In February 2024, the finance ministers and central bank governors of BRICS met in Sao Paulo, Brazil. There, the Russian representatives said they would prepare a report “for BRICS countries’ leaders with a list of initiatives and recommendations on ways to improve the international monetary and financial system”. 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. If CBDC were susceptible to cyber risks, it could undermine consumer confidence and trust in the financial system. The intricately interconnected CBDC ecosystem—comprising central banks, commercial banks, payment service providers, and technology vendors—faces an array of cybersecurity challenges, exacerbated by human vulnerabilities and the use of novel technologies untested at scale.
Respectively, this work can serve as an indicator for further studies of interbank market liquidity interconnection in the framework of BRICS, based on new realities of modern Emerging Markets’ circumstances in the changing global monetary system. MBridge is a modern payments system that uses central bank digital currencies to replace the outdated correspondent account settlement system. It allows for immediate settlement among partner central banks in China, Hong Kong, UAE, Thailand and now Saudi Arabia. Transactions conducted on this platform avoid scrutiny by outsiders such as Swift and the US.
It also emphasizes the importance of user training and stakeholder collaboration to mitigate cyber risks. This chapter introduces the ‘5P methodology’ designed to guide central banks in exploring and developing CBDC, from research to potential launch. The methodology draws from experiences in various jurisdictions and incorporates best practices from different industries, and is intended to facilitate experimentation and support progressive decision-making while effectively managing risks. The preparation phase focuses on researching trends, defining objectives, establishing success criteria, evaluating feasibility, assessing capacity, and analyzing risks. The proof-of-concept phase involves conducting small-scale empirical tests and validation activities to gain insights into CBDC designs, typically in a laboratory environment.
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 group aims to reshape the political economic landscape to benefit themselves and they have created the BRICS Business Council, the Contingent Reserve Agreement, which provides short-term liquidity support, and the New Development Bank, which supports development projects in BRICS countries. 134 countries & currency unions, representing 98% of global GDP, are exploring a CBDC. Currently, 66 countries are in the advanced phase of exploration—development, pilot, or launch. Our results seem to be explained by the fact that richer countries are issuers of international reserve currencies and are able to access cheaper financing (both for the public and private sector). The richest countries have become the bankers of the world, attracting excess savings by providing low-yield safe assets and investing these inflows in more profitable ventures.
Denomination can be done at the drop of a hat; just put a price label in renminbi on every barrel of oil. The e-CNY network has expanded over the last year, and China’s goals have only become clearer. Domestically, the People’s Bank of China is still in test-and-learn mode, globally, China is more focused on setting defining international standards. Every G20 country is exploring a CBDC, with 19 of them in the advanced stages of CBDC exploration.
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. “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. 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.
CBDCs could affect the macroeconomic environment that underpins monetary policy transmission. A CBDC offers a safe store of value and efficient means of payment, which can increase competition for deposit funding, raise banks’ share of wholesale funding, and lower bank profits. A CBDC also could bolster financial inclusion and help reduce dollarization or cryptoization. These changes in the macroeconomic environment can potentially strengthen the channels of monetary policy transmission if CBDC is appropriately designed. For moderate levels of CBDC holdings, the effects on monetary policy transmission are expected to be relatively small in normal times.
In May, the US House passed a bill prohibiting the direct issuance of a retail CBDC, but the Senate has not acted. In every country with an advanced retail CBDC project, CBDCs are intermediated, meaning they are distributed through banks, financial institutions, and payments service providers. Trump’s protectionist policies threaten to radically unbalance the balance of payments and exchange rates throughout the world, preventing debtor countries from earning the dollars…
This trade-off differs by country depending on norms, legal and regulatory frameworks, and preferences. CBDC offers an opportunity to improve this trade-off in comparison to private digital payment systems, including through robust institutional arrangements and technological solutions. 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. Do central banks need a CBDC when already equipped with other well-established digital payments systems?
