How BRICS plans for settlements in digital national currencies will change the crypto market

We explore how the shift to central bank digital currencies (CBDC) might alter the global crypto scene.

The crypto world’s fate is not solely in BRICS‘ hands. Yet, the financial sphere is a web of connections. Fedor Ivanov, Shard’s Director of Analytics, shares insights on how CBDCs could influence the crypto market globally.

BRICS nations are making strides in national digital currencies (CBDC). Brazil, Russia, India, China, and South Africa are all in the game. South Africa is the only one without a digital currency yet, but plans to introduce the digital rand soon.

Digital Currencies of the BRICS Countries

CBDC development varies among BRICS nations. Most are still studying, while the biggest have already started practical work.

China leads, launching the digital yuan in 2021. Over 200 million digital wallets for the e-CNY were opened by the end of 2023. Despite a slow start, the digital yuan is now used in 17 provinces and 26 cities, including major cities like Beijing and Shanghai.

In India, a pilot for the digital Rupee began in 2022. The retail digital rupee pilot started in four major cities in December 2022. The full launch happened on April 1, 2023. Like China, the adoption has been slower than expected.

The Reserve Bank of India hopes the digital rupee will make the interbank market more efficient. It aims to reduce transaction costs and the role of intermediary banks. The state sees CBDC as a tool to combat the shadow economy.

India and Russia plan to use CBDC for foreign trade. The Central Bank of Brazil aims to attract investments with the digital real (DREX), which has been in pilot since 2023.

Saudi Arabia and the UAE have been testing CBDC since 2019 with the “Aber” project. Iran is also testing the digital rial.

So far, only South Africa, Egypt, and Ethiopia are not testing CBDCs yet. They are either at the development or decision-making stage. South Africa is getting ready to launch a digital rand version in late 2024 or early 2025. They are also working on projects like Dunbar and Khokha to make cross-border transactions easier and cheaper.

The success of CBDCs in international trade is key. Russia has a big reason to move away from the US dollar. China, being a big holder of US debt, doesn’t have a big reason to destroy the dollar yet. But, they are working on alternatives.

BRICS is creating a digital platform called BRICS Bridge. It aims to simplify and speed up international payments. This platform could reduce costs and cut out traditional banking middlemen. But, it needs to start working to show its demand.

Many countries and organizations are cautious about using tools that bypass US and G7 sanctions. The BIS stopped working on a cross-border payment platform in October 2023. This was due to high risks of using it to bypass sanctions.

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But, the technology has a future, especially when traditional payment methods fail. BRICS Bridge and similar platforms can offer fast and cheap settlements. Smart contracts in CBDCs make cross-border payments seamless and cheap.

If CBDCs become the norm for cross-border settlements, it could impact the crypto market. This could especially affect the stablecoin market, where most digital currency trade happens.

In November 2024, Tether issued 12 billion USDT. This demand is not just because of the Bitcoin rally. USDT is used in trading by many countries, including Russia and Venezuela. It’s even rumored to be used for Iranian oil transactions.

Widespread use of CBDCs might make stablecoins less popular. Users might prefer more stable, regulated digital assets. This could be especially true for BRICS countries, which might find more secure alternatives for settlements.

However, Bitcoin and other cryptocurrencies will still attract investors looking for decentralized solutions. Conventional currencies are also free of the problems faced by digital currencies. But, settlements in national currencies still have issues.

For CBDCs to really impact the crypto market, a big part of transactions needs to move to them. This is unlikely to happen soon. It’s also important to remember that big countries like China, Russia, India, and Saudi Arabia are cautious about cryptocurrencies. They might ban them if they start using their own digital currencies widely.

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