The group, whose members are Brazil, Russia, India, China, and South Africa, will work on building a payment system based on digital technologies and blockchain, according to a report by Russian news agency TASS, which interviewed Kremlin aide Yury Ushakov.
He said the group's key future goals included creating an independent payment system based on blockchain, digital technology, and other state-of-the-art tools. The main priority was to ensure the system was convenient for ordinary users, governments, and businesses, as well as politics-independent and cost-effective.
Reducing reliance on the USD via BRICS blockchain
BRICS's blockchain effort is part of a goal to augment its role in the international monetary system. The group has been trying to reduce its reliance on US dollars to perform settlements.
Last week, TASS reported that the Central Bank of Russia, the country's Finance Ministry, and BRICS partners were working on the BRICS Bridge multilateral payment platform. Last month, Financial Stability Board Chair Klaas Knot wrote to finance ministers of G20 countries that tokenization, crypto assets, and artificial intelligence (AI) remained priorities.
Stablecoins as an alternative to de-dollarization
Attempts like the BRICS blockchain to reduce the reliance on the dollar for settlements, also known as de-dollarization, could be countered by stablecoins, according to an analysis by CoinDesk. There is rising speculation that the US dollar's global dominance will decline, with a steady drop in its share of central bank reserves and efforts such as BRICS's blockchain.
Foreign and domestic policies could erode the dollar's dominance, although it will probably remain the dominant global reserve currency in the near future. Against the backdrop of these changes, US-regulated stablecoins could prove an alternative to enhance the dollar's global dominance and soften the impact of de-dollarization.
More and more countries are diversifying their reserves away from the USD, a process that the Federal Reserve's interest rate hikes exacerbate. In 2000, the USD's share of central bank holdings was 71%. It was 58% in the last quarter of 2022.
Effect of the "shadow economy"
At the same time, many economies still have a shadow component. Shadow economies are comprised by economic activities that governments do not include in the country's gross domestic product (GDP) because they are illegal or unregulated or taxes are not paid or not fully paid. The USD often serves as the exchange medium of choice in this sector because it is stable and widely accepted.
In countries like Argentina, Turkey, and others with high inflation (115% and 38.2% as of June 2023), people rush to convert their earnings and savings into US dollars to be able to preserve them. However, local laws limit foreign currency holdings, and the central bank-set currency exchange rate can devalue their currency by as much as 50%, which happened with Argentina's peso.
The benefits of stablecoins
As a result, residents have turned to crypto and decentralized finance (DeFi). They have been able to overcome limitations by converting their funds into stablecoins, which represent fiat currency digitally and have 1:1 backing by the USD or EUR.
Therefore, regulated fiat-backed stablecoins can be a solution. Stablecoins can maintain a stable value relative to the fiat currency backing them. They offer the technological benefits and flexibility of crypto combined with the stability of the US dollar (for USD-backed ones), offering an innovative financial tool that can help solidify the USD's global economic position.
The risks of de-dollarization
If left unchecked, the de-dollarization of the global economy could cause the US significant pressure due to inflation and the cost of borrowing. Stablecoins could do away with these risks. Circle CEO Jeremy Allaire points out that well-regulated stablecoins could strengthen the US dollar's global economic position.
He claims that the Federal Reserve could ensure secure backing for stablecoins, for example, by Treasury bills and dollars, if it could supervise non-bank stablecoin issuers. Such an initiative could help introduce a digital dollar into the basic global economy, robustly countering non-dollar trade regimes.
What's more, regulated USD-backed stablecoins could play a key role in countries where people use the dollar widely outside the formal economy, for example, the shadow sector.
Improved transparency and regulation
If trackable stablecoins could replace shadow-economy US dollars, transactions could have a more transparent and better-regulated alternative, which would minimize shadow-economy risks. Stablecoin issuers are private enterprises, which means they are subject to fewer limitations than tokenized deposits or central bank digital currencies (CBDCs) when expanding into new markets.
If they meet US regulatory requirements, they are more flexible and have higher growth potential. US-regulated stablecoins backed by the USD are a way to counteract de-dollarization efforts like the BRICS blockchain. They could help the USD maintain its global financial authority by using a combination of the USD’s stability and the flexibility of digital currencies.
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