The BRICS economic bloc, which consists of Brazil, Russia, India, China, and South Africa, is reportedly discussing the possibility of issuing a cross-national digital currency in order to reduce the bloc’s dependence on the United States economy. What will the new cryptocurrency look like, how does the BRICS group plan to use it and are there any existing projects underway that seek to achieve a similar goal of independence on such a high level?
BRICS and its problems
The BRICS bloc comprises the largest countries in terms of geography and economy. Together, they wield significant power in global affairs. The five nations of the BRICS block (Brazil, Russia, India, China, South Africa) had a combined nominal gross domestic product of $40 trillion in 2018, which is about 23.2% of the gross world product.
Although BRICS nations have a lot of economic power, other countries are competing for the same markets. The European Union and the U.S. are the biggest competition.
Lately it seems that BRICS countries’ diplomacy hasn’t been as successful in reducing international sanctions, especially when it comes to politically touchy areas such as the arms and energy markets. Although politics may not be able to help, advances in technology can. Blockchain and digital assets have the potential to open new horizons for finance.
The idea of a cryptocurrency being used as a means of payments and value transmission is not a new one, but it is something that is being actively promoted not only in countries like Venezuela with its Petro, but also among BRICS countries. A single cryptocurrency could help BRICS nations settle transactions more easily, which would solve some of the economic problems they currently face.
A means of circumventing U.S. sanctions
During the 11th BRICS summit that was held in Brazil on Nov. 13–14, the BRICS Business Council discussed creating a common cryptocurrency as a potential solution to these problems, according to reports that cite Kirill Dmitriev, a member of the council. Dmitriev, who is the director-general of the Russian Direct Investment Fund, said that an efficient BRICS payment system could be used to stimulate settlements between the countries while reducing the use of the U.S. dollar for these purposes.
It was also reported that the new system could be used as an alternative to the international payment mechanism SWIFT to make trading with countries under U.S. sanctions easier.
Dmitriev said that in recent years, the amount of U.S. dollars used to make payments between the BRICS countries has decreased significantly. In the past five years, the percentage of USD used in foreign trade transactions in Russia has decreased from 92% to 50%, while the percentage of transactions made in Russian rubles has increased from 3% to 14%.
Oleg Dushin believes there is still potential to reduce the U.S. dollar’s dominance if Russia and India change the currency they use to make payments between each other.
Dushin said that Russia and China have already stopped using U.S. dollars in half of their mutual settlements and that there is a general trend of driving the dollar out of the international payments system. The BRICS countries (Brazil, Russia, India, China, and South Africa) are working on a system that will reduce the influence of the dollar in the global economy and reduce the risk of payments being frozen by the United States.
Smirnov noted the convenience and reduction of transaction costs as some of the advantages of creating a single cryptocurrency system for the BRICS countries. He called it an alternative to bonds.
Commenting on the possibility of BRICS countries using a single cryptocurrency, Vladimir Rozhankovsky, an expert at the International Financial Center, told BFM:
” It is better to carry out trading payments directly to reduce currency risks, rather than through the purchase of dollars. Most global economies are now working on this issue.
Peg to gold, not the U.S. dollar
There is no agreed-upon design for the BRICS cryptocurrency yet, but experts are considering what it could be pegged to. Elina Sidorenko, the head of the Russian State Duma’s working group on cryptocurrency issues, said that there are several possible options for what the international cryptocurrency could be pegged to.
The value of a proposed new cryptocurrency could be linked to that of another cryptocurrency, said Anastasia Shevchenko in an interview with Dp. However, this could perpetuate the US dollar’s monopoly, or the new cryptocurrency could be linked to the price of a raw material or product, which carries the risk of market manipulation. She concluded:
The third option is a link to gold, and taking into account the latest Basel Accords, such a decision seems very convincing and timely.
Olinga Taeed, a member of the China E-Commerce Blockchain Committee, told Cointelegraph that the Chinese have been researching the possibility of issuing a gold-backed cryptocurrency due to the country’s access to natural mineral reserves in Africa through China’s Belt and Road Initiative. He went on to add:
” international trade that does not involve any friction has become more important recently, with DLT being seen as a possible solution for Brexit, for example, which would normally take 5-10 years to happen. This means that people are willing to act on their well-rehearsed thoughts. Donald Trump has revealed that the United States has been using the financial instrument of the dollar to pressure Iran, Russia, and China for non-financial gain.
Russia seeks an alternative to SWIFT
Russia has been the target of sanctions since 2014. Russian authorities are considering creating alternatives to SWIFT because of multiple economic restrictions.
One of the financial messaging systems reportedly being used in 18% of money transfers in the country is the System for Transfer of Financial Messages (SFPS). Foreign financial organizations began to join SFPS in 2018. Although Siluanov said that SPFS is not currently a full replacement for SWIFT, he believes that it has the potential to become one in the future.
The Russian government is considering a national cryptocurrency secured by gold. According to Elvira Nabiullina, head of the Central Bank of Russia, a cryptocurrency could potentially be used to settle trade transactions with other countries. Nabiullina believes that it is more important to develop international settlements facilitated by national currencies rather than crypto.
The sanctions blocked at least 20% of Russia’s defense transactions in 2018 because they were tethered to the U.S. dollar. That being said, the idea of a unified cryptocurrency is still being openly discussed as a way to get around U.S. sanctions and decrease dependence on the U.S. dollar.
The five member states of the BRICS alliance would be able to trade with each other using a single cryptocurrency, ignoring any exchange rate differences. This would provide a boost to the Russian ruble, which has lost value in recent years.
China considering a national crypto to bypass U.S. sanctions
China is the leading country in the BRICS bloc when it comes to GDP and is the most open country when it comes to discussions about blockchain implementation. China plans to speed up the creation of its own digital currency backed by the central bank and integrate blockchain technology into other key financial areas such as Alibaba, Tencent, and various banks.
As China dives deeper into blockchain technology and digital ID, the rest of the world is being spurred into action. China’s recent advancements in blockchain technology and digital ID are causing the rest of the world to take action.
The debate around Facebook’s Libra coin has been intense, and this might be part of the reason why the coin’s development has been happening so quickly. Some Chinese analysts are concerned that if a company with strong ties to the US creates a global digital currency, it could destabilize national currencies and hurt their exchange rates. A cryptocurrency backed by the U.S. dollar could give the dollar more influence in the global economy, making Washington’s political position stronger.
The Chinese government is interested in developing a unified cryptocurrency to be used for settlements between BRICS countries, as well as launching a national cryptocurrency that would protect the Chinese economy from its adversary across the Pacific.
Brazil has a positive stance on using stablecoins
Brazil has the highest rate of Bitcoin (BTC) trade in Latin America. This makes Brazil a good place to develop a national cryptocurrency, as well as to support a BRICS cryptocurrency for settlements between member states.
Related: Why Has Brazil’s Central Bank Included Crypto Assets in Trade Balance?
Brazilian authorities appear to be open to discussions with stablecoin issuers, given the country’s positive stance toward blockchain. The Mile Unity Foundation recently met with members of Brazil’s Ministry of Industry, Foreign Trade and Services to discuss the use of the XDR stablecoin for international transfers of funds.
The potential to increase export/import figures by using a single cryptocurrency among BRICS member states is immense.
Brazil is not subject to sanctions, however its main trade partners in technology, such as Russia, are. If countries use the U.S. dollar to settle debts between one another, they won’t have much wiggle room to do so.
India is fighting with poverty and corruption
The government is reportedly discussing the possibility of creating a national digital currency. There may be significant reasons for the country’s 1.3 billion people to move, not the least of which being the alleviation of the poverty that many of them are languishing in.
The Reserve Bank of India (RBI) is advocating for the creation of a digital currency that would be backed and regulated by the central bank, and would be considered legal tender. The RBI (Reserve Bank of India) is looking to blockchain technology to try and reduce or even eliminate the rampant corruption in India and also to help reduce the dependence of millions of Indians who work abroad and need to send money back home. Currently, there are many financial intermediaries involved in these cross-border money transfers, and blockchain could potentially help streamline the process.
The Indian government also believes that having a national digital currency will reduce the reliance of the population on other digital currencies. Since India is a major buyer of Russian arms and one of the most important energy trade partners within BRICS, using a unified digital currency for settlements would open up entirely new trading prospects.
South Africa is making money transfers accessible for citizens
The South African Reserve Bank has even discussed the possibility of issuing a national digital currency, which could allow for its citizens to freely transact without the need for banks.
There are an estimated 11 million people in the country who don’t have a bank account or any form of official ID. A national digital currency would help them gain access to financial services and boost economic development. Just as South Africa is bound to the U.S. dollar in its settlements with China and Russia, it too feels the impact of the sanctions regime.
Experts say
BRICS digital currency may be highly viable, considering world is moving from a monopolar political model to a multipolar one, and traditional financial institutions are shifting to trading platforms.
The main beneficiary of the trade war between the U.S. and China is China, which is interested in expanding its sales markets. Smirnov told BFM that he believes that over time, such systems will become more widespread:
A group of European banks have been working on a way to settle transactions between each other without using the SWIFT system for a few years now.
While it’s difficult to say for certain whether or not a BRICS payment system would bolster the individual national currencies of member states, it’s worth noting that these currencies have been in decline against the US dollar for the past two decades. If fewer settlements are made in U.S. dollars around the world, the value of the dollar could decrease.
Rojankovsky noted that there are several possible risks associated with the idea of creating a digital currency backed by gold, including deregulation of the market and the possibility of manipulation. He said that the project does not require the involvement of any expert group, which would be a body that would be monitoring the project.
The innovator’s dilemma
The decision whether or not to launch a U.S. This situation with CBDCs is similar to the “innovator’s dilemma” which is when a new technology comes along and disrupts the market. This was first spoken about by Clayton Christensen.
Applying Christensen’s framework to Washington’s decision to launch a CBDC, the innovator’s dilemma facing U.S. policymakers can be described like this:
- A dominant incumbent (the U.S. dollar) garners the lion’s share of industry profits and benefits, but only incrementally innovates (e.g. SWIFT.gpi and FEDNow infrastructure upgrades) to meet customer needs.
- Meanwhile, insurgent innovators (e.g. digital currencies, stablecoins, decentralized payment networks) enter the market using new technologies (e.g. blockchain) and experience rapid adoption due to a superior value proposition (e.g. faster transactions, lower costs, privacy, flexibility, “bank by device”), but face a “chasm” before mass scale adoption.
- Larger industry players (e.g. central banks, China) adopt the same technologies both to protect their own business from these disruptors but also to gain market share from the dominant incumbent.
- Adoption by these large industry players and entrepreneurial fervor by the insurgents increases the disruption’s value to customers, making eventual mass scale adoption inevitable.
- The dominant incumbent now faces a hard choice: whether to adopt or fight against these disruptive technologies—and if adopting, how to do so effectively.
There are two main types of alternatives to the SWIFT system and the U.S. dollar: cryptocurrencies and central bank digital currencies. Cryptocurrencies are a type of payment that does not need a central monetary authority, such as a government or bank. They are created using distributed ledger technologies and cryptographic techniques that enable people to buy, sell or trade them securely in a decentralized way. These networks are not controlled by anyone and allow for privacy from government interference or intervention. Cryptocurrencies, including bitcoin, ethereum, and an increasing number of alternatives, have risen in value to ~3% of the global money supply.
Although CBDCs and cryptocurrencies both use similar technology, CBDCs centralize the infrastructure of a digital currency while cryptocurrencies decentralized control of money. This enables CBDCs to have greater control and inspection. A Central Bank Digital Currency (CBDC) is a digital version of a country’s fiat currency. Since it is issued and regulated by the state’s monetary authority or central bank, it can be used as legal tender. CBDCs are supported by the government that issued them. Ninety countries are exploring the idea of a CBDC, while nine have already launched one. All of the countries that have launched a central bank digital currency (CBDC) are small, with a limited currency float.
CBDC “hubs” are the next step in making digital currencies effective for international payments. Bilateral trade pairs can be cleared and settled through these hubs. Currently, CBDC implementations are deployed on various blockchain and other IT systems. These systems do not talk to each other. CBDCs and stablecoins need to be able to communicate with each other in order to be cleared and settled. Countries will need to work together on issues like this if they want to use digital currencies internationally, as well as deal with the tough regulatory challenges that come with different jurisdictions. There are many efforts underway to make it happen, even though it is difficult to do. An increasing number of places are trying to establish regulations for digital currency exchanges, which will be important for the global financial system in the future.
Central banks can improve the efficiency of the financial system by introducing their own digital currencies. CBDCs can lower the $120 billion in transaction fees that global corporations pay every year. CBDCs can provide unbanked individuals with easier and safer access to money by promoting financial inclusion. They can compete with private companies by setting transparency standards and limiting illicit activity. They can help the implementation of monetary policy to be more efficient and effective. They can help fine tune and calibrate capital controls.
For now, the U.S. dollar is the most important currency in the world. The dollar is the most common currency held in reserve by governments and institutions around the world, making up approximately 60% of global reserves. The dollar is the most traded currency, representing 88% of global currency trades. It is also listed on 79% of international trade invoices and is the currency with the most international banking liabilities, representing 60% of them. There are more than 65 countries that have their currencies pegged to the U.S. dollar. More than 50% of global cross-border transactions are completed using the SWIFT (Society for Worldwide Interbank Financial Telecommunications)-based payments system. While SWIFT does have the ability to process currencies other than just the U.S. dollar, it is still ultimately controlled by the central banks of ten different countries that are allies with the United States.
U.S. dollar’s supremacy gives the U.S. government and economy unique advantages, such as the power to print money with less restrictions, issuing debt at low interest rates which in turn lowers the cost of capital for both the government and U.S. businesses, and maintaining long-term and consistent trade surpluses. The SWIFT system’s compliance services allow the US government to monitor global transactions and apply sanctions to countries and individuals on a larger scale than any other government. As the use of cryptocurrencies and central bank digital currencies increases, the benefits that the United States gets from the dollar being the dominant currency will gradually decrease.
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