In recent years, there has been much talk about whether the BRICS could pose a serious challenge to US global financial dominance and the status of US dollar as world reserve currency.
Although some are quick to dismiss the BRICS as a loose group of tin dictatorships with no unifying ideology, it now comprises nations that make up 35% of global gross domestic product (GDP), and its economies are growing rapidly. With the latest addition of Indonesia for the club, there is another fast-growing financial powerhouse in the mix.
At the center of BRICS economic power is one nation: China. Depending on what happens in the next few years and what decisions it makes in response, it could challenge dominance of USD within BRICS itself and create a new monetary system to compete with what we have today. Don’t think it’s possible? Let’s see what can happen.
No need for a BRICS digital currency, RMB will do
Ahead of this year’s BRICS summit in Kazan, Russia, there was speculation about a BRICS digital currency. No such currency was announced, and Russian President Vladimir Putin called the idea “premature.” But the BRICS countries pledged to de-dollarize faster and trade internally in their national currencies.
While a future BRICS entity may become a reality, there is no need for it now. China, with largest economy on earth in real GDP termscan challenge the existing monetary system and the status of USD within BRICS nations. In fact, the moment to decide whether to do so is fast approaching.
To understand why, it is necessary to go back to 1985 when Japan signed Plaza Accord. While headlines and pundits around the world predicted that Japan would soon overtake the United States as the world’s largest economy, a meeting between the United States, Great Britain, West Germany, France and Japan took place at the Plaza Hotel New York. At this infamous meeting, the parties agreed to allow the Japanese Yen to appreciate against the USD, and over the next two years it did so by 50% or so. This, combined with poor decisions by the Bank of Japan (BOJ) and other institutions, had devastating effects on Japan’s exports and economic competitiveness, and talk of its economic supremacy soon faded into silence.
However, China is not Japan, and this is not 1985. The world has changed, and while the Donald Trump administration may try to push for a similar agreement, China is unlikely to agree. In fact, there is some evidence that China may need to let its currency depreciate (the opposite of what Japan agreed to). That’s it less dependent on the US for exports than Japan was, and it already has a long-term plan to increase domestic consumption.
So, if a similar idea were to be pursued, what will China do? There are two options: wait for Trump’s era of economic nationalism to pass and hope for a return to the status quo, or seriously challenge the current world order and monetary system by making a new agreement with BRCIS nations. Just as global trade surpluses in USD are now recycled into US bonds, investments and other assets, Beijing can get BRICS nations to agree to recycle their surpluses into Chinese assets and investments in RMB.
If this were to happen, the USD would lose its dominance in trade and account for over 35% of global GDP. Sure, BRICS nations would still use it to trade with America, but the monetary system, as we know it, would be forever changed. Such a move would significantly challenge the existing order and even trigger a hot war. Of course there is an alternative…
Supercharged global free trade with peer-to-peer payments
The above scenario would likely lead to tumultuous times, and the world we have known for a very long time would be irrevocably changed. But while many believe China’s continued rise as a major world power is unstoppablethere is another way forward, and blockchain technology can play a role in it.
A return to the era of global free trade, with some tweaks to make it a better deal for aggrieved parties who lost out through globalizationcould save us from what may follow a breakdown of the current global economic system. Nations prosper when they trade, and as hard as it is to believe at times, the period since 1945 (Pax Americana) has been the most peaceful and prosperous in world history. Yes, America and the world got richer from China’s rise, and everyone else got richer along with them, despite what doomsayers might say.
It is possible that this period of global free trade is merely experiencing a bump in the road and requires some adjustments rather than revolutionary change. In fact, with the advent of scalable blockchains like BSVcapable of a million transactions per second (TPS) today, the free trade era can supercharge and grow to new heights.
Scalable public blockchains and the tools that build upon them enable open trade between nations and their citizens. Payments can be done much more efficiently across the planet, promoting even more trade. Everything from supply chains to trade finance, dispute resolution, insurance and customs compliance can be made better with blockchain technology.
In short, blockchain technology can take the unprecedented prosperity unleashed since 1945 and exaggerate it. Micropayments and peer-to-peer payments can break down even more walls and barriers, enabling people all over the world to pay each other for free in seconds. In addition, blockchain and related technologies such as smart contracts can make trading reliable, making it possible to do business anywhere without worrying about being cheated.
For this vision to be realized, we need a reset of political relations where powerful rival nations realize they are better off working together and a scalable blockchain that can take tens and even hundreds of millions of TPS. This blockchain must be able to asset tokenization so tokenized currencies, property deeds, stocks, shares, bonds, contracts and other assets and documents can be transferred to anyone anywhere in the world in seconds. It must also be designed to comply with laws and regulations related to international trade, finance and other important sectors.
Which way will the world go? Will it choose mutual prosperity or a battle for the top spot? It remains to be seen. No one can predict the future. However, there is no doubt that we would all be better off if even more trade took place between growing economies so that the pie is bigger for everyone. Scalable blockchain technology is one of the key components required to make this happen. Let’s hope our leaders return to mutual prosperity and cooperation rather than fighting for supremacy!
Watch: Determining Blockchain’s Economic Value
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