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Establishing a common currency is a practical challenge, but the bloc – which includes the initials Brazil, Russia, India, China and South Africa, plus new members Iran, Egypt, Ethiopia and the United Arab Emirates – is seeking to expand trade and lending. Local currency As a method Parting ways with the dollar.
The move to ditch the dollar could intensify this year when BRICS nations meet in Kazan, Russia, from Oct. 22-24, Christopher Glanville, managing director of international political research at GlobalData TS Lombard, said in a report on Friday.
The summit comes as the United States and its allies have stepped up their attack on China over what they say is excessive export capacity, with Washington also imposing secondary sanctions on banks that process remittances to and from Russia, even in local currencies such as the Chinese yuan.
Central banks turn their attention to digital currency transfers
A more systemic solution is being considered. Bank for International Settlements Glanville is writing about a central bank digital currency platform that would allow direct peer-to-peer settlement of commercial invoices and foreign exchange transactions in participating countries’ central bank digital currencies. These currencies are similar to cryptocurrencies, but It is issued and guaranteed by the central bank.
The central banks of each country China, Hong Kong, UAE, Thailand It took part in a trial of the BIS’s digital currency system in 2022, but it is not yet operational.
Nevertheless, Russian Foreign Minister Sergey Lavrov Digital currency-based payment system Glanville wrote that this was a sign that the central bank was looking at solutions that were “insulated from the US.”
“Lavrov’s signal was not surprising given Russia’s own dire need,” Glanville wrote. “Countries outside the U.S. alliance system may not feel the same urgency, but this CBDC solution, insulated from the U.S., still seems to be in their interest.”
This would make particular sense for China, which is in the midst of a trade war with the U.S. China’s central bank already has one of the most developed digital currencies, the digital yuan. Used domestically, Including paying part Civil servant salaries.
of BIS suspends membership of Russian Central Bank It remains unclear how an inter-central bank digital currency-based platform and infrastructure would function in Russia following Russia’s invasion of Ukraine in 2022.
Central bank digital currencies could weaken the US dollar’s role in international payments
Still, Granville wrote that the addition of other central banks to the CBDC system could undermine a key pillar of the U.S. dollar’s status as an international reserve currency: cross-border payments outside the euro zone.
Granville’s analysis shows that the dollar will account for 60% of cross-border payments outside the euro zone by 2023. That contrasts with its 80% share of trade finance, which covers the range of products banks and companies use in trade, and 60% of global foreign exchange reserves.
As Business Insider recently reported, Western countries cannot afford to completely cut off Russian banks from the SWIFT messaging network, as this could have a devastating knock-on effect on trade finance, a vital pillar of international trade and global foreign exchange reserves. The dollar is still king.
But reducing the USD’s share of international payments through a non-USD CBDC platform “would weaken one of the three pillars of the USD’s status as an international reserve currency,” Glanville wrote. Although the currency of choice for international payments is not as systemically important as the dollar’s role in trade finance and foreign exchange reserves, the impact would persist, he added.
Despite the discussion about central bank digital currencies, any implementation will inevitably come with challenges.
Even China, which has one of the most advanced digital currencies in the world, relies on a “two-tier” system that involves banks as wallet custodian agents, which Granville wrote is meant to avoid overly disrupting financial institutions’ business models and causing financial instability.