Hi, I’m Yves. I haven’t written much about the BRICS alternative currency project because it seems too fluid, except for the idea of improving information systems to make bilateral trade more efficient. There is also a lot of low-quality commentary, including articles by people who should know better, who don’t understand that SWIFT and the Russian messaging system that replaces it are far from representative of a payments system. SWIFT does not perform either of its two core functions: clearing and settlement.
After some research, it seems that providing a non-MEGO (My Eyes Glaze Over) overview of reclamation and settlement is not easy, and a more concise discussion may not seem sufficient to explain the implications for the BRICS project.
But in the meantime, the article below shows how BRICS member states have considered several possible mechanisms and been forced to reject them: As the article warns, a gold-backed plan would be a major setback for BRICS (a view shared by Michael Hudson), but it also suggests that Indonesia and perhaps other BRICS member states, or even major membership candidates, would oppose it.
Article by Lendy Arta Luvian, a postgraduate student at the Faculty of Social and Political Sciences, Gadjah Mada University. Published in Modern Diplomacy. Info BRICS
The BRICS summit will be held from October 22 to 24, 2024, and the main topic will be discussing the possibility of introducing a common currency backed by gold. Since its formation, BRICS, consisting of Brazil, Russia, India, China and South Africa, has played a key role in the world economy. Its main goal is to strengthen economic and political cooperation among its member countries and reduce its dependence on the global financial system dominated by the Western countries, especially the United States. The dominance of the US dollar as the world’s reserve currency and main means of transaction has created a large dependency on the Washington-controlled monetary system.
The BRICS de-dollarization initiative aims to reduce reliance on the dollar and create a more independent alternative for international transactions. First steps include the establishment of the New Development Bank (NDB) and the Emergency Reserve Arrangement. However, these steps have yet to fully meet initial expectations. The BRICS are now considering the use of a gold-backed currency as a more stable alternative that is less susceptible to global political upheaval. But how will this affect countries such as Indonesia? Will it provide an alternative to balance the international monetary system or could it spell disaster?
The De-Dollarization Initiative and Why the BRICS Are Considering a Gold Standard Currency
One of the BRICS’ latest initiatives is the development of a new payment system that does not require the US dollar. The system is designed to facilitate cross-border transactions using advanced digital technologies such as blockchain. While the system is still under development, there is speculation about the possibility of using a gold-backed currency as part of this system.
A gold-backed currency could potentially offer greater stability compared to fiat currencies, which are subject to monetary policy and inflation. Gold has long been considered a reliable store of value and acts as a hedge against currency fluctuations. By linking the value of their currencies to gold, BRICS hopes to create an alternative that is more resilient to global economic instability and international sanctions that frequently affect member states.
However, despite being backed by gold, the monetary system proposed by BRICS would still fundamentally depend on usury, as interest rates would continue to play a central role. Over time, this reliance on interest-bearing mechanisms could lead to a gradual decoupling of BRICS currencies from gold. As financial institutions seek greater flexibility to respond to market demands and economic growth, the temptation to inflate currencies and adjust monetary policies could erode the initial gold standard. This scenario reflects the historical tendency for currencies, despite being backed by gold, to eventually break ties with precious metals and adopt more adaptable fiat-based systems.
The history of gold in the international monetary system
Gold has long been used as a medium of exchange and store of value. In the history of the international monetary system, gold played a key role as the global currency standard known as the gold standard. In 1944, the new international monetary system was established at the Bretton Woods Conference, where the US dollar became the primary reserve currency and was exchangeable for gold at a fixed rate. This system gave the United States great power in international trade. Unfortunately, the dollar-to-gold exchange rate continued to rise as more dollars were printed and circulated around the world than were available gold reserves.
This represented an abuse of power to over-print dollars without sufficient gold reserves. Eventually, in 1971, President Richard Nixon announced the decoupling of the US dollar from gold (the Nixon Shock), ushering in an era when the dollar became a fiat currency backed only by market confidence and not by gold reserves.
This transition led to the US dollar becoming the primary currency for oil transactions, coining the term petrodollar and making the global financial system more dependent on the dollar. This change gave the US a huge advantage, including the ability to run large trade deficits and impose economic sanctions on countries opposed to US foreign policy. International trade was almost exclusively conducted in dollars even after the link to gold was removed. Before the COVID-19 pandemic, nearly 100% of oil transactions were conducted in US dollars, so oil maintained its dollar value thereafter. However, by 2023, it was reported that one-fifth of oil transactions were conducted in currencies other than the US dollar.
Instability caused by U.S. monetary policy could have broader implications for the global economy, forcing countries such as the BRICS to seek more stable alternatives.
Challenges and Risks of Gold-Backed Digital Currency in BRICS
A gold-backed currency has many benefits, including value stability and protection from inflation. By linking its currency value to gold, BRICS can reduce volatility and create a more stable alternative compared to fiat currencies. This also allows member countries to reduce their reliance on the US dollar and increase their economic independence. Implementing a gold-backed currency into a digital system could combine the stability of gold with the efficiency of blockchain technology, increasing the transparency and speed of international transactions. This system could increase the efficiency of international trade and reduce transaction costs associated with currency conversion.
However, the introduction of a gold-backed digital currency presents technical and regulatory challenges. The security and data protection of the blockchain system are major concerns, as are potential issues related to the interoperability of existing international systems. Using a gold-backed digital currency as the basis for the BRICS currency could introduce vulnerabilities related to the stability and integrity of the monetary system. While blockchain offers transparency, there are risks associated with potential cyber attacks and system failures. Additionally, reliance on a new technology could pose challenges to its integration with the existing global financial system.
The next question is whether BRICS will repeat what the US has done in the past: recklessly printing and increasing its currency without sufficient gold reserves to back it up. This possibility could lead countries that cooperate with BRICS, including Indonesia, which cannot avoid its ties with BRICS, to fall into the same trap again.
Indonesia’s Strategic Role
Indonesia has launched the Local Currency Transaction (LCT) National Task Force to strengthen the use of local currencies in international transactions. The initiative, which involves Bank Indonesia and nine ministries, aims to diversify currencies and improve exchange rate stability in bilateral transactions. The initiative, which is in line with the BRICS de-dollarization efforts, reflects Indonesia’s efforts to reduce reliance on the US dollar and support regional payment systems.
As one of the BRICS member states, Indonesia plays a strategic role in the de-dollarization effort. By introducing special tasks to support the use of the rupiah in bilateral transactions and promoting local payment systems, Indonesia is contributing to BRICS efforts to reduce dependency on the US dollar. These efforts include launching a cross-border payment system with Singapore and developing a universal QR code for regional payments in ASEAN.
Dedollarization could greatly benefit BRICS countries, including Indonesia, by reducing the impact of US dollar fluctuations and economic sanctions. Furthermore, increased intra-ASEAN and regional trade could strengthen BRICS’ position in the global economy and reduce their reliance on the Western financial system.
It is important to pay attention to what has happened in the past. History shows that major changes in monetary systems can have far-reaching effects, both good and bad. Trust in a particular currency or monetary system can easily be abused. The possibility that the BRICS currency will break the dominance of the dollar in international trade is as great as the possibility that the BRICS will lead the world into a state of economic instability. The Nixon Shock proved how capitalist instruments can deceive the world. If the BRICS no longer care about the basic idea of using gold reserves, will they repeat the same steps in the future with a currency that can be printed by simply typing numbers on a screen?
