BRICS and The Era of De — Dollarization: Will it have any impact on the DeFI Space?
The USA and the US Dollar have been a powerhouse in the global economy for decades now ever since the Bretton Woods system was introduced. 2023 however has seen a different twist in that supremacy as BRICS was rising in popularity and the US facing its money supply issues. With the value of the US Dollar continuing to decline, are we seeing the sign of the end of its supremacy? Will the De — Dollarization possibly have any impact on the DeFI Space?
BRICS and De-Dollarization
The US Economy might not have the greatest start in 2023 as interest rate hikes continue to record highs while causing contraction in their economy. US Interest rates stand at 5.25% based on the recent hike in May, an all-time high since 2007 while the inflation rate continues to decrease nearing its best number since May 2021 of 5%. With these numbers, it seems that the global economy on paper is getting better but it is not.
A contraction in the US economy, although necessary to readjust after the massive increase in National Debt, has been followed by a possible banking crisis and imminent recession. Fears about the US Economy facing a breach of its Debt Ceiling have also been raised quite often and could result in massive unemployment. More importantly, is the role that the USA and the US Dollar hold as the world reserve currency and how its decisions impact the other nations.
Ever since the introduction of the Bretton Woods System, the global economy has depended on the US Economy as a traction for the global economy and most nations stored their national reserves in US Dollars. This interdependence for example the rapid interest rate hikes imposed by the FED might make borrowing more expensive for other nations. We can also take a look at the events that unfolded in 2008 where a Mortgage Crisis in the US could cause the global economy to tumble down causing the Great Depression for many nations.
This is why the term De — Dollarization is quite frequently mentioned this past month as countries seek to reduce their dependence on the US Dollar as a global trade currency. There have been a lot of factors that lead to this De — Dollarization but one of the main reasons began when Russia invaded Ukraine in 2022 and the US decided to freeze Russian assets and currency to be exchanged for the US Dollar. Around the same time, the US Dollar’s status as a global currency was put into question when China conducted its first trade deal with Saudi Arabia using its currency, the YUAN.
Early in 2023, the newly elected Brazil President Luiz Inacio Lula da Silva stated in his speech on the New Development Bank during his visit to China as follows:
“Every night I ask myself why all countries have to base their trade on the dollar. Why can’t we do trade based on our currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
These all concerns by some of the World’s Emerging Economies contributed to the rise of De-Dollarization and the rise in popularity of the BRICS Alliance. The BRICS Alliance was originally formed on 16th June 2009 with the context of foreign investment strategies but the group’s latest development is what leads to De-Dollarization. The term “BRICs” was coined by Goldman Sachs economist Jim O’Neill in 2001, who coined the term to describe the fast-growing economies of Brazil, Russia, India, and China that would emerge to collectively dominate the global economy by 2050. South Africa then joined the Alliance in 2010 and changed the term to “BRICS”.
One of the latest developments that the BRICS Alliance formed is the trade deal between China and Brazil to trade in their own National Currency. This was also paired with the announcement that the BRICS Alliance would introduce a new reserve currency backed by Gold and we can see that in late 2022 where National Bank were buying massive amounts of Gold to increase their reserves respectively. So how does this impact the US Dollar?
The advantage that the US has as the national reserve currency of the world is that it can expand its money supply as the rest of the world will keep on transacting and storing its national reserves in the US Dollar. Now as we know that ever since the Gold Standard was removed, the national currency such as the US Dollar is backed by how much trust and value the world placed in the currency. With this in mind, more countries that use the US Dollar means the currency becomes more valuable as it’s constantly circulating.
With more countries adopting trade deals in their national currency it appreciates their value while simultaneously depreciating the power of the US Dollar as it is being used less. Now with the BRICS Alliance gaining momentum and more countries such as Saudi Arabia, Indonesia, and Argentina expressing interest in joining the alliance, this is not good news for the US as its supremacy in the global economy will be weakening.
This will also pose a question if the US Dollar would step down from its role as the world’s reserve currency, who would then take up the role to replace it? The world has so often fallen back on the USA as the lender of the last resort and if it were to be replaced some other emerging nation will have to take up the role in times of crisis or recession. The Era of De — Dollarization might have still been in its infancy stage but its effects can be massive for the years to come. We will have to follow the latest developments proposed by the BRICS Alliance and the strategies adopted by the USA to cope with the pressure.
Its implications on the DeFI Space
The enthusiast in the DeFI Space more often than not will acknowledge that the impacts happening around the world shouldn’t impact the digital world. That is true in some sense but as long as people are living in the Real World and not in the metaverse, these events will always impact the growth of the DeFI Space. Now what we know is that most of the value inscribed in the DeFI Space is in USD so there will be a lot of changes in that aspect.
One of the most suggested implications is the rise of a new breed of stablecoins that are reserved in other national currencies as most of them are now backed by the US Dollar. USDT, USDC, and BUSD are encompassing almost 90% of the global Stablecoin market share due to the supremacy of the US Dollar so we should see a shift in this aspect if more countries do trade in their own National Currency. Also in retrospect, these existing Stablecoins will face a difficult time if the US Dollar depreciates.
There will also be new DeFI superpowers from these emerging economies to challenge the current leaders in DeFI Institutions that mostly originated from the US. Countries like Brazil or India could become a global hub for blockchain developments and DeFI institutions as we see their impact rise in the global economy. This will also reduce the US grip on the Decentralized space with new countries emerging to take its place.
This shift and the rise of De — Dollarization will also bring turbulent times to the Global Economy including the DeFI Space as the world starts to readjust to the new policies. We can see it from now on as the DeFI Space is still working to recover from its best times in 2021. All in all, the implication might be huge if the predicted events of De — Dollarization might come true but we will have to see as 2023 rolls by!
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