BRICS Currency Conundrum and Bitcoin's Balancing Act

Macroeconomic analyst Lyn Alden has cast a discerning eye on a proposal that's been making waves: a plan for five nations to join forces and birth a unified BRICS currency. However, Alden's raised eyebrows come with an undercurrent of skepticism, suggesting that while the endeavor may be ambitious, its path to fruition might be strewn with stumbling blocks, ultimately unable to unseat the reigning champion, the United States dollar.

Chatting with Cointelegraph just ahead of the annual BRICS summit in South Africa, Alden took a deep dive into why the notion of concocting a universally accepted gold-backed currency among the consortium—Brazil, Russia, India, China, and South Africa—might be akin to swimming against the current.

Harkening back to the year 2022, it was Russian President Vladimir Putin who thrust the concept into the limelight, championing the BRICS crusade to introduce an international reserve currency as a worthy adversary to the almighty U.S. dollar. The revelation that followed painted a picture of a currency backed by the Midas touch—gold.

However, Alden's keen analysis highlights certain chinks in the armor.

"The gold-backed foundation for a fractional-reserve banking system holds water only momentarily," Alden asserts, cautioning against overconfidence in such a model. As per her reasoning, the currency's rate of proliferation is bound to outpace the rather leisurely accumulation of gold reserves.

Alden instead weaves a scenario where BRICS countries gradually loosen their reliance on the USD for transnational transactions, opting for a paradigm shift towards embracing their respective currencies in bilateral trade—a shift where the Chinese yuan could potentially steal the spotlight.

The BRICS hold G7 currencies as their reserves, and not the other way around. And yet, the BRICS just flipped the G7 in economic size.

Reserve practices don’t change overnight, but this is a very different environment than 10+ years ago. https://t.co/khoH1Cbvp8

— Lyn Alden (@LynAldenContact) April 11, 2023

Her take isn't in isolation. Echoing her sentiments is one Jim O’Neil, a former Goldman Sachs economist, who dismissed the idea of a collective currency as something straddling the realm of the ludicrous. In an August 15 tête-à-tête with the Australian Financial Review, O’Neil bemoaned the practical feasibility of conjuring a BRICS central bank, terming the notion slightly cringe-worthy.

Supporting the notion of healthy skepticism, India’s foreign secretary, Vinay Mohan Kwatra, hummed a similar tune on August 21, downplaying the possibility of the BRICS dream currency taking tangible form. He rather favored a tune where the group flexes its muscles by bolstering trade through individual national currencies.

While these debates simmer on the intellectual stovetop, emissaries from the five nations are poised to converge at the 15th BRICS annual summit in South Africa, scheduled from August 22 to 24. The docket brims with issues of global significance—discussion on the potential shared currency, the promising BRICS Development Bank, intricate threads of international trade, and the relentless Russia-Ukraine tussle.

As the narrative of challenging the U.S. dollar's dominion weaves through the discourse, Lyn Alden weaves in a subplot featuring Bitcoin. She ponders how attempts at diluting the greenback's sway could inadvertently cast shadows over the realm of cryptocurrency.

The scenario Alden sketches involves a cascade of repercussions—less demand for U.S. Treasuries, dancing Treasury yields, and an inevitable rendezvous where the U.S. Federal Reserve steps in to stem the tide of burgeoning government deficits.

Treading the speculative path, Alden envisions Bitcoin's journey on two divergent tracks. The ascent of U.S. Treasury yields, regardless of the cause, could clip the wings of Bitcoin's price ascent, given its historical vulnerability to risk asset turbulence. On the flip side, Alden unveils a world where Bitcoin's price could scale new heights, drawing inspiration from the Fed's rescue mission in the banking sector in early 2023. As financial institutions teetered, the Federal Reserve unfurled its liquidity parachute—a move that seemed to breathe new life into Bitcoin.

The liquidity parachute, a lifeline typically tossed to a bank when its stash of liquid assets runs dry, beckons the central bank to swoop in with emergency liquidity. It's this multifaceted drama that lends depth to the unfolding narratives around currency, Bitcoin, and the grand stage where they converge.