The popular idiom, “Rome wasn't built in a day” signifies that great achievements do not take shape overnight. “Rome wasn't burned in a day,” a play off the original phrase, connotes that it takes a long time to destroy something substantial. Both expressions can be applied to the dominance of the U.S. dollar (USD) as more countries go off in search of other options.
The BRICS intergovernmental organization (named after its founding members Brazil, Russia, India, China and South Africa) was formed in 2009 to challenge the political and economic influence of wealthier western nations. Combined, BRICS countries account for over 40% of the world’s population and more than 25% of the global economy.
Since its inception, the bloc has grown in size and ambition. At present, the BRICS are seeking to establish an alternative to the prevailing international payment system, the Society for Worldwide Interbank Financial Telecommunications (SWIFT). The BRICS Pay initiative aims to better integrate currencies for trade and facilitate cross-border transactions among its members.
BRICS Pay has adopted ambitious objectives in the areas of financial inclusion and efficiency. Proponents say that the initiative will make trade between the BRICS nations seamless and allow transactions in real time through the use of a blockchain-based system. Currency settlement within the BRICS bloc will give members the flexibility of using a specific currency amassed in one country to trade with another.
Reports suggest that more than 50 countries from across Asia, Africa, South America and Eastern Europe have expressed interest in joining the initiative ahead of its potential launch at this year’s BRICS summit in October. With a growing number of cross-border payment arrangements already being settled in local currencies on a bilateral basis, BRICS Pay will likely lead to further fragmentation of the global payment system.
The international dominance of the dollar is not really at risk.
The dollar remains the principal currency of international commerce. At least 85% of trading in the spot, forward and swap markets features the USD in one leg of the transaction. Nearly 60% of foreign exchange reserves maintained by central banks are held in dollars. About half of all international debt securities and cross-border loans issued in the offshore funding markets are denominated in USD.
If the system lives up to its hype, BRICS Pay could replace SWIFT for its member nations. This will have important ramifications for international relations. By facilitating commerce in a greater array of currencies, it will reduce dependence on the U.S. dollar and make sanctions less effective. Lower demand would dampen the value of the greenback over time. For all of these reasons, the initiative risks provoking tensions between Western countries and their close trade partners.
But while the BRICS Pay system may facilitate commerce among its member states, these nations are too geographically dispersed and politically disconnected to divorce themselves entirely from the prevailing infrastructure. Shifting away from the greenback will not only involve significant transition costs, but will also require managing exchange rate volatility on multiple fronts. China is deeply integrated into global trade and has accumulated trillions of dollars in reserves. These relationships would be difficult to untangle.
The implementation of BRICS Pay is also likely to face legal, regulatory and technological roadblocks. Every member nation has its own set of financial regulations and requirements. Countries like India and Russia already have payments systems like the Unified Payment Interface and the Mir system. Integration and interoperability with existing systems will require complex standardization efforts.
The BRICS nations are trying to lay the foundation for de-dollarization. But it will take a lot of bricks (pun intended) to build an alternative payment system. Don’t dump your dollars just yet.
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