The 11-member alliance is seeking to carve out a new path in the global financial system with the launch of a BRICS Pay system. The proposed cross-border mechanism aims to reduce the US dollar’s dependency and promote the local currencies of member nations. While the ambition is big, the execution could face hiccups due to the diverse structure of the bloc.
What Does BRICS Pay Aim To Do?
The alliance envisioned BRICS Pay to be a standalone payment mechanism, similar to the West-dominated SWIFT system. SWIFT is only a messaging system, and settlement is backed by global banks and dollar liquidity. The goal is to facilitate trade in local currencies, usher the world into the multipolar financial era, and insulate itself against tariffs and sanctions from the US and the West. Ending reliance on the US dollar is also the main pillar of the payment system.
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Here Are the Challenges It is Going To Face Next
Ambition, execution, and reality are three separate things. BRICS Pay could face a reality check when it enters the formation process. Here are the immense challenges it would face in the coming years.
- Trade Volume
For a payment mechanism to work, the trading volume has to be at a massive scale. It includes goods being exchanged and the money worth billions being settled every day. The main problem here is that only China stands to benefit, as it alone accounts for enormous exports. China could begin to control the functioning of the BRICS Pay, as it will have a larger share of the payments. Trade volume for other countries will see a wide gap when compared to China.
2. Currency Trust Problem
The US dollar is the most trusted currency globally, even among its adversaries. While BRICS Pay could be used internally within the alliance, other countries might not be ready to pay or accept it, as it does nothing to uplift their native economies. The US dollar provides stability and instant liquidity, while BRICS Pay might not boast of these. Exporters will mostly prefer the US dollar for its instant settlement and liquidity features.
3. Economic Priorities Differ
Each BRICS member is different, and their priorities for their native economies don’t match. China accounts for a disproportionate share of trade that could naturally give it greater influence in settlement flows. India wants the West’s support to boost its GDP as it hosts the backend IT sector. Russia and Iran are desperate for a change due to sanctions, while the other countries are confused about their wants. The formation of a BRICS Pay will be a mixed bag that is not harmonized. This gradually chips away at its ideology of replacing the traditional financial order.