The BRICS nations are interested in creating a new currency to compete with the US dollar, and recently announced plans for a blockchain-based payment system. Learn about the developments thus far and how investors can prepare for the possibility
The BRICS nations are interested in creating a new currency to compete with the US dollar, and recently announced plans for a blockchain-based payment system. Learn about the developments thus far and how investors can prepare for the possibility.
The BRICS nations, originally composed of Brazil, Russia, India, China and South Africa, have had many discussions about establishing a new reserve currency backed by a basket of their respective currencies.
A BRICS currency was a topic at the 2024 BRICS Summit that took place October 22 to 24 in Kazan, Russia. At the summit, the BRICS nations continued their discussions of creating a potentially gold-backed currency, known as the “Unit,” as an alternative to the US dollar.
The potential BRICS currency would allow these nations to assert their economic independence while competing with the existing international financial system. The current system is dominated by the US dollar, which accounts for about 90 percent of all currency trading. Until recently, nearly 100 percent of oil trading was conducted in US dollars; however, in 2023, one-fifth of oil trades were reportedly made using non-US dollar currencies.
Central to this ongoing situation is the US trade war with China, as well as US sanctions on China and Russia. Should the BRICS nations establish a new reserve currency, it would likely significantly impact the US dollar, potentially leading to a decline in demand, or what’s known as de-dollarization. In turn, this would have implications for the United States and global economies.
Another factor is former US president Donald Trump returning for a second term beginning on January 20. Trump’s America-first policies are expected to drive up the value of the dollar compared to its global counterparts, as was already on display the day following his election win on November 5 as China’s yuan, Russia’s ruble, Brazil’s real, India’s rupee and South Africa’s rand all fell. This could in turn push these BRICS member nations to look for new paths to move away from the US dollar.
At the 2024 BRICS summit, Russian President Vladimir Putin appeared on stage holding what appeared as a prototype of a possible BRICS banknote. However, he seemed to back away from previous aggressive calls for de-dollarization, stating the goal of the BRICS member nations is not to move away from the US dollar-dominated SWIFT platform, but rather to deter the “weaponization” of the US dollar by developing alternative systems for using local currencies in financial transactions between BRICS countries and with trading partners.
“We are not refusing, not fighting the dollar, but if they don’t let us work with it, what can we do? We then have to look for other alternatives, which is happening,” he stated.
It’s still too hard to predict if and when a BRICS currency will be released in 2025 or beyond, but it’s a good time to look at the potential for a BRICS currency and its possible implications for investors.
Why do the BRICS nations want to create a new currency?
The BRICS nations have a slew of reasons for wanting to set up a new currency, including recent global financial challenges and aggressive US foreign policies. They want to better serve their own economic interests while reducing global dependence on the US dollar and the euro.
In recent years, the US has placed numerous sanctions on Russia and Iran. The two countries are working together to bring about a BRICS currency that would negate the economic impacts of such restrictions, according to Iranian Ambassador to Russia Kazem Jalal, speaking at a press conference during the Russia–Islamic World: KazanForum in May 2024.
Some experts believe that a BRICS currency is a flawed idea, as it would unite countries with very different economies. There are also concerns that non-Chinese members might increase their dependence on China’s yuan instead. That said, when Russia demanded in October 2023 that India pay for oil in yuan as Russia is struggling to use its excess supply of rupees, India refused to use anything other than the US dollar or rupees to pay.
When will a BRICS currency be released?
There’s no definitive launch date as of yet, but the countries’ leaders have discussed the possibility at length.
Looking back at the timeline of BRICS currency discussions, during the 14th BRICS Summit, held in mid-2022, Russian President Vladimir Putin said the BRICS countries plan to issue a “new global reserve currency,” and are ready to work openly with all fair trade partners.
In April 2023, Brazilian President Luiz Inacio Lula da Silva showed support for a BRICS currency, commenting, “Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries? Who decided that the dollar was the (trade) currency after the end of gold parity?”
In the lead up to the 2023 BRICS Summit last August, there was speculation that an announcement of such a currency could be on the table. This proved to be wishful thinking, however.
“The development of anything alternative is more a medium to long term ambition. There is no suggestion right now to creates a BRICS currency,” Leslie Maasdorp, CFO of the New Development Bank, told Bloomberg at the time. The bank represents the BRICS bloc.
Most recently, government officials in Brazil, which took the rotating presidency of the BRICS group for 2025, have said there are no plans to take any significant steps toward a BRICS currency. However, measures to reduce the reliance on the US dollar are very much on the table with cross-border payment systems, including exploring blockchain technology, set to be a major theme at the 2025 BRICS summit to be hosted in Rio de Janeiro in July, reported Reuters.
What would the advantages of a BRICS currency be?
A new currency could have several benefits for the BRICS countries, including more efficient cross-border transactions and increased financial inclusion. By leveraging blockchain technology, digital currencies and smart contracts, the currency could revolutionize the global financial system. Thanks to seamless cross-border payments, it could also promote trade and economic integration among the BRICS nations and beyond.
A new BRICS currency would also:
– Strengthen economic integration within the BRICS countries
– Reduce the influence of the US on the global stage
– Weaken the standing of the US dollar as a global reserve currency
– Encourage other countries to form alliances to develop regional currencies
– Mitigate risks associated with global volatility due to unilateral measures and the diminution of dollar dependence
How would a new BRICS currency affect the US dollar?
For decades, the US dollar has enjoyed unparalleled dominance as the world’s leading reserve currency. According to the US Federal Reserve, between 1999 and 2019, the dollar was used in 96 percent of international trade invoicing in the Americas, 74 percent in the Asia-Pacific region and 79 percent in the rest of the world.
According to the Atlantic Council, the US dollar is used in approximately 88 percent of currency exchanges, and 59 percent of all foreign currency reserves held by central banks. Due to its status as the most widely used currency for conversion and its use as a benchmark in the forex market, almost all central banks worldwide hold dollars. Additionally, the dollar is used for the vast majority of oil trades.
Although the dollar’s reserve currency share has decreased as the euro and yen have gained popularity, the dollar is still the most widely used reserve currency, followed by the euro, the yen, the pound and the yuan.
The potential impact of a new BRICS currency on the US dollar remains uncertain, with experts debating its potential to challenge the dollar’s dominance. However, if a new BRICS currency was to stabilize against the dollar, it could weaken the power of US sanctions, leading to a further decline in the dollar’s value. It could also cause an economic crisis affecting American households. Aside from that, this new currency could accelerate the trend toward de-dollarization.
Nations worldwide are seeking alternatives to the US dollar, with examples being China and Russia trading in their own currencies, and countries like India, Kenya and Malaysia advocating for de-dollarization or signing agreements with other nations to trade in local currencies or alternative benchmarks.
While it is unclear whether a new BRICS currency would inspire the creation of other US dollar alternatives, the possibility of challenging the dollar’s dominance as a reserve currency remains. And as countries continue to diversify their reserve holdings, the US dollar could face increasing competition from emerging currencies, potentially altering the balance of power in global markets.
However, a study by the Atlantic Council’s GeoEconomics Center released in June 2024 shows that the US dollar is far from being dethroned as the world’s primary reserve currency.
“The group’s ‘Dollar Dominance Monitor’ said the dollar continued to dominate foreign reserve holdings, trade invoicing, and currency transactions globally and its role as the primary global reserve currency was secure in the near and medium term,” Reuters reported.
Warwick J. McKibbin and Marcus Noland of the Peterson Institute for International Economics agree with this sentiment, writing in their analysis of the impacts of US tariffs on BRICS nations that “the BRICS pose no serious threat to the dollar’s dominance.”
Ultimately, the impact of a new BRICS currency on the US dollar will depend on its adoption, its perceived stability and the extent to which it can offer a viable alternative to the dollar’s longstanding hegemony.
How would a BRICS currency impact the economy?
A potential shift toward a new BRICS currency could have significant implications for the North American economy and investors operating within it. Some of the most affected sectors and industries would include:
– Oil and gas
– Banking and finance
– Commodities
– International trade
– Technology
– Tourism and travel
– The foreign exchange market
A new BRICS currency would also introduce new trading pairs, alter currency correlations and increase market volatility, requiring investors to adapt their strategies accordingly.
Is a BRICS currency possible?
Some financial analysts point to the creation of the euro in 1999 as proof that a BRICS currency may be possible. However, this would require years of preparation, the establishment of a new central bank and an agreement between the five nations to phase out their own sovereign currencies; it would most likely also need the support of the International Monetary Fund to be successful internationally.
The impact of its war on Ukraine will continue to weaken Russia’s economy and the value of the ruble, and China is intent on raising the power of the yuan internationally. There is also a wide chasm of economic disparity between China and other BRICS nations. These are no small obstacles to overcome.
Melissa Pistilli has been reporting on the markets and educating investors since 2006. She has covered a wide variety of industries in the investment space including mining, cannabis, tech and pharmaceuticals. She helps to educate investors about opportunities in a variety of growth markets. Melissa holds a bachelor’s degree in English education as well as a master’s degree in the teaching of writing, both from Humboldt State University, California.
Investing News Network
