Next week, the BRICS1 nations will meet to further discuss how to reduce their reliance on the US dollar. Proposed ideas include creating a new BRICS currency, perhaps backed by commodities, or for countries to simply make payments in their own local currencies. Notably, a currency’s perceived stability is not the only criterion for its selection as a new trade currency; it has become ever more important for countries to have confidence that they will always be able to access the currency’s payment and storage mechanisms.
BRICS is not alone. The European Union (EU) is currently testing its euro central bank digital currency system in an effort to reduce reliance on US payment companies like Visa and Mastercard and to encourage use of the euro within its bloc. Globally, the percentage of oil transactions in non-US dollar currencies rose to 20% last year (in 2023), the highest in decades. The proportion of country currency reserves held in US dollar assets has also fallen from 71% in 2000 to 58% today (as of October 2024).
Nevertheless, most commodity trade and half of all global trade is still invoiced in US dollars. Also, over 80% of cross-border payments involve SWIFT, a payment messaging system started by US and European banks. Recent attempts to build alternatives to SWIFT are mostly being used domestically by their single country creators. Thus, international communities like BRICS and the EU still have a long way to go to significantly reduce their exposure to the US dollar and its related payment systems.
Nations’ attempts at implementing new currency systems have been less hampered by technological and logistical constraints, but more by the fundamental social question that has challenged currencies for thousands of years - can users of the currency trust those who control it?
The age-old answer to this question of trust has been to implement currencies that are merely proxies for commodities. Indeed, this solution to the currency trust problem appears to be increasingly back in vogue. Since 2018, national reserve managers (especially from the BRICS nations) have been accumulating gold at an accelerated pace and physically storing that gold domestically.
Project mBridge, a joint effort by the Bank for International Settlements (BIS), the central banks in Thailand, Hong Kong, UAE and the Digital Currency Institute in China, offers a more modern solution to the problem of trust in a currency system. The solution includes a distributed ledger that requires consensus from participants to write to it, eliminating reliance on any single member to approve payments. mBridge launched a working product in June this year and, interestingly, also added Saudi Arabia as a user, a country whose representatives have said are open to trading oil in currencies other than the US dollar.
Despite the emergence of several currency proposals, no single currency is clearly poised to succeed the US dollar’s role in payments. History suggests that diversification away from the dollar may potentially take decades, so its effects may not be seen immediately in market prices. In the meantime, reserve managers will likely continue to accumulate gold and gradually reduce their US dollar exposure, and a growing number of currencies will increasingly be traded amongst nations.
The present proliferation of competing currency system proposals might be one part of a wider secular trend of a unipolar world turning multipolar. Such a world will require the increased cooperation of nations, and such cooperation will require solving the very problems of trust presented by today’s global currency ecosystem.