remains hesitant. Legislative efforts to ban the development of a U.S. CBDC reflect political divisions and concerns about privacy and control. However, Turrin argues that modernizing the dollar is essential to maintaining its relevance in a rapidly evolving financial landscape.
Other major economies, such as the European Union and the United Kingdom, are actively developing their own digital currencies, recognizing the benefits of modernized financial systems. The U.S. risks falling behind if it does not embrace these technological advancements, Turrin said.
Conclusion
The process of de-dollarization and the rise of CBDCs represent a fundamental shift in the global financial system. While Turrin does not believe the dollar is being dethroned, its monopoly on international trade and finance is being challenged. The emergence of platforms like mBridge, which began in 2021, and the large number of central banks joining as members, illustrate how clear changes are underway when it comes to trade, geopolitics, and the use of new technologies.
To listen to this full audio interview, see Richard Turrin on PetroYuan, Saudi Arabia joining mBridge CBDC Alternative to SWIFT. If you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
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