De-Risking Trade and Reforming CRA towards Intra-BRICS De-dollarization via Smart Contracts

Emerging Markets Scholar / Master of International Business (MIB) 2019 
Fletcher School at Tufts University. Medford, M.A.
HSE Moscow- MIB Exchange 2018

BRICS countries have maintained a longstanding goal of “de-IMFing” and “de-dollarizing” their trade settlements and reserves in order to increase their sovereignty over transactions and avoid currency crisis, and proposed the creation of a Multilateral Clearing Union towards that goal. The Contingency Reserve Arrangement was the implementation of the Multilateral Clearing Union, but fell short of meeting the original purpose due to its IMF linkage requirements and limited scope, symptomatic of a lack of trust between BRICS member states. Furthermore, there existed several economic forces preventing the wider use of BRICS national currencies in trade. This paper seeks develops a proposal to overcome these forces via a near-term solution, using Smart Contracts to de-Risk trade in a manner that promotes national currency stability and reduces dependency on both dollars/euros and Western institutions (such as IMF and western commodities markets).

Implementation Considerations

The key considerations in designing and implementing a distributed multi-functional large-scale integrated solution such as above on blockchain are: 1) latency and throughput 2) interoperability, scalability, and versatility 3) data privacy and security, and finally, 5) costs of energy consumption and token fees.

To address these concerns, it is necessary to integrate the latest developments in protocols underway.

Ethereum 2.0, to be released in November 2020, will increase transaction throughput from a current bottlenecked 14/second to 100,000/second, as well as moving computations from an energy-intensive proof-of-work blockchain to a proof-of-stake one and have enhanced data security.22 Furthermore, it will be necessary to deploy scriptable smart contracts to both program variable fulfillment criterion and tie-in with external data. Chainlink has modular “middleware” for external data connectivity as well as a decentralized Oracle network which is necessary for trust validation amongst BRICS transacting parties. For data access control, BRICS-on dapps can be built on a permissioned version of an enterprise blockchain, and integrated using secure APIs for the intra-BRICS payment systems. Current western trade finance tracking systems such as MAERSK’s Tradelens, IBM’s WeTrade, and R3’s Marco Polo use enterprise blockchains Hyperledger Fabric and CORDA; BRICS may be interested in either adapting these existing platforms or developing its own, depending on its core requirements and integration requirements with the BRICS settlement interbank messaging systems.

There is however an inherent issue of token fees, which in Ethererum are known as gas fees. With the Ethereum native token Ether (ETH) constantly rising in price, and Ethereum 2 not being a viable solution to this23, an alternative implementation is possible by using Smart Contracts with a Centralized Ledger,without blockchain, tokenization or distributed ledgers. The world’s biggest commodities pricing firm, S&P Global Platts, has implemented such an exchange (TradeVision), sacrificing an additional level of security and verification in return for greatly lowered cost and efficiency.24 BRICS may be interested in tracking this model for feasibility.

In assessing implementation steps towards this all-in-one integrated solution for de-risking trade finance, BRICS working committees should perform a gap analysis of key requirements for an ideal comprehensive intra-BRICS trade finance solution, supplementing some of the key concerns this paper has outlined. The most important factor to keep in mind is interoperability between all of the BRICS trade, settlement, payment, and crypto solutions under development, individual Central and Commercial Banks, and the NDB CRA’s swap line facilities. Only then can a comprehensive IT architecture be performed, followed by large-Scale feasibility studies, project budgeting, and , and cost-benefit analysis before deciding whether such a comprehensive system can be commissioned. This paper is high-level effort to set the ball rolling in that direction, in the hope that Smart Contracts will be used to disintermediate and de-risk BRICS trade finance in the near future.

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