BRICS push to reduce US dollar dominance with digital currencies

The feasibility of establishing a common currency is a challenge; Instead, the BRICS organization has focused on increasing trade and lending in local currencies to decrease dependence on the dollar, says writer Huilen Tan.

  • A woman pays cash while shopping at a street vendor on September 26, 2017 in New York.  Even though the numbers show an overall healthy economy, low-income spenders are showing the strain.  (AP)
    A woman pays cash while shopping at a street vendor on September 26, 2017 in New York. Even though numbers show a healthy economy overall, low-income spenders are showing the strain (AP)

An opinion article published in Business Insider by writer Huileng Tan delves into efforts led by the BRICS group to advocate for a move away from the dominance of the US dollar.

Last year, Brazilian President Luiz InĂ¡cio Lula da Silva proposed a BRICS common currency, although this idea faced skepticism from economists.

The feasibility of establishing a common currency is a challenge; Instead, the bloc has focused on increasing trade and lending in local currencies to decrease dependence on the dollar.

Christopher Granville, managing director of global political research at GlobalData TS Lombard, suggested that discussions on reducing dependence on the dollar could gain momentum during the BRICS summit in Kazan, Russia, scheduled for October 22-24.

This comes amid rising tensions between the United States and China, and secondary sanctions by Washington on banks that process payments involving Russia, including in local currencies such as the Chinese yuan.

A significant development in this context is the interest of central banks in digital currency transfers. Granville noted that one potential systemic solution involves a Bank for International Settlements (BIS) platform that facilitates direct peer-to-peer settlement of commercial invoices and foreign exchange transactions using central bank digital currencies (CBDCs).

These currencies are similar to cryptocurrencies, but are issued and backed by central banks. In 2022, the central banks of China, Hong Kong, the United Arab Emirates and Thailand participated in a test of this system by the BIS, although it is not yet operational.

Read more: US dollar stocks shrink in global reserves amid de-dollarization trend

Russian Foreign Minister Sergey Lavrov has promoted a digital currency-based settlement system, which Granville interprets as an indication that central banks are considering a “US-isolated” solution.

This solution seems particularly relevant for China amid its trade conflict with the United States, as China already has a well-developed digital currency, the digital yuan, which is used domestically for various payments.

However, the BIS suspended membership of the Russian central bank following the launch of its special military operation in Ukraine in 2022, raising uncertainty over how Russia would participate in the digital currency platform.

Despite this, Granville maintains that the participation of other central banks in a CBDC system could challenge the dominance of the US dollar in international payments.

The US dollar accounted for 60% of international payments outside the eurozone in 2023, compared to its 80% share in trade finance and 60% in global foreign exchange reserves.

Read more: Russia and China achieve almost complete de-dollarization of bilateral trade

Another recent report from Business Insider detailed that while the West cannot completely isolate Russian banks from the SWIFT messaging network due to the adverse impact on trade finance, reducing the participation of the US dollar in international payments through a non-dollar CBDC platform could undermine one of the pillars of the global dollar reserve. currency status.

This shift could weaken the dollar’s role in cross-border payments, although trade finance and foreign exchange reserves remain more critical.

Despite the potential benefits, the implementation of central bank digital currencies faces challenges. Even China, with one of the most advanced digital currencies, employs a “two-tier” system in which banks act as portfolio agents to avoid disruptions in the financial sector and maintain stability.