In a world dominated by financial dynamism, the unexpected can sometimes occur. The BRICS nations (Brazil, Russia, India, China, and South Africa), in a bid to recalibrate the global economic order, recently unveiled speculations around launching a common currency backed by gold, causing ripples of apprehension and excitement across the global markets. The implications of this decision would be vast and could pose a significant challenge to the longstanding dominance of the US dollar – but how realistic is it really?
The ambition of an alternative currency backed by gold shows striking similarities to the post-World War II Bretton Woods accord, which enabled the U.S. dollar to become the global reserve currency. In 1944, as the world war was beginning to ebb, 44 allied nations convened in the sylvan setting of Bretton Woods, a small town in New Hampshire. Here, in an epoch-making agreement, they forged the post-war monetary order which ultimately installed the U.S. dollar as the world’s leading reserve currency. A major feature of the Bretton Woods system was that the U.S. dollar and every currency pegged to the dollar, was convertible into gold at $35 per ounce. This created trust through gold, underscored by America’s considerable repository of gold reserves.
The Bretton Woods system breathed its last in 1971 when the United States forsook its dollar-to-gold conversions. Ever since, the U.S. dollar hegemony endured, now backed by the undeniable political and economic muscles of the United States.
Until today, the US dollar’s pervasive ubiquity in the global financial system was a testament to its resilience and reliability. According to SWIFT, the dollar accounts for around 42% of currency transactions, with the Euro accounting for roughly 32% leaving behind the Chinese yuan with < 2 percent. Furthermore, the International Monetary Fund estimates that nearly 59% of global central bank reserves are held in dollars.
This prominence of the US dollar as the world’s reserve currency has long been a thorn in the side of nations seeking to assert their influence on the global stage. Soon, BRICS countries will gather in Johannesburg, where the assembled ministers and representatives will discourse about ending this US dominance through a common currency and thus reveling in their aspirations for a new economic order. This endeavor to construct a counter-narrative to the post-World War II rules-based world order was prompted in no small part by the sanctions on Russian foreign exchange and gold reserves following the invasion of Ukraine.
Much like Bretton Woods’ design cemented the dollar as the fulcrum of the world economy, the BRICS consortium may be maneuvering to disrupt this long-standing status quo by themselves launching a currency backed by the age-old surety of gold. But the track ahead appears to be riddled with challenges that make this endeavor less a conquest and more a quixotic pursuit.
While the BRICS coalition may envisage a common currency – backed, as per Russian suggestion, by gold as per a Russian – their individual national interests are far too divergent to enable such unity.
The proposal of a single central bank, possibly located in Shanghai, would undoubtedly raise alarm bells, particularly in India. Sino-Indian border tensions and differing strategic interests pose significant barriers to the kind of deep integration necessary for a shared currency. That this discord is real was shown by India’s External Affairs Minister who quickly clarified that India had no plans for a BRICS currency. A liberal democracy-backed currency cannot simply be replaced by a concept dominated by a totalitarian state with capital controls. It is a proposition that defies pragmatism.
Historical precedence provides a further sobering perspective. OPEC as not able to establish a petro-currency and the struggles of the South American “sur” currency underline the inherent difficulties in rallying geographically disparate nations around a common financial cause.
Also, China itself, the most formidable of the BRICS economies, struggles to extend the influence of its yuan even within Asia, outside trade-linked finance. Its share in global transactions is a mere 2%.
The aspiration to supplant the dollar with a new BRICS currency would be a quantum leap, requiring not only economic might but also unprecedented collaboration, mutual trust, and legal harmonizing among these so diverse nations.
The BRICS nations are undoubtedly influential, and their currency proposal warrants attention, but the hurdles for success are high. As it stands, the likelihood of them dethroning King Dollar in the near term appears decidedly slim, given the economic, political, and logistical challenges they face. However, in the shifting sands of global politics and economics, it would be imprudent to discount the potential for change altogether. So, what if?
When we gaze upon the current constellation of global economies and geopolitics, a gold-backed BRICS currency shines brightly as a tantalizing prospect. The appeal of a gold-backed currency hinges in its potential stability. It presents a captivating diversification tool which might provide a bulwark against inflation, geopolitical uncertainties, and U.S. self-interests that plague the dollar. However, while gold has served as a steadfast store of value over centuries, the worth of a gold-backed currency would ultimately remain tethered to the fiscal policies of the BRICS nations. Their commitment to maintaining the gold standard would be the linchpin that could sway the fortunes of such currency.
Nevertheless, the birth of a gold-backed BRICS currency would underscore a seismic shift in geopolitical power, signaling a deviation from the existing dollar and euro hegemony. Such a splintering of the international monetary order could result in an even more unstable geopolitical environment.
While the dollar’s predominance may ruffle feathers, the alternatives on the horizon are hardly formidable. The BRICS nations, while economically and geopolitically significant, are still far from establishing a viable competitor to the US dollar. A global economic shift of this magnitude requires more than wishful thinking. It demands a credible, reliable, and universally acceptable alternative, which, for the time being seems non-existent.
For that action to materialize, we must not look to the east but towards the digital frontier. It is in the world of cryptocurrencies that we may find the true contender to the U.S. reserve currency. A well-designed, decentralized cryptocurrency offers features that no single nation-backed currency can boast. It is impervious to political manipulation, can be transferred instantly across borders, and is accessible to anyone with an internet connection.
A decentralized cryptocurrency also addresses the BRICS nation’s concern of shielding their economies from sanctions and potential economic default. Without the influence of any single nation or political entity, a cryptocurrency operates on its own terms, dictated by cryptographic algorithms rather than the whims of political leaders and financial institutions.
However, this utopian digital landscape is not without its pitfalls. Issues surrounding volatility, security, and regulatory compliance must be addressed for a cryptocurrency to truly challenge the U.S. dollar’s dominance. In the future it may not be the dollar, the yuan, or the rouble on the global financial stage, but a cryptocurrency such as Bitcoin, Ethereum, or some yet-to-be-conceived cryptocurrency that takes on the mantle.
In this unfolding narrative, the real shift in global economic order may come not from the vaults of national treasuries, but from algorithms humming in decentralized data centers around the globe. Unlike a potential BRICS currency, the rise of a decentralized cryptocurrency is not contingent on any single country’s economic heft. Instead, it is shaped by the collective action of millions of individuals and institutions worldwide – truly a currency of the people, by the people, and for the people.