Last year, Brazilian President Luiz Inácio Lula da Silva called for a BRICS common currency. The economist who first gave the bloc its name said that idea was almost “embarrassing.”
While the setup of a common currency is practically challenging, the bloc — which comprises Brazil, Russia, India, China, and South Africa, which make up its acronym, along with Iran, Egypt, Ethiopia, and the United Arab Emirates, its new members — has called for more trade and lending in local currencies as a way to break up with the dollar.
Christopher Granville, the managing director of global political research at GlobalData TS Lombard, wrote in a Friday report that there might be more traction in ditching the dollar this year when the BRICS bloc meets in the Russian city of Kazan from October 22 to October 24.
The summit would take place in the context of the US and its allies’ increasingly aggressive stance toward Chinese exports, which they say are over capacity. And Washington is imposing secondary sanctions against banks processing payments to and from Russia, even if they’re in local currencies, such as the Chinese yuan.
Central banks eye digital-currency transfers
Granville wrote that a more-systemic solution was in the works: a Bank for International Settlements platform that allows for the direct, peer-to-peer settlement of commercial invoices and foreign-exchange trades in the central-bank digital currencies of participating countries. These currencies are similar to cryptocurrencies but are issued and backed by central banks.
The central banks of China, Hong Kong, the UAE, and Thailand participated in a BIS trial of the digital-currency system in 2022, but it’s not live yet.
Still, Russia’s foreign minister, Sergey Lavrov, also touted a digital-currency-based settlement system to local media recently — which Granville said was a sign central banks were eyeing the “US-insulated” solution.
“That Lavrov signal was unsurprising given Russia’s own pressing need,” Granville wrote. “While other countries outside the US alliance system will not feel the same urgency, this US-insulated CBDC solution still looks to be in their interests.”
Specifically, it’d make sense for China amid its trade war with the US. China’s central bank already has one of the most developed digital currencies, the digital Chinese yuan, that is used domestically, including to pay some public-sector salaries.
The BIS suspended the Russian central bank’s membership following the country’s full-scale invasion of Ukraine in 2022, so it’s unclear how the digital-currency platform and infrastructure would work for Russia.
Central-bank digital currencies could weaken the US dollar’s role in international payments
Even so, Granville wrote that the participation of other central banks in the CBDC system could weaken a key pillar of the US dollar’s global reserve-currency status: international payments outside the eurozone.
The greenback accounted for 60% of international payments ex-eurozone in 2023, Granville’s analysis found. This is in contrast to its 80% share in trade finance — which covers a wide range of products banks and companies use for trade — and 60% of global foreign-exchange reserves.
As Business Insider reported recently, the West can’t afford to totally isolate Russian banks from the SWIFT messaging network because of the disastrous knock-on impact on trade finance — a key pillar of international trade. As for global FX reserves, the greenback is still king.
But, chipping away at the US dollar’s share in international payments through a non-dollar CBDC platform “would weaken one of three planks of the US dollar’s global reserve currency status,” Granville wrote. He added that the effect would hold even though the currency of choice for cross-border payments was less systemically important than the dollar’s role in trade finance and FX reserves.
Despite the discussion over central-bank digital currencies, there would inevitably be challenges in any implementation.
Even China, which has one of the world’s most advanced digital currencies, relies on a “two-tier” system involving banks as wallet-holding agents. Granville wrote that that setup avoided excessively disrupting the financial institution’s business model and creating financial instability.
