mBridging the Gap: Building Financial Highways for South-South Trade
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mBridging the Gap: Building Financial Highways for South-South Trade
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By Tito Mbathi, Consultant at Botho
September 13, 2023
The expansion of the BRICS coalition heralds the dawn of a new age, with the bloc poised to better represent the interests of the Global South on the world stage. Over 40 countries expressed a desire to join BRICS in the buildup to its summit in August 2023, demonstrating the growing desire for collaboration between emerging global powers. The new additions to BRICS are all important players in their respective regions, and their accession to the bloc could have significant geo-economic implications. One of the most interesting developments to emerge from BRICS’ evolution is the unified desire to trade in local currencies.
While discussions surrounding global de-dollarisation are premature, the economic strength of both the new and existing members of the BRICS coalition means that in the coming decades, several of the world’s leading economies will be able to conduct trade amongst themselves without relying on the U.S. dollar. There is already acceleration within the bloc to increase trade settlement in local currencies, with the development of a local currency settlement system between India and the UAE providing a benchmark for future developments. The UAE is at the forefront of bilateral settlement technology, having already piloted cutting edge programs in the realms of Blockchain and Central Bank Digital Currencies (CBDCs). One of the most exciting projects is mBridge, a payment system to connect economies through CBDCs.
The Future of Cross-Border Payments
The mBridge project is a collaborative effort involving China, Thailand, Hong Kong, and the United Arab Emirates. The platform aims to facilitate global money transfers without the need for legacy financial rails. mBridge allows central banks to create and trade their own CBDCs, offering an efficient and cost-effective network that directly connects these banks and commercial entities.
The implications are significant, given the dollar's role in an estimated $32 trillion in annual global trade. If mBridge can facilitate South-South trade, outside of the dollar, there are manifold opportunities for the platform and its participating countries. Using their local currency for trade enhances nations’ sovereignty by allowing them to maintain greater control over their economic policies. Using local currencies for trade can strengthen their intrinsic value, boosting local financial markets because of the increased demand for these currencies. A more robust financial market offers better financial products and services, attracts foreign investment, and provides businesses with more options for raising capital. This, in turn, can lead to a more diversified and resilient economy, creating a virtuous cycle of economic growth. Trading in local currencies, especially for contiguous countries, paves the way for further integration, with the eventual potential for more harmonious economic policies.
The Financial Implications: Beyond the Dollar
The expansion of BRICS and the bloc’s renewed interest in bilateral clearing, coupled with the expected public release of mBridge in 2024, has created a sense of excitement among many emerging market analysts. However, there is growing apprehension towards mBridge among Northern thought leaders who fear that the U.S. would lose its hegemony over global trade, and that the technology would be used by “U.S. adversaries strategizing for ways around U.S. geopolitical influence.”
This take is redundant from a Global South perspective, where stepping out from the shadows of the existing world order is not only a desire but an imperative to realize development objectives. Critics further argue that an alternative to the dollar for international trade could facilitate evasion of sanctions, tax obligations, and anti-money laundering regulations. These same critics conveniently overlook the role that cash, and specifically the USD, plays in financial malfeasance. mBridge provides greater transparency into all transactions, because each settlement is made on a blockchain.
The Double-Edged Sword of CBDCs
As with most good things, CBDCs present both opportunities and challenges, from retail users all the way up to the arbitrators of monetary policy. The main obstacle is the natural inclination to simply replace the existing system with new players and new technology. Instead of every nation trading in USD as they do today, the system may transform into everyone transacting in a digital dollar, or a digital renminbi. It is imperative for nations to be able to trade in their local currencies, otherwise the most pertinent benefits of the new system will be cast aside. This obstacle and more will be addressed as the pioneering programs for non-dollar denominated trade begin to take shape and enter the market.
The confluence of BRICS expansion and mBridge's impending launch represents a transformative opportunity for South-South trade. It holds the promise of reshaping the financial architecture in favor of emerging economies, but this transformation must be navigated with caution and strategic foresight. The stakes are high, but so are the rewards: a more equitable economic landscape where the Global South is not just a participant, but a significant player.
Tito Mbathi is a Consultant at Botho Emerging Markets Group.