Penny From the Bloc: The Emergence of Alternative Currencies

First published in Business Today on 7 April 2023

The scenario towards a multipolar world is unfolding. Several countries are moving towards the creation of an alternative economic pole; a project that began a decade ago, but only now seems to be gaining momentum.

In 2014, with $50 billion in seed money, the BRICS nations launched the New Development Bank as an alternative to the World Bank and the International Monetary Fund. In addition, they created a liquidity mechanism called the Contingent Reserve Arrangement to offer support members struggling with payments. The BRICS bank is now open to new members; with Egypt, the United Arab Emirates, Uruguay and Bangladesh taking up shares in 2021.

Within BRICS itself, the countries are working on establishing a new reserve currency to better serve their economic interests. The new currency would be based on a basket of the currencies of the five-nation bloc. In the meantime, on March 28, Brazil and China, announced an agreement to conduct all future trade transactions using their own currencies, perhaps signalling a dynamic change even from within this bloc.

Furthermore, an official meeting of all ASEAN Finance Ministers and Central Bank Governors kicked off in Indonesia. At the top of the agenda are discussions to reduce dependence on the US Dollar, Euro, Yen and British Pound from financial transactions and move to settlements in local currencies. The meeting discussed efforts to reduce dependence on major currencies through the Local Currency Transaction (LCT) scheme. This is an extension of the previous Local Currency Settlement (LCS) scheme that has already begun to be implemented between ASEAN members.

This means that an ASEAN’s cross-border digital payment system would be expanded further allowing ASEAN states to use local currencies for trade. An agreement on such cooperation was reached between Indonesia, Malaysia, Singapore, the Philippines, and Thailand in November 2022. Indonesia’s central bank already has ambitions to introduce its own domestic payment system in the near future.

We view these movements in the international monetary system – itself an extension of more general geopolitical tensions – should be welcome, as a means to rebuild the world’s financial framework on more stable pillar. Indeed, the situation following the end of the gold/dollar relationship in 1971 is characterized by high inflationary tendencies, further fuelling instability and deteriorating purchasing power.

The appearance of EURO was met with a warm welcome since it forced the dollar to face a competitor characterized by stronger monetary discipline. The emergence of something new in the East, if properly conceived, could strengthen the path toward monetary stability. However, if global currency competition moves in the right direction, the path will remain incomplete without an actual competition between currencies within countries. A competition that enables individuals to choose the currency to be used for their daily transactions, favouring the emergence of a virtuous competition among currencies toward stability.

In fact, there are good reasons to be skeptical about the possibility for a centrally controlled currency to undergo such a process of better control. «Without the conviction of the public at large that certain immediately painful measures are occasionally necessary to preserve reasonable stability, we cannot hope that any authority which has the power to determine the quantity of money will long resist the pressure for, or the seduction of, cheap money. (F.A. Hayek, Choice in Currency. A Way to Stop Inflation, 1976).

One of the main issues with regards to a stable money is precisely government monopoly over its issuance. As such, why not allow people to choose freely what money they want to use? Hayek (1976) suggested the countries from the Atlantic Community «to bind themselves mutually not to place any restrictions on the free use within their territories of one another’s – or any other – currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books.

The reason behind such a proposal is that – in a free currency system – people would refuse to use the national currency if it depreciates. Therefore, competition would serve as a push in the direction of value-stable currencies. «The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product. (Hayek, 1976).

Our point is thus that the new and vibrant developments in the international monetary scene can be a source of benefit, rather than spawn geopolitical tension, only if accompanied by a true opening of national economies to competition among available currencies. In this way, a novel ASEAN or BRICS currency could become a strong alternative not as the result of a political will of power but simply as a consequence of market competition.

Should the new currency develop without the opening of national economies to currency competition, then such currency will be a mere subject of the hegemonic prowess of its backers; its strengths will be at the mercy of the geopolitical bloc from which it was borne, rendering it unstable and more importantly, no different than the currencies it purportedly wants to replace. As the proverb says, “A chain is only as strong as its weakest link”. Sans competition, a BRICS or ASEAN currency will only be as strong as the political makeup pumping oxygen into it. On the other hand, if an emerging currency is backed by sound monetary policies impenetrable to geopolitical and monetary whims, it can win the hearts, minds and wallets of confident consumers.

By Carmelo Ferlito – CEO, Center for Market Education and Alfian Banjaransari – Country Manager, Center for Market Education Indonesia