The Petroyuan is born: Saudi Arabia joins the mBridge CBDC transfer system

The Central Bank Digital Currency (CBDC) revolution begins in earnest as Saudi Arabia becomes a full member of the mBridge project. Saudi Arabia joining the platform would give it access to instant, low-cost, cross-border currency transactions, which it would use to sell oil to China, giving rise to the petroyuan.

With Saudi Arabia’s membership in mBridge, the question is not if but when we will see a shift to using CBDC for oil purchases signaling a move away from the US dollar. China is Saudi Arabia’s largest customer for oil, and the yuan is the strongest contender to displace the dollar, given increasing trade between the nations.

This pivot will not be limited to China’s yuan. Look for other countries with CBDCs from BRICS or the global south to play small roles in a gradual shift away from the US dollar. It is not only the dollar use in oil that will be affected; mBridge will break SWIFT’s monopoly on cross-border payments and sanctions enforcement.

If this seems far-fetched, remember that as early as November 2023, China used its digital currency to buy US$90 million worth of oil on the Shanghai Petroleum and Natural Gas Exchange. China’s intention to bring the digital yuan to the global stage to support yuan internationalization is indisputable.

What are CBDCs?

CBDCs are a digital form of a national currency issued by the central bank. What is important to understand is that these are not cryptocurrencies, but the digital versions of national currencies that have the full legal backing of the issuing central bank.

According to the Atlantic Council, 134 countries and currency unions, representing 98% of global GDP, are now exploring the development of a CBDC.

The motivations for central banks to explore CBDCs include increased payment efficiency, as CBDCs can allow near-instant payment between payer and payee. This quality is especially important for international transactions, which are generally considered expensive and slow.

Other benefits of CBDCs include increasing financial inclusion and national payment systems’ overall security and robustness.

What is mBridge and why is it important to achieve MVP?

MBridge is a revolutionary cross-border payment platform that just announced on June 5 that it has reached the minimum viable product (MVP) stage.

MBridge enables cross-border payments using a common platform based on distributed ledger technology (DLT) on which multiple central banks can instantly issue and exchange their respective central bank digital currencies (multi-CBDCs).

What makes mBridge so revolutionary is that it will make cross-border transfers almost instant, cheap and universal compared to traditional cross-border transfers carried out on the SWIFT network.

Project mBridge was launched in 2021 by the Bank for International Settlements’ Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, and the Hong Kong Monetary Authority.

MBridge has been refined for three years and has undergone rigorous testing, including live trials in which approximately US$22 million worth of value has been sent across the platform. The platform is a key component of China’s plans to use the digital yuan in international trade.

Its launch in MVP status is important as it indicates that it is ready to accept trial users who will work with the existing systems to refine them. MBridge is likely to go live sometime in mid-2025, ushering in a new era of CBDC transfers.

MBridge’s impact on sanctions and SWIFT

MBridge represents a major change in the cross-border transfer of money. Currently, most transfers are made using the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network.

While the SWIFT system is the backbone of global currency transfers, users and even central bankers have complained that it is slow, with payments taking between one and five days and expensive. The World Bank found that the average cost of sending $200 from one country to another was about $12.50 or 6.25%.

SWIFT is also responsible for enforcing bans on countries or entities that appear on sanctions lists. Russia’s partial ban on using SWIFT in 2022 as part of the US sanctions package or Iran’s and Cuba’s full ban are examples.

The Center for Economic Policy Research calculates that more than one in four countries are subject to sanctions by the UN or Western governments, and 29 percent of global GDP is produced in sanctioned countries.

MBridge, an alternative to SWIFT, is considered a “sanction buster” and will handle sanctions differently. Rather than actively enforcing sanctions on users at a platform level, where SWIFT does, mBridge will allow central banks to monitor and enforce their own sanctions lists.

Security treaty between the US and Saudi Arabia expires

Adding to this story’s intrigue are reports, labeled “fake news,” that Saudi Arabia can now sell oil in any currency it wants following the expiration (June 9) of the Kissinger-negotiated 1974 security treaty with the kingdom.

The basic framework of the 1974 arrangement was that the US would buy oil from Saudi Arabia and provide the kingdom with military aid and equipment. In return, the Saudis would plow billions of their petrodollar income back into Treasuries to finance America’s spending.

The “fake news” claims are based on the fact that the security arrangement does not specify that Saudis must only sell oil for US dollars. This is true as the agreement was “under the table” and not officially documented.

Another argument is that Saudi Arabia has historically sold oil for currencies other than the dollar. While this is true, it is indisputable that most of Saudi’s oil sales since 1974 have been in US dollars.

Saudi Arabia joined mBridge against the “fake news” allegations four days before the security deal expired. This could be seen as a twist of fate or a clear signal to Washington that business as usual is over. The latter is more likely as I don’t believe in coincidence.

While Washington is negotiating a new “Strategic Alliance Agreement” with Saudi Arabia, it has been mired in delay due to the requirement that the kingdom maintain diplomatic ties with Israel during the war in Gaza. With Saudi Arabia’s need for US weapons for its intervention in the Yemeni civil war, it is hard to see them alienating the US.

Readers will note that, as a precaution against fake news, I have broken this section out separately and not used it as a specific claim for the creation of the petroyuan.

MBridge, The Petroyuan, and De-dollarization

MBridge will profoundly affect de-dollarization if digital yuan payments for oil become the norm.

These payments will not “dethrone, topple or dethrone” the dollar, but will have a major impact nonetheless. MBridge the digital yuan and digital currencies of Brazil, Russia, India and South Africa do not need to “topple” the dollar to be disruptive. It is also important to note that the Chinese government, which holds US3.2 trillion in foreign exchange reserves, has never declared that it was trying to topple the dollar.

China’s crude imports from Saudi Arabia in 2023 were about US$63 billion. For perspective, SWIFT transferred about US$150 trillion in 2023, about 59% of which was in US dollars. This mismatch shows how the global impact of the petroyuan will be small in real terms, but large on the geopolitical stage.

With the petroyuan, China will have used its yuan to buy a commodity once only available in dollars. It will have done so on a system using a CBDC it designed and mBridge, an international partner transfer system it promoted. With the first digital yuan for oil trading, it will have broken free from the dollar, and if you think that doesn’t count for much, wait until it happens and Washington protests.

See how trading the dollar plunges

So while the global impact of the petroyuan is likely to be modest and de-dollarization a slow process, that doesn’t mean it won’t be disruptive. Never underestimate the power of competition and underdogs. To illustrate this, let’s look at another example of how mBridge is disruptive by reducing the use of the dollar as an intermediary.

Take China as an example. Currently, 77% of all foreign exchange trades in China carried by SWIFT require two-step foreign exchange, with the dollar used as an intermediary adding expenses to the transaction.

For example, a Brazilian company importing refrigerators from China must first convert rules into US dollars, which are then converted into Chinese RMB as the second step. As a result, Brazil’s refrigerators cost more.

MBridge will allow transfers between developing countries that are not well served by the dollar-based financial system. Placing currencies of BRICS or other developing countries on mBridge is likely to increase market liquidity due to interventions by central and commercial banks seeking to promote direct trade between these nations.

Asia is the leader in the development of CBDC, and if trade between Hong Kong, Korea, Japan and China were to be conducted with CBDC without the dollar, the use of the dollar could affect approximately 20% of China’s US$5 trillion trade.

Expect de-dollarization to be slow until it isn’t.

The idea that slow de-dollarization is not worth bothering with, or worse, that it signals that nothing is happening, is a serious strategic mistake. It’s like ignoring a flat tire because it’s too slow to be bothered, a decision that’s dangerous at high speeds.

Most pundits focus on a “red herring” question with an obvious answer: “Will the dollar be dethroned or overthrown?” The only answer to this question is “no”, but they miss the subtle and profound changes that mBridge, CBDC and BRICS countries will bring to payments in trade and the strengthening of non-dollar regional alliances.

The question experts never seem to ask is, “Would a non-dollar currency transfer system with lower costs, faster transfers and sanctions resistance be attractive to some nations?” With 70 nations actively touting de-dollarization programs, how could it not?

De-dollarization will be slow until one day, probably caused by an economic shock or disaster, it will not be. This is when many who ignored the “slow leak” will look at CBDC and systems like mBridge and wonder what happened.

It is hard to imagine that the dollar will maintain “business as usual”. The dollar will inevitably find itself in the position of Willy Lowman from Arthur Miller’s “Death of a Salesman:” “[The dollar] ride on a smile and a shoe polish. And when they don’t start smiling back, it’s an earthquake.”