Brics has a better way to de-dollarise than creating a single currency

Despite hopeful talk of a Brics currency, the time is not yet ripe for such a move
It is more feasible for each state to launch a central bank digital currency and work towards interoperability. Here Hong Kong is in a key position to leverage its expertise

Oriol Caudevilla

Published: 5:30am, 18 Sep 2023

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Brazil’s call for a common Brics currency at the Johannesburg summit last month has reignited the debate over de-dollarisation. In recent years, more countries have moved towards carrying out trade in currencies other than the US dollar.

This is not new. The dollar’s supremacy has been increasingly questioned – from Latin American states like Brazil to Southeast Asian nations – since the 2008 global financial crisis. But the trend needs to be put into perspective: the dollar remains dominant in global foreign exchange reserves, accounting for 59 per cent in the first quarter of the year, according to the latest data from the International Monetary Fund.

De-dollarisation is the process of reducing reliance on the dollar as a reserve currency, a medium of exchange or a unit of account in the global economy. Aside from the enormous implications this has for global financial markets and international trade, given the dominance of the United States in the global economic system, it also has important political implications.

Some countries seek to de-dollarise to diversify their central bank reserves – that is, by reducing their reliance on the dollar, they could in theory manage more efficiently their currency risks and maintain greater control over their monetary policy. Yet others may have political motivations; for instance, by diminishing the dollar’s influence on their economies, they can reduce their dependence on US policies.

Earlier this year, Brazilian President Luiz Inacio Lula da Silva questioned “why all countries have to base their trade on the dollar”. At the Brics summit in Johannesburg last month, Lula again called for the creation of a common currency for trade and investment between members of the bloc – Brazil, Russia, India, China and South Africa – as a means of reducing their vulnerability to dollar exchange rate fluctuations.

While Lula did not specify what this common currency might be or how it might come about, most expert agree the options would include a basket of currencies from Brics countries, using gold as a peg for a new potential currency, or digital currencies, be it cryptocurrency (such as a stablecoin) or, even, a common central bank digital currency.

President Lula (left) with fellow Brics leaders at the summit in South Africa on August 22. Photo: dpa

But whatever the form, experts agree that a common currency would be difficult to achieve given the disparities between all five Brics members, including in economics and politics.

At the Brics summit, leaders said little, if anything, about Lula’s call for a common currency – China did not comment on the idea. Instead, President Xi Jinping spoke of promoting the “reform of the international financial and monetary systems”. Host South Africa said a Brics currency was not on the agenda.

Is the idea of a common Brics digital currency feasible? It is, but it would face many challenges. In 2019, Brics nations discussed the possibility of a digital token and plans have been revised with the rise of de-dollarisation efforts. But to do so, the bloc would need to set up a banking union and a fiscal union, and also achieve macroeconomic convergence.

Furthermore, a single Brics currency would leave the bloc dominated by its biggest and most powerful economy, which is China. This leaves some of us to wonder why smaller countries would want to link their monetary policy and aspects of their fiscal policy to the Chinese economy.

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To me, the more feasible idea would be for each Brics country to launch, for example, its own central bank digital currency and then work towards interoperability.

There are several projects already experimenting with such interoperability. The Bank for International Settlements, for example, has launched Project mBridge to explore how to connect economies through central bank digital currencies. The central banks taking part in the project include those of Thailand, Hong Kong, mainland China and the United Arab Emirates. The aim is to build a common platform for efficient, low-cost cross-border digital payments.

As most countries of the world have yet to launch their own central bank digital currency, the interoperability issue, it would seem, is mainly one for the future. Still, there is a vital role here that Hong Kong can play.

The Hong Kong Monetary Authority has solid experience in the area of central bank digital currencies – and not just from Project mBridge. It has been involved in digital yuan trials in the city, recently launched a e-HKD pilot project for an electronic version of its local currency, and is part of Project Sela, a collaboration with the Bank of Israel and Bank for International Settlements.

A central bank digital currency such as e-HKD is the future

When it comes to the interoperability of central bank digital currencies, Hong Kong is in a key position to leverage its expertise.

To sum up, despite a growing trend towards de-dollarisation, the time does not seem ripe for creating a common Brics currency, digital or otherwise. A more feasible idea would be for each of these countries to launch its own CBDC and then work towards interoperability.

China is at a very advanced stage, having launched its digital yuan. This may in turn boost global use of the yuan, with the Belt and Road Initiative and the Regional Comprehensive Economic Partnership poised to be perfect platforms. In boosting cross-border adoption of the digital yuan, such economic exchanges can pave the way for other Asian CBDCs. Hong Kong also plays a key role in helping the renminbi to internationalise, given its role as the world’s largest offshore yuan centre.

While it remains difficult to predict how de-dollarisation will go, it is a trend that looks set to intensify.

Dr Oriol Caudevilla is an honorary fellow at the Asian Institute of International Financial Law at the University of Hong Kong and a board director at the Global Impact FinTech Forum. The views do not necessarily reflect those of any of the organisations the author collaborates with