Although establishing a common currency is a real challenge, the bloc – which includes the countries of Brazil, Russia, India, China and South Africa that make up its acronym, as well as new members Iran, Egypt, Ethiopia and the United States The United Arab Emirates has called for more local currency trade and lending as a way to break away from the dollar.
There could be more motivation to abandon the dollar this year when the BRICS bloc meets in the Russian city of Kazan on October 22-24, wrote Christopher Granville, managing director of global policy research at GlobalData.TS Lombard, in a report released Friday. .
The summit would take place against the backdrop of the increasingly aggressive stance of the United States and its allies towards Chinese exports, which they say exceed their capabilities. And Washington imposes secondary sanctions on banks that process payments to and from Russia, even if they are made in local currency, such as the Chinese yuan.
Central Banks Consider Digital Currency Transfers
A more systemic solution is in the works: a Central Bank of International Settlements digital currency platform that enables direct, peer-to-peer settlement of commercial invoices and foreign exchange transactions in the digital currencies of central banks of the participating countries, Granville wrote. . These currencies are similar to cryptocurrencies but are issued and guaranteed by central banks.
The central banks of China, Hong Kong, the United Arab Emirates and Thailand participated in a trial of the digital currency system by the BIS in 2022, but it is not yet operational.
Yet Russian Foreign Minister Sergei Lavrov also recently touted a digital currency-based settlement system to local media – a signal that central banks are eyeing the solution “isolated from the United States,” Granville wrote.
“This signal from Lavrov was not surprising given Russia’s pressing needs,” Granville wrote. “While other countries outside the US alliance system will not feel the same urgency, this US-isolated CBDC solution still appears to be in their interest.”
Specifically, it would make sense for China in the context of its trade war with the United States. China’s central bank already has one of the most developed digital currencies, the Chinese digital yuan, which is used domestically, including to pay some public sector salaries.
The BIS suspended the Russian central bank’s membership following that country’s invasion of Ukraine in 2022. It is therefore unclear how the digital currency-based platform and infrastructure comes into play. central banks would work for Russia.
Central bank digital currencies could weaken the dollar’s role in international payments
Nonetheless, 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 represented 60% of international payments outside the euro zone in 2023, according to Granville’s analysis. This contrasts with its 80% share in trade finance – which covers a wide range of products that banks and companies use for trade – and with 60% of global foreign exchange reserves.
As Business Insider recently reported, the West cannot afford to completely isolate Russian banks from the SWIFT messaging network due to its disastrous impact on trade finance, a key pillar of international trade. As for global foreign exchange reserves, the greenback remains king.
But reducing the U.S. dollar’s share of international payments through a non-dollar CBDC platform “would weaken one of the three elements of the U.S. dollar’s global reserve currency status,” Granville wrote. This effect would persist even if the currency of choice for cross-border payments is less systemically important than the dollar’s role in trade financing and foreign exchange reserves, Granville added.
Despite talk of central bank digital currencies, any implementation would inevitably pose challenges.
Even China, which has one of the most advanced digital currencies in the world, relies on a “two-tier” system involving banks as agents holding wallets. This setup avoids excessively disrupting the financial institution’s business model and creating financial instability, Granville wrote.
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