Nicole Ayub
(author’s bio is at the end)
At the BRICS finance ministers’ meeting in February 2024 in São Paulo, the Russian minister proposed a payment system for the BRICS, possibly using blockchain technology. This proposal aims for an “independent and depoliticized” compensation of international transactions [1]. By October, the Russian proposal is taking shape through a document prepared by the Russian Ministry of Finance and central bank, which was distributed to journalists ahead of the Summit scheduled for October 22-24 [2] (*footnote at the end of the text). Earlier, Brazil suggested a system that would bypass the U.S. dollar to reduce dependence on foreign currencies by creating a currency for trade among BRICS members [3]. Thus, it is important to clarify the differences between a payment platform and a possible “BRICS currency.”
International transaction systems facilitate payments between bank accounts in different countries. When a person or company needs to carry out an international transaction, an intermediary is required to settle the transaction between the two bank accounts—similar to a domestic transaction where a bank acts as an intermediary between the payer and the receiver. The most commonly used system for this is SWIFT, which takes two to three days to complete the settlement.
Payment mechanisms do not determine which currency is used; instead, the parties involved choose their preferred currency. However, it is important to remember that the market is pragmatic. The security, ease, and cost of using each currency impact the decision regarding which currency is employed in international transactions. In the case of currencies, the exchange rate and the interest rates tied to financing contracts are factors to consider.
Therefore, in the case of BRICS initiatives, it’s important to distinguish between a payment system similar to SWIFT, but operated by BRICS countries, and the idea of a common currency. The proposed regional payment system by the BRICS primarily refers to the infrastructure and mechanisms used to facilitate financial transactions among member countries. This system could offer a secure and efficient platform for processing cross-border payments, reducing dependence on Western-dominated infrastructures. This, in turn, could strengthen the financial autonomy of the BRICS and enhance their ability to withstand external pressures. A common currency, in contrast, would involve creating a new monetary unit shared among the bloc’s members.
However, unlike a common currency, a regional payment system does not necessarily imply the creation of a new monetary unit. Instead, it focuses on facilitating financial transactions among member countries while maintaining the diversity of national currencies. A common currency, on the other hand, is different. It could resemble the euro, the currency of the European Union, where countries relinquish their national currencies and monetary autonomy, or it could be inspired by Keynes’ 1944 proposal for a currency to be used solely for international trade, without promoting complete economic integration of a geographically dispersed group.
Eighty years ago, the decisions made during the Bretton Woods Conference marked the beginning of a new configuration of the international monetary system. Since then, the key currency used in the international economy has become the U.S. dollar. This means that all currencies are “convertible” into dollars (we can exchange reais, yen, and rupees for dollars), which, in turn, is widely accepted as the currency in which many international contracts are denominated and international transactions are conducted. In this context, the dollar serves not only as a means of payment and a monetary unit (prices and values are denominated in dollars) but also as a store of value.
So how do international transactions occur? When Brazilians want to export their products to Japan, for example, they price their goods in dollars and receive payment in dollars from the Japanese. Without needing to leave their country, the Japanese deposit the dollar amount into an account owned by Brazilians, who will then convert the received dollars into Brazilian reais for use in Brazil. People from any country can more easily conduct international exchanges when there is a currency accepted in most transactions.
By exchanging reais for dollars, Brazilians can purchase goods from Japanese, Indian, Australian, South African, and British sellers without needing to convert reais into those respective currencies. This is because the dollar functions as a store of value in the current international monetary system and can be readily converted into any currency without losing value, or it can be the means of payment used to acquire goods priced in dollars. For example, if Brazil has a trade deficit with one country and a surplus with another, imbalances in bilateral trade are not reflected in excess or shortage of a specific national currency, since trade is often conducted in U.S. dollars (or euros). An excess of a specific national currency favors bilateral transactions at the expense of broader choices in international trade since it would have to be used for goods and services priced in that currency.
People of all nationalities know they can convert their national currencies into dollars and that they are subject to the exchange rates between their currencies and the dollar. They can also use financial instruments such as currency swaps or hedges to make their operations in this currency safer, protecting the financial stability of their companies from exchange rate fluctuations and uncertainties about the future value of the currency. As the dollar is the most widely used currency in international trade and the flow of international investments and financial applications, there is a diversity of financial instruments available in this currency. If transactions were conducted in other currencies, it might be more difficult to form the appropriate financial instrument because there would need to be a counterparty willing to conduct the operation in the currency in question. The wider the use of a currency, the greater the availability of financial instruments, which enhances transaction security, improves liquidity, and reduces both risk and conversion costs.
For a transaction to be completed, funds must be transferred from one account and deposited into another. In most international transactions, the currency used is the U.S. dollar (and the euro), and the transaction is completed through a payment system. Currently, SWIFT is the primary payment system for international transactions.
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global financial communication network that enables banks and other financial institutions to send and receive information about financial transactions in a secure and standardized manner. Simply put, SWIFT is a messaging system used to facilitate money transfers between institutions worldwide, providing a secure way to transmit payment instructions, beneficiary details, and other messages related to financial transactions [4]. This system is crucial for international payment operations and communication between banks in different countries.
In contrast to SWIFT, the BRICS countries’ initiative is based on blockchain technology, which functions as a digital ledger where all transactions are recorded. But how would blockchain work in this system? Imagine a chain made of links, where each link contains information about a transaction. Once a link is added to the chain, it becomes immutable. This structure makes the system more secure, as attempts to alter a transaction would require modifying all subsequent links, which is virtually impossible in a decentralized network. In addition to security, decentralization eliminates a central point of control, making the system more resistant to attacks and failures.
In this sense, the proposal for the new payment system envisions a more centralized structure within each country while maintaining a decentralized approach at the international level, with separate national systems that are interoperable through a single integrated multi-currency infrastructure using a shared set of rules [5]. Additionally, it would likely use Distributed Ledger Technology (DLT) for cross-border payment systems, with transactions recorded across multiple locations or nodes in a network, rather than being centralized in a single database [6]. In the payment system, a network of national commercial banks would be interconnected through the central banks of BRICS countries, where blockchain technology is used to store and transfer digital tokens backed by national currencies, allowing these currencies to be exchanged and avoiding the need for transactions in dollars [7] [8].
But what is the relationship between this and the process of “de-dollarization”? When operational, the system would provide a fast and secure way to conduct transactions in the currencies of BRICS member countries and would potentially be immune to political sanctions aimed at excluding countries from operations (as was the case with Russia being prevented from using SWIFT [9]). However, this does not eliminate the need for currencies that function as stores of value in the international monetary system (such as the US dollar and the euro), nor is it equivalent or similar to a common currency for the bloc, which would be a more significant step toward gradual de-dollarization.
A new common currency would present certain advantages, as instead of choosing the Brazilian real, Russian ruble, Indian rupee, Chinese renminbi, South African rand, or any other national currency of a BRICS country for transactions (which could use the BRICS cross-border payment system or any alternative system), the currency used would be the new common BRICS currency (and not the dollar) as the means of payment for the purchase of goods and services between members of the bloc.
For example, in the case of Brazil, which frequently engages in trade with China, instead of opting to trade in reais or renminbi — where China would need to convert its renminbi into reais to purchase from Brazil, or Brazil would need to have renminbi available for the conversion of reais, or exchange these currencies with other member countries to buy their goods and services — the new currency would function within the bloc in a way “analogous” to how the US dollar operates in international trade (with some caveats for educational purposes, as there are significant differences).
Paulo Nogueira Batista Jr., a member of an independent group of experts who discussed the reform of the international monetary system and the possibility of a BRICS currency, proposes the following characteristics for a new reserve currency (NMR):
“It would not be a single currency, replacing the national currencies of the participating countries. Therefore, it would not be a currency similar to the euro, issued by a common central bank. It would be a parallel currency, designed for international transactions. National currencies and central banks would continue to exist in their current forms. There would be no loss of sovereignty and no need to coordinate monetary policies.” [10]
This suggestion, which echoes Keynes’ proposal for a currency to be used exclusively for international trade, has the advantage of not facing the obstacles that intense financial integration would require, nor the need for a central bank issuing the currency, without infringing on the sovereignty of the countries involved. It should be noted that this initiative is not to be confused with the existence of the New Development Bank (NDB), which is a bank created to finance development projects in the bloc’s countries, with capital contributed by its members, but has nothing to do with a payment system or a common currency.
Given this, it is important to follow the new BRICS initiatives that aim to both facilitate economic exchanges between their members and contribute to de-dollarization. However, it should be made clear that cross-border payment systems have different objectives and contribute to de-dollarization in different ways than a new currency for the bloc, which, in turn, would not be a perfect substitute for the dollar.
(*footnote) It should be noted that the proposal would involve voluntary participation and is not an official system already in operation. There have been reports in the press [11] about a “test” of a system called “Brics Pay” [12], but we have not found reliable sources to confirm its accuracy, so this article disregards its existence.
REFERENCES
[1] “’Mais eficiente’ e ‘menos assimétrico’? Sistema de pagamentos do BRICS é viável, avalia economista”
https://noticiabrasil.net.br/20240228/mais-eficiente-e-menos-assimetrico-sistema-de-pagamentos-do-brics-e-viavel-avalia-economista-33298760.html
[2]https://www.reuters.com/world/brics-summit-russia-push-end-dollar-dominance-2024-10-16/
[3] https://agenciabrasil.ebc.com.br/internacional/noticia/2023-08/lula-diz-que-moeda-do-brics-reduzira-vulnerabilidades
[4] https://www.investopedia.com/terms/s/swift.asp
[5]https://www.ledgerinsights.com/russia-outlines-proposal-for-brics-dlt-cross-border-payment-system/
[6] https://www.investopedia.com/terms/d/distributed-ledger-technology-dlt.asp
[7]https://www.reuters.com/world/brics-summit-russia-push-end-dollar-dominance-2024-10-16/
[8] https://www.bloomberg.com/news/articles/2024-10-11/russia-pitches-brics-payment-system-aiming-to-break-us-dominance
[9] https://www.bbc.com/news/business-60521822
[10] https://www.brasildefato.com.br/2024/10/18/brics-como-chegar-a-uma-nova-moeda-de-reserva-internacional
[11] https://operamundi.uol.com.br/politica-e-economia/russia-realiza-teste-oficial-do-brics-pay-novo-sistema-de-pagamentos-do-grupo/#:~:text=Opera%20Entrevista-,R%C3%BAssia%20realiza%20teste%20oficial%20do%20BRICS%20Pay,sistema%20de%20pagamentos%20do%20grupo&text=O%20governo%20da%20R%C3%BAssia%20introduziu,feira%20(18%2F10).
[12] https://brics-pay.com/
Author’s bio:
Nicole Ayub is an economist and lawyer. She holds a Doctorate in Economics, a Master’s degree in Economic Development, an undergraduate degree in Economics from the University of Campinas (UNICAMP), and a bachelor’s degree in Law from the Pontifical Catholic University of Campinas (PUC-Campinas). She has completed a postdoctoral fellowship at the National Institute of Science and Technology in Public Policies, Strategies, and Development at the Federal University of Rio de Janeiro (INCT-PPED/UFRJ). Additionally, she holds postgraduate diplomas in Business Management and Strategy, as well as Law and Economics from the Institute of Economics at UNICAMP.
