Saudi Arabia joins central bank digital currency project led by BIS, and China

Saudi Arabia has joined a China-dominated central bank digital currency cross-border trial, in what could be another step towards less of the world’s oil trade being done in US dollars.

The move, announced by the Bank for International Settlements on Wednesday, will see Saudi’s central bank become a “full participant” of Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand and the United Arab Emirates.

The BIS, a global central bank umbrella organisation which oversees the project, also announced that mBridge had reached “minimum viable product” stage, meaning it will move beyond the pro type phase.

Roughly 135 countries and currency unions, representing 98% of global GDP, are exploring central bank digital currencies, or CBDCs. But the new technologies they use makes cross-border movement both technically challenging and politically sensitive.

“The most advanced cross-border CBDC project just added a major G20 economy and the largest oil exporter in the world,” said Josh Lipsky, who runs a global CBDC tracker at the US-based Atlantic Council.

“This means in the coming year you can expect to see a scaling up of commodity settlement on the platform outside of dollars — something that was already underway between China and Saudi Arabia but now has new technology behind it.”

The mBridge transactions can use the code China’s e-yuan is built on. That code is also available to the project’s 26 other “observing members” that include the likes of the New York branch of the Federal Reserve, the International Monetary Fund and European Central Bank.

The BIS also said the mBridge platform was now compatible with the Ethereum Virtual Machine — a piece of software that forms the backbone of the network used by the Ether cryptocurrency.

“This allows it to be a testbed,” it said.

Supporters of CBDCs say they will modernise payments with new functionality and provide an alternative to physical cash, which seems in terminal decline.

But questions remain why they represent an advance, with barely any uptake in countries such as Nigeria that have already adopted them, and both political and public pushback in some countries amid fears they could enable government snooping.

As well as dominating the mBridge project, China is carrying out the world’s largest domestic CBDC pilot which now reaches 260mn people and covers 200 scenarios from e-commerce to government stimulus payments.

Other big emerging economies, including India, Brazil and Russia, also plan to launch digital currencies in the next 1-2 years while the ECB has begun work on a digital euro pilot ahead of a possible launch in 2028.

In stark contrast, the US House of Representatives passed a bill banning the Federal Reserve from creating a “digital dollar”, although it still needs to pass a vote in the Senate to become law.

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