BRICS bet on blockchain

BRICS will test trade between member countries in national currencies in 2024 via a common system.

The “BRICS,” which originally included only Brazil, Russia, India, China and South Africa, have joined together in an initiative to create a unified payments system leveraging innovative digital currency and blockchain technologies. This ambitious approach is not only a technological advance; it also represents a strategic maneuver aimed at strengthening financial autonomy, reducing their dependence on dominant currencies like the US dollar and bypassing traditional banking networks such as SWIFT, which constitutes a source of vulnerability for these nations in due to geopolitical tensions.

This initiative cannot be underestimated. Collectively, the BRICS represent a substantial share of the world's population and economic output. Their economies are growing strongly and have control over a high proportion of the world's raw materials. By offering a payment system based on digital currencies and blockchain technology, the BRICS bloc is positioning itself at the forefront of financial innovation, aiming to create a more inclusive, efficient and secure global financial infrastructure. This initiative reflects a broader trend towards dedollarization and the search for alternative financial channels capable of supporting the dynamic needs of emerging economies and ensuring their resilience in the face of external shocks and manipulations, as well as possible collapses in geopolitical relations.

Source: Forbes, Statista

Reduce dependence on Western financial systems

The collective ambition to reduce dependence on established Western financial systems, particularly the dominance of the US dollar in international trade and the SWIFT banking network, is probably the most powerful driver of this initiative. The role of the US dollar as the world's primary reserve currency and the widespread use of SWIFT for international financial messaging have given Western countries, and notably the United States, considerable economic power. This influence has manifested itself through sanctions and other economic measures that may have a negative impact on recipient countries. The exclusion of several Russian banks from the SWIFT network by the European Union in March 2022, in response to geopolitical tensions, highlighted the vulnerability of reliance on financial infrastructure whose access can be driven by political considerations. However, this move is not only aimed at reducing dependence, but also at asserting a greater role on the global stage, reflecting their economic power and geopolitical influence.

Another key aspect of the BRICS payment system drive is the desire to foster smoother and more cost-effective global transactions. Traditional cross-border payment mechanisms can be slow, expensive and fraught with regulatory hurdles. By leveraging digital currencies and blockchain technology, BRICS countries hope to streamline these processes, significantly reducing transaction costs and times. This efficiency could boost trade and investment flows within the BRICS bloc and with other nations, fostering greater economic integration and cooperation.

Source: Visual Capitalist 2023

Challenges to overcome

Despite the promising aspects of this initiative, significant challenges remain. One of them is to ensure interoperability between different digital currencies and different national payment systems. The technical standards, regulations and operational frameworks of digital currencies and payment systems in each BRICS country will need to be harmonized to enable seamless cross-border transactions. This involves complex technical integration and regulatory alignment to ensure compatibility and efficiency. Second, navigating the regulatory landscapes of different countries presents a significant challenge. Each BRICS nation has its own set of financial regulations, compliance standards, and legal frameworks governing digital currencies and blockchain technology. Aligning these disparate regulatory environments to facilitate a unified payments system will require extensive collaboration and negotiations.

In addition, as with any digital financial system, it is essential to guarantee the security and confidentiality of transactions. The system must be designed to protect against cyber threats, fraud and unauthorized access, while respecting user privacy and adhering to data protection laws in force in different jurisdictions. The security challenge will only grow in importance in the coming years with the advent of quantum computing, something existing cryptocurrency projects are already working to protect against.

Beyond its immediate benefits for BRICS countries, the establishment of a new payments system has major implications for global economic power dynamics. It directly challenges the dominance of the US dollar and traditional financial institutions, signaling a shift towards a more multipolar financial world. This development could allow other emerging economies and regional blocs to explore other financial systems and other currencies, which could lead to a more diverse and balanced global economic landscape.

The move toward dedollarization and the development of independent financial systems by groups such as BRICS could kick off a reassessment of global economic dependencies and alliances. As countries increasingly seek to reduce their exposure to geopolitical risks and economic sanctions, we may see a fragmentation of the global financial system into multiple, more regional financial networks. This could foster a greater degree of financial autonomy and resilience among emerging markets and developing economies, further accelerating the shift to a multipolar global economy.

Political and strategic considerations

Beyond technical and regulatory hurdles, the initiative faces potential political and strategic challenges. The ambition to reduce dependence on the US dollar and bypass traditional financial networks such as SWIFT risks facing skepticism and resistance from global financial institutions and Western powers. These entities have a vested interest in maintaining the status quo, where the US dollar plays a central role in global finance, and may view the BRICS payment system as a threat to their financial dominance. It should be noted that while the United States is renowned for its military might, its most powerful weapon in recent decades has been the greenback, and one can never be sure of the reaction of a nation that has led the way for so long when its back is against the wall. The geopolitical implications of creating an alternative global payment system cannot be overlooked. The initiative is likely to exacerbate already growing tensions between some BRICS countries and Western countries, which could lead to diplomatic conflicts or economic sanctions. It is precisely this delicate balance of international relations that could influence the willingness of other countries to engage with or support the BRICS payments system, impacting its global adoption and effectiveness.

Future developments and expansions

The BRICS payment system is poised for significant future developments, especially with the potential integration of new technologies. Blockchain has laid the foundation, but advances in artificial intelligence, quantum computing and cybersecurity could further improve the system's efficiency, security and scalability. As these technologies evolve, they could enable the BRICS system to process transactions faster, with greater transparency and less vulnerability to cyber threats. Another interesting prospect is the potential expansion of the system. Currently focused on the BRICS nations, which recently added 5 new members, there is a real possibility for other countries seeking alternatives to the dollar-dominated financial system to join this new economic alliance. Such expansions could transform the BRICS payment system into a global platform for international trade and financial transactions.

Furthermore, the success of the BRICS payment system relies on seamless cooperation among member nations. This movement toward greater financial independence and a balanced global economic order has a good chance of succeeding, as it appears to be an easy cause to support. It highlights the importance of diversifying economic dependence, fostering resilience to external shocks and enabling nations to participate more equitably in the global market. The BRICS payment system is a step toward a future where financial transactions are no longer tied to the interests of a few, but are instead guided by the collective will of a more diverse group of nations.

Implications for cryptocurrencies and blockchain

Furthermore, this decision constitutes significant support for cryptography and blockchain, with broad implications for all of these sectors.

Not only does it highlight the growing acceptance and institutional interest in blockchain and cryptocurrencies, but it also serves as a catalyst for more innovation, adoption and investment in the space. For cryptocurrency advocates, this commitment by BRICS countries to blockchain technology brings substantial legitimacy to the field, which they have long awaited, and comes just months after bitcoin was recognized as an asset class by the SEC through the Spot Bitcoin ETF. The adoption of these technologies as part of a major international financial initiative signals to the world that blockchain and cryptocurrencies offer viable solutions to real-world economic challenges. This approval could encourage other countries and multinational companies to explore and adopt blockchain and digital currencies, thereby broadening the acceptance and application of the technology, creating a snowball effect of adoption. This in turn could attract more retail and institutional investors, thereby boosting investment in startups and blockchain-related projects. These innovations benefit the entire blockchain ecosystem, further expanding the boundaries of possibilities offered by distributed ledger technologies.

Source: Precedence Research

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