Can a BRICS Currency Challenge the US Dollar?

According to the standard criteria for the historical development of major reserve currencies, one of the requirements is a fully convertible capital account so that investors both at home and abroad can freely invest in and withdraw funds from the issuing country at any time. And when it comes to a common, shared currency such as the euro, a new central bank must be created, which means that the central banks of each participating country will lose their independence, including the ability to conduct monetary policy according to domestic conditions and priorities.

Given these demands, it is hard to believe that the ten BRICS+ members will be able to make the necessary sacrifices to support a true competitor to the dollar. Can you imagine India giving up central bank independence to promote a new currency bloc that also includes its longtime rival, China? And can you imagine India or China giving up capital controls? The Chinese yuan is not widely used internationally because the Chinese authorities have always deliberately prevented capital from freely flowing in and out of China.

The US is pushing for an alternative to the dollar

These are indeed serious obstacles. Nevertheless, in recent months I have begun to question my own judgment for several reasons.

First, Chinese President Xi Jinping himself has expressed interest in seeing the yuan play a more important role as a global reserve currency.

Second, the leaders of several BRICS+ countries have made clear their opposition to the continued dominance of the dollar, and their economic advisors certainly know as much about monetary history and theory as I do.

Third, there is the Trump effect. The current US president is waging war against the very institutions that underpin dollar dominance, including through politically motivated criminal investigations of members of the US Federal Reserve Board.

The Trump administration has also openly abandoned America’s role as the custodian and provider of global public goods. In the name of “America First,” Donald Trump has fully indulged his obsession with tariffs, and as a result, the U.S. dollar has weakened significantly.

The rest of the world is not going to put up with US aggression. Most other countries, including many longtime US allies, are making new trade agreements among themselves. In the last few weeks alone, major deals have been announced: between Canada and China, the European Union and Mercosur (Argentina, Brazil, Paraguay and Uruguay), the EU and India, etc. The United States may still be the world’s largest economy, accounting for 25% of global GDP. But that leaves 75% of world GDP still on the table.

Fourth, these recent events have led me to question whether the world’s major reserve currencies really require free movement of capital. In the broad historical context, this has only been true since the collapse of the Bretton Woods system in 1971-73.

Moreover, the euro has been successfully used as a currency of exchange between member countries. If it has not become fully internationalized, it is partly because its largest member, Germany, has never wanted to challenge the dollar directly and has long been reluctant to allow the creation of a truly pan-European bond market.

Digital currencies make it easier

Given the success of the euro, perhaps BRICS+ members-especially the larger ones-could consider introducing a common currency to settle among themselves, even if they resist liberalizing their capital accounts.

The process would certainly be difficult at first, and would probably require the creation of a basket of member countries’ currencies weighted by their GDP. But if it is part of a broader process to ensure freer and more voluminous intra-BRICS+ trade, it could be worth the effort.

This brings me to my final thought. Proponents of stable dollar-denominated coins and other digital currencies argue that they will broaden and deepen the dollar’s dominance. But there is a big problem with this argument: the same technologies will also make it easier for BRICS+ to develop alternative payment systems to settle among themselves.

Is a BRICS currency a reality or still a fantasy? We will find out soon enough.