Thailand and China abandon the dollar

Beijing and Bangkok will dedollarize their trade by promoting their national currencies. With CBDCs? What about Bitcoin?

Thailand and China no longer want the dollar

The central banks of the two nations signed an agreement on Tuesday aimed at strengthening cooperation to facilitate cross-border settlements in local currencies.

Not a month goes by without nations taking the initiative to do without the dollar in their bilateral trade. India and Nigeria reached a similar agreement just last week.

Dedollarization is a reality and the Russian president once again forcefully underlined it during his recent state visit to China. On this subject, don’t miss our article: Putin cuts dollar shorts.

Little information has filtered out on how the two Asian countries intend to improve their trade. However, we know that Thailand and China are working together on the mBridge (multiple CBDC Bridge) project.

Some consider that this project of international transactions in CBDC could break the monopoly of the SWIFT network. The project involves the Bank for International Settlements (BIS) and the central banks of China, Hong Kong, Thailand and the United Arab Emirates.

China is concerned that its economy depends on Western-controlled payment networks. Let us remember that Iran and Russia have been disconnected from the Swift network. That is to say two countries openly hostile to the dollar…

A redundant system?

Some will wonder why China is working on the m-Bridge project since it already uses the CIPS (China's Cross-border Interbank Payment System).

The growth of CPIS has been meteoric since its launch in 2015. It has processed more than 123 trillion yuan in 2023, compared to 10,000 billion in 2021 and 2,000 billion in 2017. It now connects nearly 1,500 banks in 114 countries.

CIPS is not (yet) a threat to the monopoly of the SWIFT network since it is only a yuan payment system. SWIFT is a more global messaging system serving as an intermediary for payment systems linked to national currencies. More than 11,000 banks use SWIFT around the world.

The mBridge project is to create an international payment network in CBDC that would no longer need a messaging system like swift. Banks would connect directly via their central bank. In China, mBridge is connected to the CBDC e-CNY system.

Some U.S. officials fear the mBridge network could give Beijing a head start in using CBDCs to revolutionize international payments.

The United States fears that it will allow other currencies to overshadow the dollar, the currency in which half of the approximately 32,000 billion dollars exchanged each year in the world is denominated.

Josh Lipsky, director of the GeoEconomics Center of the American think tank Atlantic Council, said that the fact that mBridge is taking shape under the auspices of the BRI is raising eyebrows in Washington. Especially since China is getting rid of the dollar at a record pace.

Mbridge faces reality

According to two people with direct knowledge of the project, the technological backbone is a blockchain built by the Chinese. It notably uses Ethereum's Solidity smart contract language.

Its goal is to compete with the current system. Payments today are made in two stages: the message and the movement of money. For example, if I want to pay someone in China, my bank must have an account (Nostro) in a Chinese bank and ask it via a swift message to pay the recipient.

Upon receipt of the message, the Chinese bank transfers the money to the recipient who is often at another bank. In this case, a Chinese national transfer will be required, which constitutes a third step.

Additionally, if my bank does not have a Nostro account with a Chinese bank, it will have to send the payment through another bank with an account in China, which will incur additional fees and a fourth step.

With mBridge, the promise is that banks no longer need a bank account at a Chinese bank. Banks would go directly to mBridge to purchase e-CNY (yuan CBDC) before transferring them directly to the Chinese recipient's bank.

The removal of messages means banks no longer need to hold foreign accounts stocked with cash, which would reduce the costs of cross-border payments.

Not so fast…

To work, exchange rates on mBridge will need to be very competitive. If this is not the case, the savings made on Nostro accounts will be neutralized.

However, competitive exchange rates require significant volumes. This is one of the reasons why the dollar is central to the international monetary system.

Since the Bretton Wood agreements, the greenback has been the global standard against which all currencies float. That is to say, when a Peruvian company makes a transfer to a Kazakh client, the conversion is not done via a Sol / Tenge pair. The ground is first converted into dollars which will then be converted into tenge.

It is therefore difficult to imagine how mBridge and CBDCs with starving volumes could transform international payments.

Conversely, bitcoin is a potential benchmark already boasting impressive volumes. They represented the equivalent of 25 billion dollars in the last 24 hours according to onchainfx.

Bitcoin has the immense advantage of being a currency as well as a payment system. Two in one. A system that is moreover stateless since it is decentralized. This is a key parameter. Indeed, who is to say that mBridge will not also be used for political purposes?

Central banks may struggle to keep control over international transfers, but it is probably impossible to do better than the technological feat that is bitcoin.

And in view of the strong geopolitical tensions which are currently turning into a trade war, the world more than ever needs a global payment system immune to political whims. And no CBDC…