Key takeaways:
BRICS countries are looking at several ways to phase out the U.S. dollar in global trade. Central Bank Digital Currencies (CBDCs) are one such option. However, CBDCs will not end the dollar’s dominance in global payments overnight.Russian President Vladimir Putin recently waved a mock-up banknote for a potential common currency of the BRICS countries, signaling what may be the bloc’s strongest public show of its distrust of the U.S. dollar yet.
The dollar has been politically weaponized in the service of U.S. interests. Now, the BRICS nations are betting on taking back control of their economies by phasing out the greenback as the de facto medium of global trade.
The banknote, showcased by Putin at the annual BRICS summit held in Kazan, Russia, from Oct. 22 – 24, features the flags of the BRICS founding countries – Russia, China, India, Brazil, and South Africa – on the front.
Observers think the idea of a physical common currency replacing the rupee, renminbi, rand, or ruble seems far-fetched at this time.
However, they say a Central Bank Digital Currency (CBDC)—a virtual currency backed and issued by the state—would provide a more practical solution for BRICS, as it seeks to end the dominance of the U.S. dollar in international trade and transactions.
We look at some of the strategies adopted by the bloc to reduce its dependence on the dollar and the role that CBDCs could play in the effort to de-dollarize the world economy.
Before CBDCs, There Was Gold
Over the past few years, countries like China, Russia, Iran, and Turkey—which are mostly the recipients of U.S. economic sanctions and trade wars—have reassessed the dollar “hegemony” in global payments and started to de-dollarize their trade relationships.
A new report by the economic think tank ING notes that while the BRICS plan to ditch the dollar in many areas, the bloc’s most promising strategy for de-dollarization lies in foreign exchange reserves and fuel trade.
Since 2008, the alliance has been accumulating gold as an alternative to U.S. dollar central bank reserves. The report says that between 2008 and 2021, BRICS grew its share of global gold holdings from 5% to 22%.
In that period, the bloc’s central banks bought a net of 6,600 tons of gold, outperforming the global average increase of 5,500 tons.
Still, gold currently accounts for just 10% of BRICS’ central bank reserves, which is below the global average of 20%. “The scope for an increase in BRICS+ global holdings is probably not exhausted, ING said in its report.
It added that since the BRICS now controls 44% of global central bank foreign exchange reserves, this share makes it a major player in the ongoing de-dollarization agenda.
The ING’s findings dovetail with recent data showing that the central banks of developing countries have been aggressively buying gold over the past two years, pushing gold prices higher.
China alone has purchased 225 tons in the last 15 months, according to the World Gold Council data. During the first nine months of 2024, central banks bought a net of 800 tons, 14% higher than the same period last year.
As BRICS pile up gold to diversify their reserves, the U.S. dollar-denominated foreign exchange central bank reserves have slumped to 58.2% this year, the lowest level since 1995.
One key area for the BRICS’s de-dollarization agenda is global trade, particularly fuel trade. The bloc accounts for 20% of global trade flows or around $10 trillion in annual trade revenue.
Member states are increasingly trading with each other using local fiat currencies. Per the ING report, the share of countries in BRICS combined trade revenue has continued to grow, reaching 28% this year compared to 22% in 2008.
But the most notable progress is in emerging markets fuel trade, it said, where the bloc’s share spiked from 20% to 37% of total revenue in 2023.
“This is the area where BRICS+ has the most potential to enforce de-dollarization,” the report said. The alliance has already mostly weaned itself from the dollar in cross-border settlements and global debt markets.
What Role Could CBDCs Play in De-dollarization?
Central Bank Digital Currencies have the makings of a power move in BRICS’ long-term mission to limit dollar dominance in international trade.
CBDCs would mean greater autonomy for BRICS member states because international transactions will be settled on an interoperable distributed ledger system (DLT), or blockchain, according to new research from the Russian finance ministry, Bank of Russia, and Yukov and Partners. The research was published ahead of the Kazan BRICS summit.
“The cumulative effect of these changes means that a DLT transaction will only cost 1-2% of the comparable, conventionally settled one,” the study says.
The research also estimates that the bloc will save $15 billion a year if half of all cross-border transfers are made using blockchain-based state-issued digital currencies.
Ben Kurland, the co-founder of crypto trading and analytics platform DYOR Labs, says CBDCs could help end the complicity of payment processors with powerful state interests, such as SWIFT, Visa, and Mastercard.
“By enabling direct cross-border transactions in their [BRICS] own digital currencies, CBDCs could reduce reliance on the U.S. dollar as an intermediary,” Kurland told Cryptonews.
“This could streamline transactions, lower costs, and minimize exposure to dollar price fluctuations. CBDCs facilitating real-time settlement of international payments would enhance efficiency and promote trade between nations using their local currencies.”
Continuing, Kurland said:
“Moreover, CBDCs can aid in developing alternative payment networks that bypass traditional dollar-dominated systems like SWIFT. CBDCs also offer a means to mitigate sanction risks associated with dollar-based systems, reducing vulnerability to unilateral financial pressures.”
According to a previous study by the Bank for International Settlements (BIS), central banks can issue two types of CBDCs – wholesale and general purpose. Wholesale CBDCs are generally limited to specific tasks, such as interbank payments involving the dollar.
General-purpose digital currencies are designed to replace cash and will be made available to the public. They have little relevance for U.S. dollar transactions. One example of a general-purpose CBDC is the European Central Bank’s ‘digital euro’, which targets local retail users.
Some central banks from Canada, Singapore, and South Africa replicated wholesale payment systems using distributed ledger technology. This is the same tech behind major independent cryptocurrencies like Bitcoin.
The ING report notes initiatives such as m-Bridge, which aims to facilitate dollar-free cross-border payments.
The project is incubated by the Swiss-based BIS, a bank for central banks, with participation from the central banks of China, the UAE, and Thailand. To date, 30 central banks are reportedly ‘observing’ m-Bridge, now in its third year of development.
Teunis Brosens, head of regulatory analysis at ING, said that wholesale CBDCs could “disrupt” the existing correspondent banking system, which is anchored on the dollar for almost all cross-border transactions.
As quoted in the ING report, Brosens said:
“On a unified wholesale CBDC platform, transactions could be cleared directly between two currencies, without the intermediate step of going via the dollar and a U.S. bank.”
He added that the move could “impact SWIFT-based global payments but could also, for example, facilitate ‘delivery-vs-payment’ settlement of securities.”
Jack Saracco, co-founder of Ping, a platform that allows remote workers to convert payments into crypto or local money, believes the BRICS digital currencies will help people “send real digital dollars” across borders.
Essentially, the CBDCs will be “copying what private stablecoins (like USDT or USDC) are doing today,” Saracco tells Cryptonews. He cited Latin America, where he claimed that over “90% of the onramp volume is USD stablecoin acquisition.”
De-dollarization Won’t Happen Overnight
Several countries are now looking to roll out their own government-issued digital currencies.
According to the Atlantic Council’s CBDC tracker, 134 countries or currency unions representing 98% of global GDP are actively exploring the possibility of issuing state-backed cryptocurrencies.
It says that number was only 35 in 2020. Currently, 66 countries are in the advanced phase of exploration—development, pilot, or launch. Three countries—the Bahamas, Jamaica, and Nigeria—have fully launched CBDCs.
However, wholesale CBDCs, whether from the BRICS countries or elsewhere, will not end the U.S. dollar’s dominance in global payments overnight, Brosens said.
He said that while the business case for wholesale CBDC platforms was “clear enough” after years of research, “putting things into practice is more complicated.”
Brosens notes that the problem is not so much a technical issue – as the technology is already advanced – but an organizational one, saying:
“The problem to be solved here is one of organization and governance: how to get all banks, central and commercial alike, on one platform. Central banks need to vet and license platforms, and be willing to issue reserves on it, or at least to allow circulation of tokens fully backed by their reserves. Commercial banks need to pledge liquidity to the platform. A legal framework needs to be worked out and agreed by all participants.”
For these reasons, Brosens said, CBDC-inspired de-dollarization will take even longer. But when the technology finally catches on, the “impact on dollar use in global payments could become material.”
Kurland, the DYOR Labs co-founder, admitted that dethroning the dollar is a tall order.
“The U.S. dollar benefits from a high degree of trust and stability, backed by the world’s largest economy, a level of confidence not easily replicated by other currencies,” Kurland told Cryptonews.
“It enjoys unparalleled liquidity in global financial markets…[and] the entrenched infrastructure supporting dollar transactions creates a network effect that is challenging to displace.”
What Is BRICS?
Founded in 2009, BRICS is an informal bloc of five core member states: Brazil, Russia, India, China, and South Africa. The group recently admitted four new countries: Egypt, Ethiopia, Iran, and the United Arab Emirates (UAE).
The bloc accounts for 37% of the global domestic product and 44% of the world’s population. Around 30 other countries, including Bahrain, Belarus, Cuba, Pakistan, Turkey, Thailand, and Zimbabwe, have applied to join the BRICS.
These prospective members account for an additional 5% of the global GDP and 8% of the world population. Since its founding, the bloc has primarily focused on building trade among its members – but without the dollar.
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