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The recent announcement that BRICS nations are developing a blockchain and digital technology-based payment system to compete with SWIFT (Society for Worldwide Interbank Financial Telecommunications), the dominant player in international money transfers, reflects a significant shift in global financial dynamics. SWIFT, a network that banks use to securely communicate with one another, mostly to provide instructions for transferring payments between accounts, handled an astonishing about 45 million Financial Information Network (FIN) messages per day in 2022, highlighting its critical role in enabling global trade. BRICS, who collectively constitute a formidable 28% of the global economy with a combined GDP of more than $28.5 trillion, seeks to bring a faster, more cost-effective, and politically independent alternative.

BRICS Blockchain

The anticipated benefits of a BRICS blockchain system are very compelling. Leveraging blockchain technology has the potential to speed up transactions while decreasing the time and expenses involved with traditional cross-border payments. This increased efficiency has the potential to dramatically expand economic activity in the BRICS bloc. Furthermore, the decentralized structure of blockchains facilitates payments by utilizing a network in which transactions are authenticated in real-time using information kept within the blockchain. Notably, popular blockchain platforms include Bitcoin and Ethereum.

Traditional cross-border payments often require intermediary banks, which incur fees and delays. However, blockchain technology provides a solution by increasing the speed of the process, potentially lowering transaction costs by up to 50%, according to reports on financial technology. Furthermore, the decentralized structure of blockchains can help to address financial inclusion issues, especially in BRICS countries where many people do not have access to traditional banking services. Blockchains, by allowing involvement in the financial system without the need for banks, have the potential to open new economic opportunities for a significant section of the BRICS population.

Furthermore, the possibility of reduced reliance on the US dollar and independence from political influence are key benefits of the BRICS system. According to a study conducted by the Centre for International and Strategic Studies (CISS), over 20 countries have shown interest in joining the BRICS bloc, citing a desire for a more diverse global financial system. This highlights the allure of a successful BRICS blockchain system, which might operate as a magnet for more nations, significantly expanding its reach and influence.

Blockchain technology provides a transparent and tamper-proof record of transactions, which can help reduce corruption and fraud in the financial system. This increased transparency promotes trust and confidence, resulting in a stronger financial climate.

SWIFT's Staying Power: Trust and Efficiency in a Familiar System

Despite the benefits of blockchain, SWIFT continues to play an important role in the global financial environment. This supremacy is backed by its enormous network, comprising over 11,000 banks and financial institutions in more than 200 countries and territories. This extensive network effect promotes familiarity and trust among financial institutions all around the world. In addition, SWIFT uses standardised communication protocols known as ISO 20022 messages. These provide secure and consistent data flow between banks, thereby reducing errors and disruptions in cross-border payments. SWIFT processed approximately 45 million messages per day on average in 2022.

De-Dollarisation Trend Fuels BRICS's Blockchain Push

The recent development of a de-dollarisation trend lends major weight to the BRICS blockchain proposal. According to a World Economic Forum June 2023 White paper, there's been a significant surge in Central Bank Digital Currencies (CBDCs) exploration in 2023 with 100 countries, representing more than 95% of global GDP involved. This widespread exploration reflects growing recognition of CBDCs' potential to transform digital payments and demonstrates a clear transition away from the US dollar's dominance in international banking.

The United States' use of the dollar as a political instrument reinforces the case for other payment arrangements. The freezing of Russian assets during the Ukraine crisis is a harsh reminder of the vulnerability that comes with overreliance on a US-dominated financial system. This weakness encourages other countries to create alternate solutions, potentially making the BRICS blockchain system a more appealing option.

Statistics validate the extent of the US dollar's current supremacy. According to the Federal Reserve, the dollar will continue to be the world's principal reserve currency, accounting for almost 60% of total foreign exchange reserves. However, the trend toward de-dollarisation, combined with efforts such as the BRICS blockchain system, points to a future in which this supremacy may fade.

The Price of Power Shift

The possible consequences of shifting away from dollar dominance are varied. As the dollar's power declines, US borrowing costs may rise, affecting interest rates and inflation dynamics for American consumers. Additionally, such a change could cause temporary volatility in the global financial system. Furthermore, if the BRICS payment system is successful, the US may retaliate with countermeasures, thereby exacerbating geopolitical tensions, thereby affecting global financial markets.

While blockchain technology has significant advantages, such as faster processing and lower fees, questions remain about its vulnerability to illicit activities such as tax fraud. The pseudonymous character of some blockchain transactions raises concerns about possible abuse. For example, Chainalysis estimates that despite the market downturn, illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.1 billion in 2022.

Despite the claimed efficiency, several blockchain systems fail to manage large transaction volumes. For example, Bitcoin's network can only process roughly seven transactions per second, far less than established payment processors such as Visa, which can handle tens of thousands of transactions per second. Thus, the viability of blockchains for large-scale international payments remains unknown. Security vulnerabilities and scalability difficulties may represent major hazards to investors. This constraint creates barriers to widespread adoption.

Furthermore, the regulatory landscape for cryptocurrencies and blockchain is unpredictable, which may limit mainstream adoption. The lack of clear legislation causes uncertainty for both firms and users, impeding the technology's adoption into existing financial institutions.

Additionally, while blockchain technology boasts continuous improvement and addresses past vulnerabilities, security concerns remain significant. Cryptocurrency security breaches are becoming increasingly common. In a high-profile incident, cryptocurrency exchange platform Wormhole lost $320 million to a cyberattack in February 2022. Furthermore, according to a report by the Federal Trade Commission, cryptocurrency scammers have stolen over $1 billion since 2021, prompting concerns about its long-term stability and security in comparison to established networks such as SWIFT.

For the BRICS system to succeed, effective security measures that prevent these dangers must be prioritised. This might include stronger transaction validation processes, regular security audits, and collaboration with multinational cybersecurity specialists. As blockchain technology advances, resolving these security challenges is critical to assuring its sustainability as a legitimate alternative to established financial institutions.

Conclusion

In conclusion, the BRICS blockchain initiative has the potential to disrupt global finance. In terms of credit assessment, the BRICS project has the potential to be credit-positive for participating nations if it successfully decreases transaction costs and reduces dependence on the US dollar. Uncertainties around blockchain technology, as well as integration issues with existing systems, raise credit-negative concerns. The BRICS system's success and eventual impact on global banking depend on its ability to manage these hurdles and potential geopolitical responses.