The Digital Currency Genie has Left the Building - The BIS Building
Central Bank Digital Currency: mBridge | BIS Exits mBridge | Chinese Dominance
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“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed the 16th BRICS Summit hosted by Russian President Putin in Kazan, the capital of the Autonomous Republic of Tatarstan in Russia. What is BRICS? A look into the BRICS Kazan Declaration and who participated in the BRICS Summit.
In this week’s BWR, I discuss the Bank of International Settlements (BIS) exit from the Central Bank Digital Currency project mBridge. The West needs to step up with game.
Takeaways
DIGITAL TECHNOLOGY—The digital currency genie is out of the bottle. Western governments must embrace it and create a common regulatory framework conducive to its adoption and innovation; otherwise, they forfeit the opportunity to Russia and China. Russia and China recognize the potential and are building it into an alternative global economic network with the help of Western institutions, such as the Bank International Bank of Settlements (BIS).
ADOPTION AND SCALE—BRICS Bridge and mBridge Achilles' heel will be adoption and scale. The presence of Western-sanctioned countries in the system caps these two essential elements needed for it to be economically viable.
The Digital Currency Genie has Left the Building - The BIS Building
Central Bank Digital Currency: mBridge | BIS Exits mBridge | Chinese Dominance
Elusive BRICS Bridge
In “Russian Rubles for Rupees and Yuan—Cross-Border Settlements without USD” I wrote about the BRICS declared priority during Russia’s 2024 Chairmanship, to drive the use of BRICS national currencies for cross-border settlements and establish the infrastructure and rails to support these non-USD and non-EUR settlements. In “The Kremlin and Cryptocurrencies” I discussed Russia’s drive to de-dollarize and use crypto as a means to evade Western sanctions.
As the most Western-sanctioned country in history, Russia aims to break its economic dependence on the USD and EUR. This includes exiting the global system - Rusxit -and its infrastructure systems like SWIFT and insulating their trading partners from primary and secondary Western sanctions.
Weeks before the summit, the Russian Ministry of Finance (MINFIN), the Central Bank of Russia (CBR), and Yakov & Partners released a research paper on the future of the international monetary and financial system. The MINFIN/CBR paper proposed Central Bank Digital Currency (CBDC) and Distributed Ledger Technology network (DLT) systems to support local and cross-border national currency payments.
However, the 32-page BRICS summit Kazan Declaration jointly released by the members on 23 Oct 2024 dedicated only three—clauses 65 - 67—of the 134 clauses to expanding the new international monetary system and cross-border payments. The Declaration states,
“We reiterate our commitment to enhancing financial cooperation within BRICS […] widespread benefits of faster, low cost, more efficient, transparent, safe and inclusive cross-border payment instruments […] the use of local currencies in financial transactions between BRICS countries and their trading partners […] strengthening of correspondent banking networks within BRICS and enabling settlements in local currencies in line with BRICS Cross-Border Payments Initiative (BCBPI) […]acknowledge the importance of exploring the feasibility of connecting BRICS countries’ financial markets infrastructure […] establishment of an independent cross-border settlement and depositary infrastructure, BRICS Clear […] We task our Finance Ministers and Central Bank Governors, as appropriate, to continue consideration of the issue of local currencies, payment instruments and platforms and report back to us by the next Presidency.”
Russia has led the Western-sanctioned countries—the “Alliance of the Aggrieved”—in their quest for methods and strategies for evading Western sanctions and eliminating USD and EUR from cross-border transactions. In August of this year, Putin signed into law the legalization of cryptocurrencies for cross-border payments. The new law gives the CBR broad power to experiment with a RUB BBDC, cryptocurrencies, and crypto exchanges.
Other methods proposed by the aggrieved alliance for eliminating USD and EUR for cross-border transactions have been a digital currency based on a basket of BRICS currencies, IMF Sovereign Drawing Rights (SDR), and CBDC. Of these various methods, the CBDC has received the most significant interest from the Kremlin and the focus has been on the BIS mBridge project.
BIS mBridge Project
The BIS mBridge project is a DLT network payments ledger designed to support real-time, cross-border payments and foreign exchange transactions, and it was launched in 2021. BIS developed the pilot project with the Bank of Thailand, the Central Bank of the United Arab Emirates, the People’s Bank of China (PBOC), and the Hong Kong Monetary Authority. An additional 31 other central banks are participating as project observers from Asia, Europe, and Latin America.
mBridge enables commercial banks to make cross-border payments via their central banks using wholesale CBDCs. The design allows for direct local currency payments, eliminating USD or EUR. Also, for cross-border transactions, banks often use correspondent banks or maintain expensive nostro accounts at the destination. mBridge eliminates these needs.
However, mBridge viability is expensive. Eliminating USD or EUR as the intermediary currency increases FX costs. Almost all currencies have optimal FX rates against USD rather than another national currency. The Western-sanctioned countries will absorb the higher FX cost. It is a cost of participating in the global market.
To put the USD intermediary function and cost into perspective, there are approximately 180 currencies in the World, and each has an optimal FX rate against USD. That’s 180 currency pairs with relatively strong supply and demand. So it’s cheaper to go from BRL to USD to RMB, than directly from BRL to RMB. That’s because the direct local currency route for 180 currencies translates to 16,110 currency pairs.
Tokenization may solve the intermediary fiat currency problem that makes eBridge FX expensive. BIS has launched Project Agorá, which attempts to address this issue. Project Agorá comprises 41 private financial institutions and seven central banks worldwide. Project Agorá and its impact on Russia warrants a stand-alone BWR piece.
The PBOC has been the driving force behind the mBridge project’s technology, developing proprietary technology for and with it. It has also rolled out and executed limited real-time transactions with commercial and central banks.
Rest assured, this technology and structure will be transferred to Russia, China’s junior partner, for developing BRICS Bridge.
BIS Exit from mBridge
Speaking at a Banking Conference in Madrid last week, Agustín Carstens, BIS general manager, confirmed that BIS is leaving the mBridge project after its four years of participation since its inception. Carstens said,
“I would say that the project has been so successful that we can declare that we have graduated out […] we are leaving not because it was a failure and not because of political considerations, but because it is at a level where the partners can carry it on by themselves […] At the same time, I have to say that mBridge is not mature enough to start operating; it is many years away from that.”
It is widely believed that BIS elected to exit the project because the Kremlin has expressed great interest in it and is modeling the BRICS Bridge concept after mBridge. BIS can not be associated with a payment system in which Western-sanctioned countries are members and exploit the network to evade sanctions.
It should be noted that BIS announced on 5 June 2024 that the project had reached the minimum viable product (MVP) stage. Having said that, renewed concerns about Russian interest in the project make the BIS timing suspiciously political. With BIS out of the picture, the project will be handed over to the participating central banks, and most likely, China will take control.
mBridge Under Chinese Leadership
China will dominate the mBridge project as it is rolled out for commercial use. In BIS’s absence, technology will transfer to the BRICS Bridge project. Or maybe mBridge absorbs the BRICS Bridge idea along with its collection of sanctioned countries, e.g., Iran, Cuba, Russia, Belarus, etc. The latter will face internal headwinds within the BRICS group, members, and partners, such as the UAE and Brasil, because they do not want to be directly linked to an alternative global payment platform that caters to Western-sanctioned countries. But then again, opportunity and greedy arbitrage make for strange bedfellows.
Additional Reading(s)
The Kremlin and Cryptocurrencies (Barbershop Whispers…Russia, 08 Sep 2024)
Explainer: BIS backs out of CBDC project mBridge (The Banker, 31 Oct 2024)
Russian Rubles for Rupees and Yuan - Cross Border Settlements without USD (Barbershop Whispers…Russia, 02 Jun 2024)
BIS debates ending cross border CBDC project mBridge – report (Ledger Insights, 29 Oct 2024)
Experimenting with a multi-CBDC platform for cross-border payments (BIS, Oct 2023)
RUSXIT- Russia’s Exit from the Global Economy (Barbershop Whispers…Russia, 15 Sep 2024)
Follow-ups & Quick Bites
Follow-ups
No follow-ups this week.
Quick Bites
Slovak Prime Minister Fico Interview on Russian State Television
Former Slovak leader Igor Matovič didn’t mince words in deploring an appearance by the country’s current Prime Minister, Robert Fico, on Russia’s state-owned Rossiya 1 TV channel on Wednesday. Matovič rightly said,
“What a horrible treacherous ferret,”
The pro-Russian Slovak leader was interviewed on “60 Minutes,” a political talk show hosted by Russia’s sanctioned propagandist-in-chief, Olga Skabeyeva.
In his Rossiya 1 interview, Fico accused the West of “prolonging the war” by supporting Ukraine, described Western sanctions against Russia as ineffective and said he was ready to negotiate with Russian President Vladimir Putin. Fico said,
“The European Union tells Ukrainians: ‘Here are your weapons, here is your money, fight, just don’t bother us, we no longer want anything to do with this war’,”
The Slovak leader added that he would like to visit Moscow on 09 May next year to celebrate the 80th anniversary of the end of World War II in Europe.
Additional Reading(s)
PM Fico a ‘treacherous ferret’ for appearing on Russian TV (Politico, 30 Oct 2024)
Ukrainian Drones Light Up Chechen Military Academy
A drone attack targeted Chechnya on 29 Oct 2024 for the first time during Putin’s war on Ukraine.
The drone strike hit the building of the Russian Special Forces University named after Vladimir Putin in the city of Gudermes, the independent news outlet Agentstvo reported.
Chechen President Ramzan Kadyrov claimed that the strike, which took place at 6:30 a.m. local time, hit the roof of the university's empty building, starting a fire but causing no casualties. The Chechen dictator said the fire had been extinguished.
Additional Reading(s)
Kadyrov Vows Revenge (Reuters, 29 Oct 2024)
Ukraine Strikes Chechnya With Long-Range Drones For The First Time (The War Zone, 29 Oct 2024)
U.S. Justice Department Indicts Russian Over Crypto Market Manipulation and Fraud
The U.S. Department of Justice (DOJ) is charging the founder and CEO of crypto firm Gotbit with wire fraud and conspiracy to commit market manipulation and wire fraud.
In a new press release, the U.S. Attorney’s Office of the District of Massachusetts is alleging that 26-year-old Russian national Aleksei Andriunin and two Gotbit directors offered and promoted crypto market manipulation services between 2018 and 2024. According to authorities, Gotbit – known as a market maker at the time – would engage in market manipulation to artificially boost trading volumes for crypto projects, including companies located in the US, though no specific entities were named.
Andriunin and his cohorts Fedor Kedrov and Qawi Jalili would allegedly “wash trade” crypto assets using computer code to inflate their trading volume and get them listed on websites such as CoinMarketCap, which keeps track of trending cryptocurrencies and larger crypto exchange platforms.
According to the press release, it is believed that Andriunin moved much of Gotbit’s proceeds to his personal Binance account.
Vol 2, No 52 - BWR 03.11.2024
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