Yesterday the UAE sent the first cross border payment using the UAE’s central bank digital currency (CBDC), the Digital Dirham. According to Gulf News, the payment of Dirham 50 million ($13.6m) was made to China. It used the mBridge cross border CBDC platform, where both countries are participants alongside Hong Kong and China. Another 23 central banks are observers.
Last year the UAE and China agreed to promote digital currency payments between the countries.
The Central Bank of UAE executed the mBridge transaction during the bank’s fiftieth anniversary celebrations. Coincidentally, it was also the eve of the first BRICS meeting following its expansion from five to ten member countries. The UAE joined at the start of the year. That’s symbolic given the BRICS members are keen to encourage local currency payments and less dependence on the dollar, something which the mBridge platform might help.
Strictly speaking, the mBridge project is not yet live. There are plans to launch a minimum viable product (MVP) in the middle of the year. However, last week, the Bank for International Settlements (BIS) Innovation Hub said it was too early to talk about timescales.
One of the benefits of using central bank digital currencies for cross border payments is it should remove the need to use the correspondent banking system, which adds costs and delays to payments. In a speech this week, the Deputy Director of China’s Digital Currency Research Institute (DCRI) said that mBridge transactions take seven seconds and cut costs by 50%. The DCRI developed the technology that underpins mBridge.
Could mBridge FX costs be higher?
However, a recent report from the Carnegie Endowment highlighted that US dollar currency legs tend to be far more liquid, so higher foreign exchange (FX) costs could limit the benefits of local currency payments.
Last October the Financial Stability Board (FSB) published a paper for the G20 showing that FX makes up most of the costs of cross border payments – 60% for P2P payments, 97% for P2B payments and somewhere in between for B2B payments.
Notably, one of the outstanding work items for mBridge relates to novel technologies to support FX and liquidity.