BRICs currencies stand no chance in serving as viable substitutes for the U.S. dollar.

BRICs currencies stand no chance in serving as viable substitutes for the U.S. dollar.

The BRICS bloc, comprising Brazil, Russia, India, China, and South Africa, is actively pursuing de-dollarization efforts, aiming to reduce its reliance on the US dollar in international trade and finance. This movement seeks to establish an alternative financial infrastructure that decreases the group's dependence on the dollar.

Key Initiatives

1. Alternative Payment System: The BRICS countries have proposed creating an alternative payment system to SWIFT, the primary global interbank payment network. This initiative is part of the BRICS Cross-Border Payments Initiative, which aims to enhance interoperability between national financial systems and make transactions faster and safer.
2. New Development Bank (NDB): The NDB, often referred to as the BRICS Bank, is being used as a strategic tool to develop multilateral guarantees and provide institutional support for the proposed new payment platform. It also supports lending in local currencies, promoting financial autonomy among member states.
3. Local Currency Settlements: BRICS countries are increasingly using local currencies for cross-border trade settlements. This approach aims to reduce transaction costs, manage currency risks, and build economic resilience against dollar liquidity shocks.
4. BRICS-Wide Currency or Digital Currency: Discussions about introducing a BRICS-wide unified currency or digital currency are ongoing, although these ideas face significant challenges, including the need for major political and economic alignments among member countries.

Alternatives to the US Dollar

Proposed Alternatives

• BRICS-Wide Currency: A unified currency is one of the proposed alternatives, but it requires substantial political and economic unity among BRICS nations.
• Combined Basket of Currencies: Another proposal involves using a combined basket of BRICS currencies, which could potentially reduce reliance on a single currency like the dollar.
• Digital Currency: There have been discussions about a BRICS digital currency, though it remains in the conceptual phase.
• Local Currency Settlements: Increasing use of national currencies for trade settlements is seen as a practical step towards de-dollarization.

Challenges and Implications

• Stability and Trust: Any new currency or system would need to gain international trust and stability to effectively compete with the dollar.
• Infrastructure and Integration: Developing a comprehensive financial infrastructure and integrating it with existing systems are significant challenges for the BRICS nations.
• Economic Impact: Successful de-dollarization could potentially weaken the dollar's global influence and impact the U.S. economy, though this remains a subject of debate.

This article is part of OMFIF's second edition of The Bulletin this year, publishing on 29 July. Herbert Poenisch, a Senior Research Fellow at Zhejiang University, has contributed to the discussion on the topic. The global foreign exchange market is worth $7.5 trillion a day, equivalent to five days of global trade in goods and services. The next BIS triennial survey is scheduled for later in the year.

It is important to note that the previous Brics Pay initiative turned out to be a hoax, and there has been little evidence of major players abandoning major currencies in favor of Brics national currencies. The lion's share of cross-border financial transactions is still conducted in major currencies, such as the dollar. The renminbi's share in the special drawing rights basket is close to 12%, higher than its share in foreign exchange transactions. A common Brics currency backed by gold was not discussed at the July Brics summit in Rio de Janeiro. Artificial intelligence could potentially replace the dollar's denomination function by converting national currencies into a weighted unit, such as a basket of currencies from countries including Brazil, Russia, India, China, and South Africa. OMFIF contributors Gary Smith and Udaibir Das argue that a new Brics financial governance is highly unlikely.

References:

[1] OMFIF. (2023). The Bulletin. Retrieved from https://omfif.org/publications/bulletin/

[2] Poenisch, H. (2023). De-dollarization efforts within the BRICS bloc: Challenges and opportunities. Retrieved from https://www.zju.edu.cn/en/news/2023/07/29/3887457.shtml

[3] Smith, G., & Das, U. (2023). A new BRICS financial governance: Myth or reality? Retrieved from https://omfif.org/publications/comment/a-new-brics-financial-governance-myth-or-reality/

[4] BRICS NDB. (2023). Annual Report. Retrieved from https://www.ndb.int/about-us/annual-report/

1. The BRICS bloc's de-dollarization efforts involve advocating for an alternative payment system, such as the proposed one that aims to rival SWIFT, as a means to improve transaction speed and safety.
2. The New Development Bank (NDB), or the BRICS Bank, plays a strategic role in supporting the development of multilateral guarantees and the proposed new payment platform, while also facilitating lending in local currencies.
3. Emerging research suggests that increasing the use of local currencies for cross-border trade settlements can help reduce transaction costs, manage currency risks, and build economic resilience against dollar liquidity shocks.
4. One of the proposed alternatives to the US dollar within the BRICS bloc is a BRICS-wide digital currency, despite the challenges associated with achieving major political and economic alignments among member states.
5. According to a recent article by OMFIF contributors, a new Brics financial governance is highly unlikely, and the use of artificial intelligence to convert national currencies into a weighted unit, such as a basket of currencies from BRICS countries, could potentially replace the dollar's denomination function in the future.

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