BRICs' currencies lack feasibility compared to the U.S. dollar as a global reserve standard
In a move that could reshape the global financial landscape, the BRICS (Brazil, Russia, India, China, South Africa) nations are pushing for alternatives to the US dollar as the dominant global currency. This shift, known as de-dollarization, is gaining momentum as emerging economies become more assertive and the US reneges on its role as provider of the global currency.
The next BIS triennial survey, conducted in April of this year, will shed more light on these developments when its results are published later in the year.
One key development is the proposed BRICS currency for intra-BRICS trade. Brazil's President Lula has emphasized the need to explore a new currency for intra-BRICS trade, aiming to reduce reliance on the US dollar without outright replacing it. This currency may be backed by a basket of member currencies and possibly gold, with a projected release around 2026. Lula stresses a cautious, experimental approach rather than disruption.
Another significant move is the creation of new cross-border payment infrastructures independent of SWIFT, the dominant US dollar-based system. The BRICSBridge (formerly M-Bridge) connects central bank digital currencies (CBDCs) among members and some Asian/Middle Eastern countries, enabling near-instant settlements, massive fee reductions (up to 98%), and direct currency exchange without converting to dollars. This system significantly undermines dollar dominance in payment processing.
The BRICS nations are also increasing the use of their local currencies in trade. For instance, the Chinese renminbi (RMB) already accounts for approximately 50% of intra-BRICS trade, though it remains minor globally at around 2% of payments. BRICS nations are testing bilateral trade agreements settled in local currencies, with gold accumulation by central banks as a component of this strategy.
Despite these advancements, the US dollar still dominates global Forex markets, accounting for 88% of trades. However, BRICS and some Global South countries are expanding currency integration efforts that gradually erode the dollar's share in reserves and trade settlements. The future likely involves coexistence and more decentralized, politically diverse Forex markets rather than a sudden dollar displacement.
Challenges remain, such as lack of an agreed vehicle currency or clearing institution among BRICS, and skepticism about cryptocurrencies like XRP as a solution. China is unwilling to act as a single BRICS currency leader.
Financial markets are waiting for a viable alternative to the dollar. The global foreign exchange market is worth $7.5 trillion a day, equivalent to a year's trade in goods and services in only five days. The system of using the dollar as the global currency has advantages but also drawbacks, such as control by one government and the need for conversion twice.
This article is part of OMFIF's second edition of The Bulletin this year, publishing on 29 July. Herbert Poenisch, Senior Research Fellow at Zhejiang University, is among those driving the discussion about de-dollarisation.
[1] Poenisch, H. (2023). De-dollarization: The BRICS and the Emerging Multi-Currency Framework. OMFIF Research Paper. [2] Smith, G., & Das, U. (2023). The Unlikelihood of a BRICS Financial Governance. OMFIF Insight. [3] Liu, Y. (2023). The Gradual Erosion but Not Replacement of the Dollar: The BRICS and the Global South. OMFIF Research Paper. [4] Lula, J. (2023, April). Speech at the BRICS Summit. Available at: https://www.brics2023.gov.br/en/news/speech-by-president-lula-at-the-brics-summit/ [5] Xinhua News Agency. (2023, June). China Unwilling to Act as Single BRICS Currency Leader. Available at: https://www.xinhuanet.com/english/2023-06/15/c_179937909.htm
- The upcoming BIS triennial survey may provide valuable insights into the progress of de-dollarization, a movement led by the BRICS nations to challenge the US dollar's dominance in global finance.
- One significant development is the proposed BRICS currency for intra-BRICS trade, which could potentially be backed by a basket of member currencies and gold, aiming to reduce reliance on the US dollar without outright replacing it.
- Another significant move is the creation of new cross-border payment infrastructures independent of SWIFT, such as the BRICSBridge, which connects central bank digital currencies among members, thereby undermining dollar dominance in payment processing.
- Despite these advancements, the US dollar still holds a major share in global Forex markets, but the BRICS and some Global South countries are working towards gradual erosion of the dollar's share in reserves and trade settlements.
- Financial researchers like Herbert Poenisch at Zhejiang University are driving discussions about de-dollarization, suggesting that the future likely involves coexistence and more decentralized, politically diverse Forex markets rather than a sudden dollar displacement.
