Finance ministers discuss BRICS Bridge digital currency payments – Ledger Insights

Yesterday, BRICS finance ministers and central bank governors met in Sao Paulo, Brazil. After the meeting, Russia’s Finance Ministry said they were discussing current payment systems that are “used as a weapon of political and economic pressure.” Russia is currently the BRICS chair. By the end of the year, the Ministry and Bank of Russia will deliver a report on the options for improving the international financial system. One of the initiatives could be a BRICS bridging platform, the Ministry said. It did not explicitly mention digital currencies.

The Ministry specifically said: “We are talking about creating a multilateral digital settlement and payment platform.” However, Sputnik International, one of Russia’s English propaganda networks, went further. It said Finance Minister Anton Siluanov is ready to test digital currencies with China, the Eurasian Economic Union (EAEU) and the Gulf countries.

Another news outlet quoted Siluanov as saying: “The first thing to do is to create a connection with the existing central bank digital currency systems that are already operating in a number of countries. In parallel, national financial messaging systems should be connected .”

A BRICS bridge shares a similar name with mBridge, the cross-border central bank digital currency (cross-border CBDC) platform developed by four central banks, including BRICS members China and the UAE.

However, the expansion to ten BRICS members makes decision-making somewhat difficult. Before the meeting, a Russian news outlet reported South Africa’s ambassador to Russia, Mzuvukile Jeff Maketuka, as saying that South Africa would prefer an “African payment system that offers opportunities for trade with global partners”. It wants to avoid the dominance of any one currency. While the dollar was explicitly mentioned, within the BRICS there is the potential for China’s renminbi to be used as a surrogate.

BRICS and the challenge of currency pairs

At the beginning of the year, BRICS expanded from five to ten countries with the addition of Egypt, Ethiopia, Iran, Saudi Arabia and the UAE. However, reports that Saudi is a member have been disputed.

One of the reasons for the dollar’s dominance is that it is the most liquid currency, so all currencies have optimal foreign exchange prices against the dollar. Even if countries do not want to depend on the dollar, if the alternative costs much more, they will be reluctant to change.

It is also worth noting that talk of a shared common currency has not completely disappeared, although the Russian central bank has not been enthusiastic. The topic seems to have moved to the back burner at the main BRICS summit last year as well.

Nevertheless, the Russian news agency Interfax quoted the same Minister of Finance late last year. He talked about using a ‘third’ currency for settlement where currency trading pairs have limited activity.

India was given as an example, as Russia exports to India but has limited imports. The Minister suggested that either the Chinese yuan or UAE dirham could be used as an intermediate settlement currency as there is significant Indian trade with those two countries. This will correspond to a BRICS bridging project.

However, one of his Interfax quotes may refer to a common BRICS currency – a unit of account. “Next year we will be chairman of the BRICS (he spoke in December), and one of the topics that the Ministry of Finance will announce and work with our colleagues is the creation of settlements and a unit of account that we in will allow to solve issues of conversion and settlements, so that it will be possible to take into account trade transactions between the BRICS countries (and) not have these problems.”

What does it mean?

Based on these statements, the path is not entirely clear. And it looks like it has yet to be settled.

This may mean that the BRICS bridge project includes particular logic. If Russia exports to India and doesn’t want to receive rupees, they can agree that India pays in the Chinese renminbi or the UAE dirham. Alternatively, they can have two FX transactions – one from rupee to dirham and another from dirham to roubles. However, two lots of FX can be expensive.

Then there is the reference to a ‘unit of account’. This usually means the unit used for billing. This could mean that talk of a common currency is still on the cards. But then why did the Finance Minister say ‘unit of account’ rather than a common currency?

Or are they considering a currency measurement basket without creating a common currency? Then each currency will have an exchange rate quoted against the basket.

The IMF has the concept of Special Drawing Rights (SDRs). It is an asset, not a currency. The general public does not have access to SDRs. Only 20 institutions can hold SDRs, including four central banks. But it is used as a unit of account.

For example, say the currency basket is CBRICS. Russia invoices India for oil in CBRICS. They agree to settle in Chinese yuan. How much yuan is paid is determined by the CBRICS-yuan rate.

Meanwhile, the US Federal Reserve recently wrote a paper analyzing the impact of a CBDC on dollar dominance. It concluded that offshore CBDCs would have only a marginal impact. On the other hand, there was some recognition that geopolitical shifts could have an effect.