PROMOTING BRICS ECONOMIC INTEGRATION VIA CENTRAL BANK DIGITAL CURRENCIES

Central Bank Digital Currency (CBDC) Promotion among BRICS Countries

Given the current economic climate, the BRICS need to adopt radical measures to transform society to break out of the current economic hardships characterised by experiences of poverty, inequality, unemployment, weak trading networks and limited foreign investment. CBDCs offer a radical departure from traditional economic and monetary policy, bringing new ideas to reimagine the economic structure in BRICS and globally. A CBDC is a virtual or digital format of a nationally issued fiat currency. It is supported and regulated by the country’s monetary authority and must abide by its monetary policies. These currencies simplify monetary and fiscal policies, reducing the barriers faced by the financially excluded portions of society. They provide a universal means of payment appropriate to the digital era and, globally, represent one of the most fundamental shifts in the evolution of money (Auer and Böhme, 2021; Kayrouz, 2021).

 

The CBDC can either be designed as an account or token-based system. The account-based model could replicate features of the current financial system. In contrast, the token-based model is based on ownership of the CBDC using cryptographic proof, where one’s identity can be verified at the moment of the transaction (Kayrouz, 2021).

Today there are three main camps for CBDC adoption, and  BRICS countries belong to all three of them. China leads the advanced camp with Sweden and Canada. All three have gone through various testing phases and focused on domestic monetary policy aspects of the evolution of cash serving financial inclusion purposes. India and Brazil belong to this camp also in their thinking; however, situated in the planning stage. A progressive camp is led by countries also serving as regional financial centres, e.g. Singapore, UAE and Switzerland. These countries saw opportunities in which the new cryptocurrency inspired financial infrastructure and services could benefit them as the regional hub for cross-border financial services. South Africa’s effort in CBDC is also an attempt towards this goal. The third camp includes countries such as Japan, France and Italy, which acknowledge the disruptive nature of CBDC and digital currency. They are trying to take advantage of such disruption and help modernise their financial infrastructure that has lagged behind the first tier countries such as US and UK. Russia belongs to this camp also with their new trial in bringing blockchain and Distributed Ledger Technologies (DLT) into their existing banking system.

With such diverse stages of development in the technology, there is a need for focus, planning and coordinated action by Central Banks, financial institutions of BRICS countries that require the involvement of international standard institutions. For example, such coordinated work could involve establishing a CBDC working group headed by the new development bank with the support of the Bank of International Settlements (BIS) or the International Telecommunications Union (ITU). This institution can include study groups working on the regulatory framework, the multiple Central Bank Digital Currency (mCBDC) related technologies, and industry promotion groups. They explore actual use cases of CBDCs to promote various economic and trade-related development within BRICS countries.

The following are some industries and economic development areas related to the promotion of multilateral trade that could benefit from a coordinated CBDC initiative among the BRICS countries:

·Commodity trade: BRICS countries have complimentary needs in this area, a new scheme of pricing and settlement using a combined currency index among BRICS CBDC could be used to accommodate multilateral trade that otherwise might not happen due to foreign currency reserve domination, sanctions, or costs outside of the BRICS countries.

·Tourism and Service: Piloted in China, ATMs that can directly exchange other countries currency to digital Yuan (eRMB) are a reality. Such technology could also be adopted among BRICS countries as a novel and convenient way to promote tourism and, at the same time, CBDC usage among BRICS countries. Such effort could also be coordinated by the New Development Bank, first among the business, government and student populations.

·Cross-border e-Commerce: during the Covid-19 pandemic, much of the multilateral exchange, business, commerce and education activities were moved online. In China, such digitisation benefited both businesses and the public. The mCBDC could play a key role in promoting cross-border e-Commerce by coordinating exchanges of goods and services for special needs areas that benefit disadvantaged population groups and in areas of environmental sustainability.

BRICS countries represent 43% of the world population, 25% of world GDP, and 11% of the world FDI. The goods and services traded among BRICS countries could benefit from a new cross-border payment network based on the mCBDC. The mCBDC offers a new indexed settlement currency based on the value of goods and services (advanced based barter system), new technology standards leveraging blockchain, AI, big data, 5G and IoT. Small scale pilot schemes could be conducted between two countries with limited scope. Multilateral trade promoted on a fast track using an mCBDC and new digital technology will set a shining example for the rest of the world to follow.

Thus, while these currencies are currently developed in test environments, it is important to collate the research that addresses interoperability and international exchange issues. The BRICS will need to investigate the potential of using multiple CBDC bridging technologies and other alternatives to promote international trade and foreign investment from the outset before the currencies are formally adopted. Making changes to these systems at a later stage will prove to be more expensive (Ledger Insights, 2021b). To enable international trade through the CBDC, one must explore the broad dimensions of system interoperability and the arrangements that the Central Banks must consider to implement such structures. mCBDC arrangements that facilitate international trade are preferable as they promote monetary sovereignty and foster diversity and fiscal independence (Auer, Haene and Holden, 2021).

In promoting interoperability and economic integration, there is a need to develop a multilateral, regional economic integration assessment tool that can be used to track trade and investment relations and regional value chain integration in BRICS. To this end, there is a need to employ a network approach to construct a multilateral, regional economic integration measure to assess the performance and influence of each country in the bloc.  The network approach allows the development of statistics describing global trade structure and evolution in ways that existing measures do not. For example, the tool could monitor the number of actual and potential trading partners, the structure of regional trading and value chains, and the influence of individual countries and groups of countries for the whole network and specific regions.

PROMOTING BRICS ECONOMIC INTEGRATION VIA CENTRAL BANK DIGITAL CURRENCIES

Imperative for BRICS CBDCs Integration

Each BRICS country is individually testing or about to launch a CBDC based on research of the country’s demands. The Central Bank of Brazil announced guidelines for adopting a CBDC in May 2021. The Brazilian model seeks to break the cash dependence in the country, where 60% of the population uses cash more frequently than any other payment channel. The guidelines focus on operating requirements, legal safeguards and technological requirements (Ifirm, 2021). In Russia, the Bank of Russia launched a pilot digital ruble CBDC, hoping to promote a seamless transition from the traditional fiat currency to the digital version. The digital ruble aims to protect the country from mega-financial institutions and recognise how the digital variant can play a profound role in consolidating and simplifying monetary policy. The currency is currently being tested by twelve local banks  (Ledger Insights, 2021c).

India has also announced a phased implementation plan for a CBDC to launch the currency by year-end. The Reserve Bank of India has collaborated to develop the framework for the currency. It has identified four major use cases being programmable payments, cross-border remittances, retail payments and lending for micro, small and medium enterprises (LiveMint, 2021). China has made the most progress in implementing a CBDC, with the launch of the digital Yuan in four cities and with further plans to use the currency during the Winter Olympics in 2022. Presently, the currency is used for local payments. Going forward, the country is investigating options for adopting a blockchain technological backbone to secure CBDC issuance and transactions (Ledger Insights, 2021a).

South Africa, too, has not been left behind in this respect. After four years of research conducted by the South African Reserve Bank, it is currently testing a CBDC to facilitate cross-border payments while seeking solutions to overcome the barriers faced in the rollout of legacy infrastructure. South Africa is working with the central banks of Australia, Singapore and Malaysia to develop a platform for cross-border transactions. Their findings will be valuable to BRICS that may seek to adopt such functionality in future (Mureithi, 2021). This year Nigeria launched a CBDC  called the eNaira while Kenya is exploring a version of the CBDC that may use its already developed electronic payment system called mPesa.

For BRICS countries, this progress highlights technological expertise shared by the BRICS Central Banks, and that can be exploited to benefit the BRICS societies and their regional partners. The BRICS Heads of State have welcomed sharing knowledge about technological advancements, and such ideas are well suited for sharing in the BRICS Partnership on the New Industrial Revolution. In addition, the BRICS Heads of State in 2021 declared their support for using digital technologies to modernise and transform industries, promote seamless global trade and provide a mechanism for the countries to achieve the Sustainable Development Goals (BRICS Heads of State, 2020 para 65, 66). In recognising the broad suite of use cases that promote economic growth and development, and the rapid pace of technological development, new research must include economic inclusion and equal participation, promoting shared economic growth.

Financial integration in BRICS using mCBDC settlement platforms could become central in international finance and a benefit for economic growth through risk-sharing, improvements in efficiency allocation & reductions in macroeconomic volatility & transaction costs.

PROMOTING BRICS ECONOMIC INTEGRATION VIA CENTRAL BANK DIGITAL CURRENCIES

Research Goals

In summary, the goals of the research project are the following:

1.) Map out the critical features of current trade, investment and industrial policy positions in the BRICS countries and their regional partners.

2.) Explore existing and emerging trade relations between the BRICS countries, including intra-industry trade, value-added trade and GVC activity to cover trade in both goods and services.

3.) Examine investment flows within the BRICS countries and the sectoral structure and mode of entry of these investment flows.

4.) Make recommendations regarding future economic cooperation arrangements between the BRICS countries to overcome the current intra-BRICS payment obstacles relating to macroeconomic issues such a monetary policy, foreign exchange and balance of payments issues.

 

5.) The study’s recommendations will help policymakers identify strategies to promote socio-economic growth by expanding economic integration and trade and investment in the form of goods and services.

 

Given the above discussion, the below figure describes the study objectives and each associated goal.