I am Eve. I have not written much about the BRICS alternative currency project, except for the idea of improving information systems to increase the efficiency of bilateral trade, as it is too fluid. There is also a lot of poor commentary, such as articles written by people who should know better, who do not understand that SWIFT and its Russian messaging alternative are far from being a payment system. SWIFT does not perform both of its core functions: clearing and settlement.
From what I have seen, it may not be easy to provide a brief explanation of clearing and settlement that is not a MEGO (My Eyes Glaze Over), and a more concise discussion may not be satisfactory in explaining the impact on the BRICS project.
But in the meantime, the article below shows how BRICS participants have had to look at the possible mechanism and reject it. As the article warns, a gold-backed plan would be a big step backwards for BRICS (and Michael Hudson agrees). But it also suggests that Indonesia and perhaps other BRICS members or top entrants would oppose it.
By Rendy Arta Rubian, a graduate student in the Department of Social and Political Sciences at Gajah Mada University. Originally posted on Modern Diplomacy; cross-posted from Infobricks
The BRICS summit will be held from October 22 to 24, 2024, and the main agenda will be to discuss the potential use of a common currency backed by gold. The BRICS, a group of countries consisting of Brazil, Russia, India, China, and South Africa, has played a significant role in the global economy since its inception. Their main goal is to strengthen economic and political cooperation among their member countries and reduce their dependence on the global financial system led by the West, especially the United States. The dominance of the US dollar as the global reserve currency and the main trading instrument has created a significant dependence on the Washington-controlled monetary system.
The BRICS de-dollarization initiative aims to reduce dependence on the dollar and create a more independent alternative for international transactions. Initial steps include establishing a New Development Bank (NDB) and a reserve fund system. However, these steps have not yet lived up to initial expectations. The BRICS are now considering using a gold-based currency as a more stable alternative that is less affected by global political fluctuations. But what will this mean for countries like Indonesia? Will it provide an alternative to balancing the international monetary system, or will it be a recipe for disaster?
The De-dollarization Initiative and Why the BRICS Are Considering Gold Standard Currencies
One of the recent initiatives of the BRICS is to develop a new payment system that does not require the US dollar. The system is designed to facilitate cross-border transactions using advanced digital technologies, including blockchain. The system is still under development, but there is speculation that a gold-backed currency could be used as part of the system.
Gold-backed currencies can be more stable than fiat currencies, which are subject to monetary policy and inflation. Gold has long been considered a reliable store of value and can act as a hedge against currency fluctuations. By linking their currency values to gold, BRICS hope to create a more resilient alternative to global economic instability and international sanctions that frequently affect member countries.
However, despite being backed by gold, the currency system proposed by the BRICS would still be fundamentally based on usury, with interest rates continuing to play a central role. Over time, this reliance on interest-bearing mechanisms could result in the gradual decoupling of the BRICS currencies from gold. As financial institutions seek greater flexibility to respond to market demand and economic growth, the temptation to inflate their currencies or adjust monetary policy could erode the nascent gold standard. This scenario reflects the historical trend of currencies, despite being backed by gold, eventually breaking ties with precious metals in favor of 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 has played a significant role as a global monetary standard known as the gold standard. In 1944, the Bretton Woods Conference established a new international monetary system in which the US dollar became the main reserve currency and was exchangeable for gold at a fixed rate. This system gave the US considerable power in international trade. Unfortunately, as more dollars were printed and circulated around the world, the dollar’s exchange rate against gold continued to rise.
This shows that they abused their power by printing excessive dollars without sufficient gold reserves. Finally, in 1971, President Richard Nixon announced the decoupling of the US dollar from gold (Nixon Shock), opening the era when the dollar became a fiat currency backed only by market confidence, not gold reserves.
This shift made the US dollar the primary currency for oil trade, giving rise to the term petrodollar, and making the global financial system more dependent on the dollar. This shift gave the US significant advantages, including the ability to run large trade deficits and impose economic sanctions on countries that disagree with US foreign policy. International trade was conducted almost entirely in dollars, even after it was no longer tied to gold. Oil has maintained its value in dollars ever since, as before the COVID-19 pandemic, nearly 100% of oil trades were in US dollars. However, by 2023, it was reported that one-fifth of oil trades were in currencies other than the US dollar.
Instability caused by US monetary policy could have far-reaching implications for the global economy, forcing countries such as the BRICS to seek more stable alternatives.
Challenges and Risks of Gold-Backed Digital Currencies in BRICS
Gold-backed currencies offer a number of benefits, including value stability and protection against inflation. By linking their currency values to gold, BRICS can reduce volatility and create a more stable alternative to fiat currencies. This can also help member countries reduce their dependence on the US dollar and enhance their economic independence. Implementing gold-backed currencies in a digital system can combine the stability of gold with the efficiency of blockchain technology to provide transparency and speed in international transactions. This system has the potential to increase the efficiency of international trade and reduce transaction costs associated with currency conversion.
However, implementing a gold-backed digital currency poses technical and regulatory challenges. Blockchain system security and data protection are major concerns, as are potential issues related to interoperability with existing international systems. Using a gold-backed digital currency as the basis for a BRICS currency could create vulnerabilities related to the stability and integrity of the monetary system. While blockchain offers transparency, it carries risks related to potential cyberattacks and system failures. In addition, the reliance on new technologies could make it difficult to integrate with existing global financial systems.
The next question that arises is whether the BRICS will repeat what the US did in the past, that is, recklessly printing and expanding currency without sufficient gold reserves. This potential could once again lead countries that cooperate with the BRICS to the same trap, including Indonesia, which cannot avoid its connection with the BRICS.
Indonesia’s strategic role
Indonesia has activated the Local Currency Transaction (LCT) National Task Force to enhance the use of local currency in international transactions. This effort, involving Bank Indonesia and nine ministries/agencies, aims to diversify currencies and enhance exchange rate stability in bilateral transactions. This initiative, which is in line with the BRICS’s de-dollarization efforts, reflects Indonesia’s commitment to reducing its dependence on the US dollar and supporting regional payment systems.
Indonesia, one of the BRICS member countries, plays a strategic role in this de-dollarization initiative. Indonesia contributes to the BRICS’ efforts to reduce its dependence on the US dollar by supporting the use of the rupiah in bilateral transactions and introducing special tasks to promote local payment systems. These efforts include the launch of a cross-border payment system with Singapore and the development of a universal QR code for payments within the ASEAN region.
De-dollarization could provide significant benefits to BRICS countries, including Indonesia, by reducing their exposure to US dollar volatility and economic sanctions. In addition, by expanding intra-ASEAN and regional trade, BRICS could strengthen their position in the global economy and reduce their dependence on the Western financial system.
It is important to note what has happened in the past. History has shown that major changes in monetary systems can have far-reaching effects, both positive and negative. Trust in a particular currency or financial system can easily be exploited. The chances that the BRICS currencies will succeed in breaking the dollar’s dominance in international trade are as great as the chances that the BRICS will lead the world to economic instability. The Nixon shock demonstrated how capitalist tools can fool the world. If the BRICS are no longer interested in the basic idea of using gold reserves, will they repeat the same steps in the future with currencies that can be printed by simply typing numbers on a screen?
