Why in News

• The 18th BRICS Summit, to be held in New Delhi in September under India’s Chairmanship, is expected to promote cross-border payments by linking member countries’ digital payment systems and Central Bank Digital Currencies (CBDCs), while encouraging trade settlement in national currencies.

How Does the Current Cross-Border Payment System Work?

• Money does not move directly between banks in two countries — it passes through correspondent banks, typically based in London or New York, since very few banks hold both currencies directly.
• The US dollar acts as a “vehicle currency” — a local currency is converted to dollars, then to the destination currency, even when no American party is involved.
• SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the messaging backbone that carries payment instructions — it does not move money itself, only tells banks what to do. It is based in Belgium, overseen by the National Bank of Belgium along with G-10 central banks, and used by 11,000+ institutions across 200+ countries.

1. The Cost Dimension

• Every intermediary bank charges a fee, and double currency conversion means forex margins are paid twice — a 2019 BRICS survey found margins around 2.5% for Brazilian transactions, rising to 8.5% for African transactions, and as high as 20% in some cases, disproportionately burdening developing economies.

2. The Speed and Structural Dimension

• Despite innovations like SWIFT GPI, structural delays persist — BIS data shows active correspondent banking relationships fell 20% between 2011 and 2018 (up to 30% in Latin America), a phenomenon called “de-risking” as large banks exit smaller/riskier markets.

3. The Monetary Sovereignty Dimension

• Since global trade is settled mostly in the dollar, euro and yen, developing countries are indirectly exposed to the issuing countries’ monetary policy (e.g. US rate hikes) — under Russia’s 2024 chairmanship, BRICS argued this effectively monopolises settlement via a single institution (SWIFT/dollar).

4. The Geopolitical and Sanctions Dimension

• Following Russia’s 2022 invasion of Ukraine, several Russian banks were cut off from SWIFT as part of Western sanctions — exposing how a dominant payment system can be weaponised, and creating a “network effect” problem since adopting alternatives risks secondary sanctions.

1. Bilateral Linking of National Payment Systems

• India has linked its UPI with Singapore’s PayNow for real-time remittances — but this bilateral, country-by-country model is hard to scale globally since each pair needs separate technical/regulatory arrangements.

2. A Shared Multilateral Hub

• Project Nexus, designed by the BIS, is a common hub multiple countries can plug into — now handed to a company set up by six central banks including India’s RBI, expected to go live only in 2027. It is a globally coordinated initiative, not BRICS-led.

3. Central Bank Digital Currency (CBDC) Linkages

• Central banks would issue wholesale digital currencies (bank-to-bank settlement, distinct from the retail digital rupee) and exchange them on a shared platform, enabling “atomic settlement” — both legs of a swap happen simultaneously or not at all, eliminating settlement risk.
• mBridge, built by the BIS with China, Thailand, Hong Kong and the UAE, is the only functioning example — the BIS has since exited, handing it to member central banks.

4. BRICS Clear (Independent Settlement System)

• The 2024 Kazan Declaration agreed to “discuss and study the feasibility” of an independent BRICS settlement and depository system — but this was notably absent from the 2025 Rio Declaration, signalling internal disagreement on institutional alternatives.

• India’s proposal (reported in January) is comparatively moderate and cautious — linking BRICS CBDCs specifically for trade and tourism payments, a narrow use case rather than a broad challenge to the dollar-based order.
• Indian officials frame this as a cost- and efficiency-driven reform, deliberately distinguishing it from more assertive Russian proposals and Brazilian calls for alternatives explicitly aimed at reducing dollar dependence.
• In November 2024, then US President Donald Trump threatened 100% tariffs on BRICS nations attempting to replace the dollar in trade, plus a 10% tariff on countries seen pursuing “anti-American” BRICS policies — explaining India’s careful, cost-only framing even though the threats were never implemented.

Significance of BRICS Payment Cooperation

• Reduces transaction costs for developing-nation trade, many of which currently pay disproportionate forex margins.
• Partially insulates emerging economies from reserve-currency-issuing nations’ monetary policy spillovers.
• Strengthens India’s digital payments leadership, building on UPI’s global success and diplomatic soft power.
• Provides resilience against financial systems being weaponised for geopolitical coercion.
• Deepens South-South trade integration, supporting a more multipolar global financial architecture.

Challenges and Concerns

• Trust and interoperability: Linking CBDCs needs deep technical, legal and regulatory harmonisation across very different financial systems.
• Currency dominance risk: As seen with mBridge, a BRICS alternative could simply replace dollar dependence with yuan dependence.
• Divergent member interests: Russia wants a strong sanctions-escape alternative, India wants only cost efficiency, Brazil sits in between — making consensus difficult.
• Geopolitical risk of overreach: Any move perceived as direct de-dollarisation invites punitive tariffs or sanctions from the US.
• Scale and adoption lag: Even well-designed platforms like Project Nexus will take years to go live.