There has been ongoing discussion about the possibility of BRICS nations creating an alternative to the Western financial system, particularly SWIFT. The reasons for this move, how it could outperform its Western counterpart, and its potential to help Russia reduce its vulnerability to sanctions were explained to Invest Foresight by Nikita Maslennikov, Head of the Economics and Finance Department at the Institute of Modern Development.
– Why do BRICS+ countries need a SWIFT alternative?
– From what I understand, this idea hasn’t fully materialized yet; no direct SWIFT alternative has been created. Actually, what’s needed isn’t exactly a SWIFT replica.
– So, what’s required?
– A collaborative, independent settlement and depository system needs to be developed.
– And what’s the purpose of this system?
– It’s essential for conducting smooth, uninterrupted transactions between BRICS+ countries for mutual trade, free from external interference. For now, this would primarily involve transactions in national currencies.
The recent declaration reflects an agreement to explore these proposals and consider the possibilities. It’s also a means of updating each other on progress.
Russia, for instance, shared its own advancements, such as creating a system based on digital financial assets regulated by the Central Bank or using digital currencies issued by national banks. However, one challenge is developing a framework that can accommodate these diverse approaches.
– What’s the issue here?
– The problem is that not all BRICS nations have their own digital currencies and they lack digital financial assets compatibility.
– Do we need this system to protect ourselves from external influence?
– You see, unless we go digital, there’s simply no point in taking efforts. This additional system is going to be cost-intensive, and it will substantially increase the burden on the countries’ existing financial systems. Therefore, if we are going to develop one, this should be an alternative, new digital system that would allow for settlements in digital assets.
– Will these settlements help reduce vulnerability to sanctions?
– First, these settlements will be less expensive. Second, they will indeed reduce vulnerability in this regard, becoming our internal matter, a BRICS and BRICS+ one, with intermediary currencies non-involved in the settlements.
This system should also include a certain digital unit of account that would essentially be backed by digital financial assets or currencies. It might be conditional, but it should serve as a kind of standard, a sort of equivalent.
These efforts will basically help ensure independence, providing for a fairly high transactions speed as well as their stability. The main problem here is not that today we are lacking a prototype of this technological solution; the issue is whether countries are prepared for this.
– Is there any timeline for this readiness to be formalized?
– Basically, it is possible to start testing some model as early as next year, but only with a fairly limited number of countries. BRICS has only three leading countries as regards digital currencies and digital assets – namely, China, Russia and India. The rest of the association’s 13 states have a different understanding of the process and developments.
This is a typical example of how the expanding number of participants in a particular association makes the international political image effect more relevant than the work to develop certain initiatives. I will admit that problems could arise even if the group had only five countries…
– What kind of problems?
– Efforts should be taken to combine national financial infrastructures and make adjustments by adding, fixing or completing specific things. Certain countries have to change national currency regulation formats, and others need to adopt numerous laws on digital financial assets. While many have all of this in one form or another, there is no unity and no single legal field.
These tasks can be solved, yet the prospects for this system will depend on two factors. The financial and economic factor implies the progress in the digitalization of national currencies as well as the advancement of digital financial assets circulation in a particular economy, while the second factor involves possible geopolitical and financial risks.
– As well as different interests…
– True, everyone has their own interests. And it is extremely difficult to reconcile, say, China with India and seek a compromise solution for solely political reasons.
Nevertheless, this appears to be an interesting working model. Indeed, such initiatives need to be further developed and tested – but everything will be nearing completion once the use of digital national currencies becomes well-established in each BRICS country, and certain states have yet to create such digital currencies. For instance, China has this process advancing sluggishly, and in India things are around the corner. In Russia, trials and experiments are also underway, but this is not yet a circulation.
Yet, later this year we will see certain things tested with the help of digital assets and digital cryptocurrencies under the auspices of the Central Bank. These efforts will definitely allow us to gain experience, especially since this is a time-consuming process.
What we can state for sure is that there will be no single currency within BRICS so far.
– Is this not to be expected?
– No, we shouldn’t expect it since this is a matter of national, state sovereignty. None of the partners are willing to agree to it yet.
There are discussions underway on the unit of account, a kind of equivalent that can be pegged to anything. Some want to peg it to the price of gold, others to the dollar – so what should the unit of account be ultimately pegged to? Another option is pegging it to national digital currencies. But for starters, those should exist. So, I believe we will experience a long period of trials for the time being, which is generally necessary because the entire global monetary financial system is evolving and advancing towards digital transformation. Actually, today more than 90 central banks across the globe are either developing a prototype or are currently testing their trial versions.
Some countries have already launched their digital currencies. But so far this is not what is exactly required, things being complicated.
And yet, the trend is evident: by 2030, we will already see obvious progress in this regard, with many countries using digital currencies as a third form of money. In this context, BRICS’s international joint settlement system will smoothly coexist with the others.
Once again, for now only trials are in progress, which is essential for acquiring experience.