BRICS, consisting of five-member nations has revealed plans of setting up a crypto for themselves. But what are the major reasons behind this decision?
26 November 2019 | AtoZMarkets – America enjoys a unique position of power over the world’s financial system. Thanks to the supremacy of the US dollar. However, several of the nation’s adversaries appear to think they’ve found a clever way around this decades-old setup: a single Cryptocurrency.
Two reasons why BRICS nations want a single cryptocurrency
BRICS, a group of five emerging economies – Brazil, Russia, India, China, and South Africa – is considering to develop a cryptocurrency to create a single payment system within the countries. Reportedly, the prospect was discussed and it has received approval from the BRICS business council at a meeting in Brazil.
Once launched, the BRICS nations crypto would solve two problems they face in the global economic market.
1# Minimizing dependence on the US dollar
Made public by Kirill Dmitriev, director-general of the Russian Direct Investment Fund (RDIF), a $10 billion sovereign wealth fund by the Russian government, the decision has been taken to reduce dependability on the US dollar for international transactions. The share of the US dollar usage in foreign trade settlements also went down from 92% to 50% in the last five years.
“An efficiently operating BRICS payment system is able to stimulate settlements in national currencies and ensure the stability of settlements and investments between our countries, which form more than 20% of the global influx of foreign direct investment,” Dmitriev said.
Also, Nikita Kulikov, a member of the State Duma’s expert council, said that the proposed BRICS nations crypto would only be used to facilitate trade transactions rather than acting as a digital form of money.
“Most likely, it will be like certain obligations that can be transferred from one legal entity to another to confirm that the recipient will have claim rights, and the contractor will have obligations for a specific amount. It will not be money, we can say that it will be a paperless document flow to facilitate transactions,” Kulikov said.
Meanwhile, to minimize the dominance of SWIFT on the banking system, Russia, China, and India are reportedly looking into alternative technologies.
2# BRICS nations seek an alternative to SWIFT
The aforementioned three members of BRICS nations have earlier been reported of exploring an alternative to the US dollar-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment system in a bid to address concerns over US sanctions and trade tariffs.
The United States, along with other Western countries, imposed sanctions on Russian officials and businessmen after Russia’s forceful annexation of Crimea in 2014. US authorities have also fined or blacklisted many Russian and Chinese companies for violating US sanctions laws.
Brazil, however, does not suffer from sanctions but its main trade partners in technology, such as Russia, are subject to them. Hence, using the US dollar for mutual settlements between countries leaves little room to maneuver. Moreover, South Africa is just as bound to the US dollar as all the other BRICS members in its settlements with China and Russia. This means that it is also feeling the impact of the sanctions regime.
During a visit to China in 2018, Russian Prime Minister Dmitry Medvedev revealed that China and Russia were discussing the launch of a new cross-border system for direct payment of trade invoices. Medvedev acknowledged that the payment system initiative was an attempt to move away from the financial system currently dominated by the dollar.
“No one currency should dominate the market, because this makes all of us dependent on the economic situation in the country that issues this reserve currency,” Medvedev said.
Meanwhile, the Russian Financial Message Transfer System (SPFS) is assumed to be linked with China’s cross-border interbank payment system CIPS. India, on the other hand, plans to link the Central Bank of Russia’s platform with a service that is under development. The new system is expected to work “as a ‘gateway’ model when messages on payments are transcoded in accordance with a certain financial system.”
As AtoZMarkets reported, the Chinese central bank is in the process of launching a digital version of the yuan. According to industry experts, the country will tap a massive market for international payments with this.
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