Saudi Arabia's decision to join a China-dominated central bank and the expiry of its 50-year-old petrodollar agreement with the US might potentially weaken the role of the US dollar in the world's oil trade.

According to Reuters, Saudi Arabia has agreed to join the BIS, a global central bank umbrella organization that oversees the project mBridge. This project, launched in 2021, is a collaboration between the central banks of China, Hong Kong, Thailand, and the United Arab Emirates.

The agreement was announced on June 5, just four days before the expiration of the petrodollar agreement between the US and Saudi Arabia. 

The term “petrodollar” refers to the US dollar’s role as the currency used for crude oil transactions on the world market. This arrangement dates back to the 1970s, when the United States and Saudi Arabia struck a deal shortly after the US went off the gold standard, leading to far-reaching consequences for the global economy.

The agreement between the US and Saudi Arabia expired on June 9, 2024. This expiration has significant implications, as it could disrupt the global financial order.

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, Reuters reported.

"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, opens new tab 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 260 million 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.