Digital currency — an innovative tool to strengthen financial interconnectedness of BRICS countries

Summary: this article explores in detail the importance and role of digital currencies as an innovative tool strengthening financial interconnectedness between BRICS countries. By way of analysis of the typical features and tech­nological basics of digital currencies along with description of the current state of financial cooperation between BRICS countries and their needs, the article considers the active impact of digital currencies on promotion of international support, deepening of financial cooperation, as well as improvement of public accessibility of finances.

Key words: digital currency; BRICS countries; financial interconnected­ness; innovative tool

I.    INTRODUCTION

Along with acceleration of the global process of economic integration, posi­tion of BRICS countries on the world’s economic arena becomes more and more important. The group of BRICS countries (Brazil, Russia, India, China, South

Africa) consists of the countries with actively developing economies, their eco­nomic cooperation is constantly deepening, and the need for financial intercon­nectedness becomes more acute every day. At present, traditional financial system features multiple abuses in the areas of international support and efficiency of set­tlements, thus it is hardly able to fulfil the needs of BRICS countries in continu­ous enlargement of their economic interaction. Due to their original technological advantages and innovative operational mechanisms, digital currencies provide a qualitatively new way to solve problems of financial interconnectedness between BRICS countries, thus becoming an important innovative tool to strengthen finan­cial cooperation of the group of BRICS countries. Many researchers highlight that digital currency can reconstruct the existing world financial order, thus providing a whole range of favorable opportunities for countries with actively developing economies.

II.    THE NOTION AND CHARACTERISTIC FEATURES

OF DIGITAL CURRENCY

2.1    Scientific definition and classification of digital currency

Digital currency is the new form of funds that is based on digital technologies and encryption algorithms that exists within the framework of electronic devices and Internet in digital format. Depending on the emission subject and operational mechanism, it can be divided into cryptocurrency, stablecoins, and central bank digital currency (CBDC). Cryptocurrency, such as bitcoin, is based on technologies of centralised blockchain, its characteristic features include anonymity and lim­ited overall amount, but also sharp fluctuations in cost, as well as lack of efficient supervision and control, thus it is hardly possible that it can become stable means of payment; in turn, stablecoins constitute currency and other assets provisioned at the level of state legislation, they are often used as means of exchange on crypto­currency markets to maintain price stability; emission and regulation of CB digital currency are directly ensured by central banks of each particular country, and its guaranties are state loans, which makes it possible for it to combine stability of tra­ditional currency and convenience of digital currency, thus CBDC is an important area of digital currency development. According to the Bank for International Set­tlements (BIS), more than 80% of central banks around the world already started researches and experiments associated with digital currency, which reflects the global scale of attention to the latter, as well as the trends in its development.

2.2    Technological basics of digital currency — blockchain technology

Blockchain is the main supporting technology of digital currency that is a kind of distributed type income and expenditure book. By means of decen­tralized mesh topology, this technology fully ensures total data protection. Characteristics of blockchain include decentralization, impossibility of coun­terfeiting, and traceability, which ensures safe and highly efficient operational conditions of digital currency. Each operation during transactions with digi­tal currencies in entered in blockchain, thus forming a unique chain of opera­tions that cannot be counterfeited and guaranties authenticity and security of transactions. At the same time, decentralization of blockchain makes it possible to refuse fr om the need to rely on third persons in form of intermediary struc­tures in course of transactions, which reduces their cost and possible risks, as well as increases efficiency of transactions. For example, some platforms for cross-border money transfers provide services of blockchain based digital trans­fers, which makes it possible to reduce the time of funds receipt from several days down to several hours, and commission fees are also reduced.

III.    CURRENT FINANCIAL INTERCONNECTEDNESS

OF THE GROUP OF BRICS COUNTRIES

3.1    Results of financial cooperation between BRICS countries

Since the foundation of the group of BRICS countries, its member countries achieved significant results in the area of financial cooperation. In 2014, the New Development Bank of BRICS countries (NDB) was officially established, the goal of which is to provide financing for sustainable development projects, as well as construction of infrastructure in the group of BRICS countries and developing countries. As of the end of 2023, the total amount of loans provided by the New Development Bank under approved projects exceeded USD 30 billion, and the projects cover multiple areas, including energy resources, transport, communica­tions, etc. In 2015, Contingent Reserve Arrangement of BRICS countries (CRA) was officially launched, which strengthened the ability of the group of BRICS countries to react to financial risks. Besides, BRICS countries also initiated active cooperation in the area of trade settlements and currency exchange, thus promot­ing the process of regional financial integration. For example, the share of trade settlements in national currency between Russia and China is increasing every year, and in 2023, it exceeded 50%, which efficiently reduces dependency of the two countries on US dollar.

Cooperation in the area of securities:

Shanghai Gold in Dubai — in 2016, Shanghai Gold Exchange and Dubai Gold and Commodities Exchange signed an agreement that allows the latter to use the base price of Shanghai Gold, and later on a futures contract for Shanghai Gold at a fixed rate was developed on its basis and it came into force, which became an important result of cooperation of the group of BRICS countries in the area of derivatives that strengthened the right of BRICS countries to define prices for pre­cious metals and their impact on the international gold market in general.

Innovative areas of cooperation, e. g. research of financial technologies — in 2023, Shanghai Stock Exchange and Dubai Financial Market declared their intent to jointly promote development of ESG and ensure sustainable development of relevant products; Shenzhen Stock Exchange jointly with Saudi Arabian Stock Exchange also initiated mutual exchange in the area of ESG and financial tech­nologies, simultaneously deepening their cooperation in the area of indices, funds, and REITs, which laid the foundation for cooperation of BRICS countries within the framework of financial innovations.

Area of cooperation of financial organizations:

Project financing of the New Development Bank — by the end of November, 2023, the total number of project loans approved by the New Development Bank exceeded USD 35 billion, in particular, the bank supported the project to upgrade locomotives of Russian Railways OJSC, water supply infrastructure in Brazilian state of Paraiba, rural highway in Indian state of Gujarat, expansion and recon­struction of a container berth in the South African city of Durban, as well as many others, thus providing important financial support to construction of infrastructure and economic development of BRICS countries.

Issuance of bonds by Chinese banks and syndicated lending — in 2023, the Bank of China issued the first lot of One Belt — One Way green bonds within the framework of NASDAQ Stock Exchange in Dubai. In the same year, it acted as the leading underwriter and registrar to help Egypt successfully place panda bonds of sustainable development on Chinese interbank market, which ensured a break­through in the area of panda bonds with zero coupon in the African region. Industrial and Commercial Bank of China also plaid the key role in organization of syndicated lending for such projects as integrated photovoltaic power plant in Dubai, United Arab Emirates, and provided an export purchase credit for the new central business district project in the capital of Egypt. Thus, the Bank of China actively participates in financing of various projects of the group of BRICS countries.

Cooperation in the area of payment systems:

Development of CIPS in BRICS countries — system of international pay­ments in yuan (CIPS) includes nine direct members located in the group of BRICS countries that are local branches of major Chinese state banks. CIPS is rapidly developing on the African continent, and in 2022, the total amount and scope of cross-border settlements in yuan processed by this system in Africa increased by 43% and 16%, respectively, as compared to the same period of the previous year, which ensured efficient and safe payment channel for cross-border settlements in yuan between BRICS countries.

Integration of Russian and Indian payment systems — in July 2024, Russia and India declared integration of their payment systems (Indian RuPay and Russian MIR) to ensure uninterrupted cross-border transfer, general reduction of depen­dency on the payment system in US dollars, as well as improved efficiency and con­venience of international transactions of both countries.

IV.   ACTIVE IMPACT OF DIGITAL CURRENCY ON FINANCIAL INTER­CONNECTEDNESS OF THE GROUP OF BRICS COUNTRIES

4.1    Economic growth acceleration

In the area of investments digital currency brought new vital forces for the projects of infrastructure construction in BRICS countries. An example here is Russian project of Moscow-Kazan high-speed railway line with the total length of approximately 770 km and budget exceeding several trillions of rubles. At the early stages of the said project traditional methods of financing faced multiple difficul­ties, in particular, limited funding channels and slow inflow of funds. After intro­duction of digital currency, the project team was able to attract investors from all over the world by way of digital bond issuance, including small and medium size investors interested in innovative areas of investments. Investors can comfortably participate in the investment process due to the wallets with digital currency. As a result, the project financing cycle reduced by approximately 25% as compared to the initial plan, and the financing rate increased by 40%, which largely promoted the construction process. Besides, projects of Indian smart cities are also using digital currency to raise larger amounts of foreign investments, which ensures financial guarantee of fast project implementation and promotes development of local construction, technologies, and other related industries, as well as creates vast amount of job opportunities and efficiently promotes economic growth.

In terms of trade, digital currency significantly improved its efficiency. Accord­ing to statistics, in 2023, the total amount of trade between BRICS countries exceeded USD 3.5 trillion and keeps on increasing. High-cost and long-time of tra­ditional trade settlements significantly restrict further deepening and expansion of the trade. For example, in course of agricultural product exchange between PRC and South Africa with the use of traditional means of payment, as a rule, commis­sion fee is 1.5-3% of the transaction amount, and funds are on the average received in 5-7 days. Due to the use of digital currency for international trade settlements, commission fee can be reduced down to 0.3-0.5%, and payment in real time is possible. It speeds up the companies’ capital turnover and promotes further expan­sion of their business. After several Chinese textile enterprises switched to settle­ments in digital currency, their trade volume with Brazil increased by 50% in a year, which supported coordinated development of production chains at all levels and provided significant economic benefits and new job opportunities.

4.2    Improved efficiency of international interaction

As regards to cross-border payments and settlements, the multilateral project of a bridge of central bank digital currencies (mbridge) achieved brilliant results. The project was jointly initiated by the Digital Currency Scientific and Research Insti­tute of the People’s Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the UAE. With the support and coordination from the innovative center of the Bank for International Settlements (Hong Kong) they jointly studied the opportunity to implement central bank digital currency for cross-border payments. From August to September, 2022, 20 commercial banks from four countries and regions took part in successful completion of the world’s first pilot real transaction project. During the reporting term, in total 164 cross-border payments and simultaneous settlements in foreign currency were performed with the total amount of over 150 million yuan. The total share of digital transactions in yuan was 46.6%. According to actual statistics, blockchain bridges can process one payment transaction within less than 7 second, while at present the delay between payment and funds receipt on account is 3-5 days for international transfers pro­cessed via correspondent banks. Besides, in accordance with the data of the Bank for International Settlements, the use of blockchain bridges for cross-border payment operations enables saving of almost half of the costs, which can significantly improve efficiency of payments and settlements between BRICS countries and other states and regions, as well as largely strengthen international economic interaction.

As regards to cooperation in the area of financial regulation, digital currency promotes exchange of information and joint supervision in the group of BRICS countries. In the past, due to the differences in regulatory standards and infor­mation systems there were multiple loopholes in the area of supervision over international financial operations. Due to implementation of digital currency tech­nologies countries of the world can create a common regulatory platform based on blockchain, and exchange data on financial transactions in real time. For example, speaking about combating money laundering and terrorism financing, Russia and Brazil solved a case of money laundering associated with cross-border transfers via the information platform of digital currency regulation. In this case, the crim­inal group attempted to hide the source of funds through complex international financial transactions. However, due to the information platform of digital currency regulation the flow of the funds was clearly traced. Law enforcement authorities of both countries acted promptly to successfully freeze accounts associated with criminal activity and arrest relevant suspects. This became an example of efficient maintenance of order on the financial market and increased efficiency and perfor­mance of international of cooperation in the area of financial regulation.

4.3     Unlocking new opportunities

Digital currency provides wide scope of opportunities for financial innovations as it creates new types of financial services and business models. An example here can be smart contracts based on blockchain technology that enable automatic fulfil­ment of contract terms without intervention of external intermediary. On financial markets of the group of BRICS countries, smart contracts are widely used in the area of supply chain financing. For example, Brazilian coffee supplier signed a trade con­tract with Chinese importer. Due to a smart contract, at the time of coffee arrival to the designated port and commencement of its inspection the system automatically launches the payment order and completes the settlement. This not only improves transaction efficiency, but also reduces the risk of contract terms violation. Accord­ing to relevant statistics, in supply financing chains wh ere smart contracts are used transaction costs are reduced by approximately 40%, and the probability of success­ful financing increases by 35%, which provides more financial channels, as well as additional opportunities for development of small and medium size enterprises.

Digital currency also plays an important role in the area of inclusive financing. Some remote rural areas of South Africa feature low level of development of their financial infrastructure that includes only several traditional bank branches, which hinders basic financial service provision to the locals. Emergence of digital currency changed this situation. Due to mobile wallets the locals can easily store, transfer, and make payments with digital currency, as well as use the entire range of financial ser­vices. According to statistics, with introduction of digital currency the coverage of the population with financial services in remote areas of South Africa has increased by 25%, and at the same time the share of population involved in financial activities has significantly increased, which promotes local economic development and social stability, as well as unleashes new potential for regional economic growth. India, in its turn, also promotes inclusive financing via digital currency, as it provides convenient lending services for multiple microenterprises and low-income groups of popula­tion, which helps them to open own businesses and improve their wellbeing, thus supporting well-balanced economic development.

V.   CHALLENGES AND RESPONSE MEASURES IN THE USE OF DIGI­

TAL CURRENCY BY THE GROUP OF BRICS COUNTRIES

5.1   Challenges in the area of control and regulation and coordination mech­anisms

Such features of digital currency as its virtual nature and transnationality resulted in enormous challenges in the area of financial supervision. As transac­tions with the use of digital currency are geographically unlimited, traditional regu­lation methods cannot be efficiently implemented, which can easily result in such illegal and criminal activity as money laundering, terrorist financing, and financial fraud. Differences in policy and standards of digital currency regulation in BRICS countries may result in regulatory arbitrage operations and partial vacuum in the area control and supervision. For example, some of the countries accept mild rules to regulate operations with digital currency while other on the contrary introduce strict restrictions, which leaves criminals the room to maneuver. To settle the reg­ulatory issues, the group of BRICS countries shall increase coordination and coop­eration in the area of supervision over digital currencies, create common regulatory framework and standards for their regulation, strengthen exchange of information and cooperation in the area of control over operations with the use of digital cur­rencies for joint combating of illegal and criminal activities. BRICS countries shall elaborate common regulation policy that is suitable for development of their own digital currencies and complies with their national interests, as well as jointly com­bat financial risks and simultaneously support innovations. In particular, it is nec­essary to create a platform for exchange of information on BRICS digital currencies and transfer of regulatory data on possible risks in real time; to regularly hold meet­ings on supervision over digital currencies in order to discuss amendment and improvement of the regulation policy; to set common standards of operations with digital currency and strengthen control of cross-border transfer in order to ensure efficient combating of money laundering and terrorism financing.

5.2            International cooperation and geopolitical challenges

Development of digital currencies steadily leads to transformation of the international currency system and reconstruction of the global financial order, which will inevitably face various resistances of the international community and geopolitical challenges. Some developed countries may apply measures to restrict development of digital currencies of the group of BRICS countries in order to maintain their own dominant position in the international financial system. The use of digital currencies in cross-border operations may also cause problems in the area of international taxation and related legal conflicts. For example, in some EU countries the norms of tax policy regarding international transactions with the use of digital currencies are rather different, as a result of which companies are facing obvious problems in the area of taxation when doing cross-border business.

The group of BRICS countries shall take active part in elaboration of interna­tional norms of digital currency circulation, strengthen liaisons and cooperation with other countries and international organizations against this background, as well as retain its voting right in the area of cross-border digital currencies. Through bilateral and multilateral cooperation it is possible for us to efficiently react to inter­national challenges and geopolitical problems associated with the development of digital currency technologies, thus supporting its favorable establishment at the global scale. To promote formulation of the rules and norms of digital currency reg­ulation, BRICS countries may join their efforts with other developing economies to ensure active presence in such international organizations and global platforms as the International Monetary Fund and the World Bank; to strengthen the dia­log and continue consultations with developed countries in order to achieve con­sensus regarding control and regulation of digital currencies, as well as in the area of taxation; to jointly participate in the development of international standards of digital currency circulation in order to increase the impact of the group of BRICS countries in the said area.

VI.    CONCLUSIONS

Thus, being an innovative financial tool, digital currency provides qualita­tively new ways to strengthen financial interconnectedness between BRICS coun­tries. By speeding up the economic growth, improving efficiency of international interaction, and releasing new potential opportunities, digital currency can cause efficient impact on the process of financial integration of the group of BRICS coun­tries, as well as increase their status and influence on the international financial arena. However, introduction of digital currency in BRICS countries is also associ­ated with multiple problems in the area of technologies, supervision, and interna­tional cooperation. To fully use the benefits of digital currency, the group of BRICS countries shall continue to strengthen cooperation in the area of technological researches and developments, improve the regulatory and coordination mecha­nisms, take active part in international cooperation, and jointly react to the global challenges. As digital currency technology continues to develop and areas of its implementation keep expanding, many researchers believe that the importance of digital currency for financial interconnectedness of BRICS countries will continue to increase, which will give a new impetus to sustainable development of the econ­omies of the group of BRICS countries. In our future research it will be possible for us to further study particular models and ways of digital currency implementation in BRICS countries, as well as to develop the best mechanisms to coordinate inter­connection between development of digital currency technologies and financial stability, which will make it possible for us to provide even more operative offers on cooperation of the group of BRICS countries in the area of digital currencies.