Evaluating Potential Pathways to De-Dollarization

The conditions for a de-dollarization moment to take place are ripe. However, the question remains, how will BRICS+ implement its de-dollarization agenda. This piece evaluates three possible pathways: adopting an alternative currency, creating a new BRICS currency, or deploying Central Bank Digital Currencies (CBDCs).

Adopting an Alternative Currency

One of the most immediate and pragmatic ways to reduce dependence on the USD is to increase the use of alternative currencies.

This can unfold in two ways: (1) using another global reserve currency like the euro, yen, or yuan; or (2) using local currencies.

While using another global reserve currency may facilitate de-dollarization, the strategy falls short of effectively achieving the broader goal of enhancing financial sovereignty. Exchanging a country's dollars for euros or pounds does little to address the problem of financial weaponization.

Europe frequently weaponizes its own financial institutions to exert diplomatic leverage, and the Japanese yen is easily influenced by Western powers.

On the other hand, opting in for BRICS-friendly options like the renminbi is also not feasible. The Chinese renminbi lacks the depth and liquidity of a fully convertible global reserve currency, as it remains subject to strict capital controls imposed by Beijing.

Additionally, while China aims to internationalize the yuan for settling more trade in its local currency, it is not actively seeking to replace the dollar as doing so would make its exports more expensive, jeopardizing its economic growth. Therefore, simply using another global reserve currency is not an effective or, in some cases, possible way to de-dollarize.

The second path to reduce reliance on the USD is to use local currencies to settle cross-border transactions.

Data from 2022, show that the dollar was involved in over 97% of Indian rupee, 95% of Brazilian real, 94% of Chinese renminbi, and 88% of South African rand foreign exchange transactions.

Additionally, 47% of Chinese, 86% of Indian, and nearly all Brazilian exports were dollar-denominated in 2022. Therefore, if a country is sanctioned by the U.S., it’s isolated from most avenues of international trade leaving the U.S. with immense political bargaining power.

A possible solution is for countries engaged in trade to settle transactions in their respective national currencies, bypassing the need for the USD as an intermediary.

This, however, is difficult to implement, especially for countries with weaker or less stable currencies.

Many national currencies suffer from high inflation, exchange rate volatility, and limited convertibility, making them less attractive for international trade.

Even if two countries, say South Africa and Cuba, chose to settle their trade in their respective currencies, there are significant liquidity and logistical challenges in today’s financial infrastructure that necessitates the conversion of each currency to USD first (e.g., Cuban peso → U.S. dollar → South African rand) rendering the whole process an exercise in futility.

Therefore, finding an alternative currency, whether a global reserve currency or a local one, fails to facilitate de-dollarization at any level. Today’s international financial infrastructure makes using local currencies to settle transactions, especially for smaller economies, practically impossible. And using a different reserve currency is like giving a country’s financial leash to another owner, defeating the core purpose of de-dollarization.

New BRICS Currency

A more radical approach to de-dollarize the BRICS is to create a new BRICS currency.

Since the Russian invasion of Ukraine in 2022, the idea of a common BRICS currency resurfaced, mostly pushed by President Vladimir Putin.

In 2023, during a BRICS meeting in Shanghai, Brazilian President Lula da Silva re-proposed the creation of a new BRICS currency stating: “Every night, I ask myself why all countries have to base their trade on the dollar?”.

However, a new BRICS currency is highly unlikely for two reasons.

Firstly, there is a notable discrepancy in the motivations of the various BRICS nations, coupled with a lack of a definitive agenda for establishing a new currency. Brazil and Russia have been at the forefront of this push for a common BRICS currency, while the rest of the BRICS+ have varied levels of enthusiasm about the idea.

India, which is arguably the weak link in the BRICS bloc for its double membership in alliances like the Quad which seeks to counter China in the Indo-Pacific, did not take an active role in pursuing this initiative.

China, the de facto BRICS leader, hasn't opposed a common currency but hasn’t pushed for it either.

Instead, its primary focus remains on expanding alternative payment systems, such as the Cross-Border Interbank Payment System (CIPS) and BRICS Pay, and promoting settlements in local currencies.

The last of the five original BRICS members, South Africa, has recently changed its initial stance regarding a common BRICS currency. In light of Trump’s 100% tariff threats against BRICS nations if they de-dollarize, government officials explained that BRICS is interested in increasing the use of national currencies to "mitigate the impact of foreign exchange fluctuations, rather than focusing on de-dollarization."

With the recent expansion of the bloc, the geopolitical tensions that must be navigated to establish a common currency are becoming increasingly complex.

Secondly, creating a common BRICS currency is logistically difficult. Unlike the European Union, the BRICS+ is an amalgamation of ten politically, economically, and geographically diverse nations with different levels of stability and disconnected financial systems.

Additionally, establishing a new currency requires significant infrastructure, including a robust payment system, liquidity mechanisms, a framework for exchange rate management, and a centralized banking unit.

Integrating the new BRICS currency into the global financial system is a whole other uphill battle, requiring substantial financial and political capital, and is likely to take considerable time to achieve. Therefore, a new BRICS currency, for now, seems a largely symbolic, unnecessarily cumbersome, and impractical pathway to effectively de-dollarize.

CBDC: The Ultimate Pathway to De-Dollarization

Theoretically, using local currencies to settle transactions could reduce reliance on the USD.

However, the current international financial infrastructure renders this approach logistically unfeasible.

One could argue that if a technical solution were found to (1) circumvent the need for the USD as an intermediary in currency exchange and (2) facilitate direct peer-to-peer transactions, thereby eliminating the necessity for correspondent banks and Western financial institutions, this solution would become viable once again.

If we had a way of settling cross-border multi-currency transactions directly, de-dollarization, at least in terms of international transactions, can actually materialize. This is where Central Bank Digital Currencies (CBDCs) can provide a technical solution to BRICS’ geopolitical problem.

The next chapter provides a high-level definition of CBDCs, focusing primarily on cross-border wholesale CBDCs (W-CBDC) as the most viable pathway to de-dollarize international trade. Beyond the theory, I will highlight the largest cross-border CBDC project, mBridge, and examine recent developments that showcase the potential of this technology to truly diversify the international financial system.