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The United States Dollar (USD) has enjoyed structural hegemony over international trade, foreign exchange reserves and sovereign debt issuance for more than eight decades since the 1944 Bretton Woods Agreement. The USD makes up almost 58% of foreign exchange holdings in the central banks, and is the currency in almost 90% of the world's transactions. In this way, the United States has the ability to print the world's basic reserve asset at near zero marginal cost, continue to run persistent trade deficits without the collapse of the dollar, and import actual commodities for dollar denominated treasury liabilities.

But the geopolitical picture has changed drastically. In what is regarded as a 'systemic process' of 'De-Dollarization', where sovereign states have been reducing their dependence on the USD, is gaining pace with great speed after the 'Weaponization of Finance'. When the Russian central bank reserves worth more than 300 billion dollars was frozen, and the SWIFT messaging network was cut off for sovereign institutions in 2022, the 'Counterparty Risk in Sovereign Reserves'' was revealed for the first time. It showed that the stocks of the reserves in the financial jurisdictions of the West have a very high political risk. As a countermeasure, the new generation of emerging economies, spearheaded by the 'BRICS' coalition of Brazil, Russia, India, China, South Africa and the growing members, are implementing institutional 'Weaponization Safeguards' to create a financial architecture with multiple poles.

Why the Single BRICS Currency Proposal Was Sidelined.

There is often a lot of speculation in the public forum about a single, common 'BRICS physical currency' that will be able to compete with the USD. But a close look at the economic and legal issues reveals that member countries have explicitly opted against a supranational currency with a physical form. Contrary to the homogeneous and economically converged states that formed the European Monetary Union, the BRICS members have very different economic structures. China is largely a manufacturing powerhouse with a $17+ trillion annual output, Russia is primarily an energy exporter, India is a services and domestic consumption powerhouse and Brazil is a powerhouse in agriculture. A combination of these trade models under a single exchange rate and a uniform interest rate would create large macroeconomic shocks.

Moreover, the introduction of a common currency would mean the member countries would have to lose national monetary sovereignty, as they would need to establish a new central bank of the BRICS alliance. Some new emerging democracies, like India and Brazil, rely largely on their central banks to lower or raise domestic interest rates as needed, to control inflation, to regulate capital flows, and to moderate local recessions. This domestic independence should be abandoned. Moreover, there are strategic trust gaps and persistent border disputes such as between India and China, which renders political unity of monetary governance in the region a non-starter. The individual states do not want to be under the rule of one member of the group who imposes monetary rule. The countries are opposed to being ruled by a single country that has monetary supremacy.

BRICS is moving away from the concept of a single currency and is aiming for a decentralized approach, with cross-border settlements taking place in the local domestic currencies, such as AED, INR, RMB, etc., using the interconnected Central Bank Digital Currencies and sovereign messaging channels such as 'BRICS Pay'.

Lessons from the Eurozone: Monetary Union Without Fiscal Union.

The potential dangers of early currency unification are well noted in the case of the EU's monetary union. The Euro was launched on paper in 2002 and electronically in 1999 and has removed the friction caused by internal currencies and has become the second largest reserve currency in the world. Its legal and economic structure had one grave fault however, and that was "monetary union without fiscal union".

The fiscal policy, taxation and government spending were still divided between the member states of the eurozone, while monetary policy was placed under the control of the European Central Bank in Frankfurt. This disconnection led to the European union Debt Crisis in 2010. Peripheries like Greece, Portugal and Ireland had taken up a huge debt to the outside world and lost export competitiveness compared to the core industrial economies like Germany.

A debt-ridden country would devalue its national currency in a traditional situation to reduce the cost of exports, become competitive and seek recovery. Peripheral states were unable to revalue as well as to reduce domestic interest rates, both of which were dictated by the Euro. This led to their depression-level unemployment, massive capital flight and painful internal austerity imposed by foreign lenders. The Eurozone crisis showed that monetary union without fiscal transfers is fragile, so the leaders of the BRICS countries were persuaded not to go for the physical unification of money.

Legal Complexities Under Public International Law and Jurisdictional Conflicts.

The shift to local currency clearing networks poses interesting legal challenges under Public International Law, international monetary law and cross-border commercial law. One of the major challenges is the assertion of the U.S. jurisdiction over the territories. If a transaction crosses through an account in a US dollar bank that is a correspondent bank account, then by US legal doctrine, even if it only passes through a US dollar bank account for a split second, then US courts and regulators have subject-matter jurisdiction. This will allow the unilateral sanctions to be applied by the US Office of Foreign Assets Control (OFAC), assets to be frozen offshore and penalties to be imposed on foreign financial institutions outside the United States.

Converting to local rather than dollar currency for settlements means legal unrest over the issue of sovereign immunity and international treaty obligations. Under Article VIII of the International Monetary Fund (IMF) Articles of Agreement, member states are not allowed to put restrictions on existing international transactions without the IMF's consent. The creation of bilateral clearing systems with local currencies, with strict capital control or non-convertibility rules, poses a legal issue of discriminatory currency practice under IMF laws. Moreover, export surplus countries holding foreign currencies that are not convertible have legal issues with the repatriation of their currencies and the reinvestment of their offshore funds within their countries' banking laws.

Also, there are strong needs for legal systems and frameworks on cross border commercial contract enforcement. International maritime charters, energy sales and trading contracts have been traditionally governed by English Law or New York Law, with arbitration being held in London, New York or Singapore. Contracts settled in local currencies in jurisdictions with different contract laws and currency regulations and restrictions provide legal uncertainty in the event of a contract breach and/or currency devaluation. Obligations to set up standardized trade contracts, as well as defining governing law clauses and neutral international arbitration centres like Dubai International Financial Centre (DIFC) and Gujarat International Financial Tec-City (GIFT City), are crucial to ensure legal clarity from a public and private international law perspective.

Multidimensional Impacts and the Path Toward Financial Pluralism

The use of local currency settlements with decentralization affects several areas. "By conducting trade in local currencies, nations can eliminate steep conversion fees and insulate domestic buying power against the erratic fluctuations of the US dollar.". Central banks are developing low-cost local currency corridors for remittances to send money home to protect the international migrant workers sending remittances home.

From a geopolitical perspective, the trading of local currencies protects emerging economies from unilateral sanctions and any coercive financial pressure, which is what is needed for true multi-polarity. It could also however risk to split the world into separate economic blocks. Nations need a pragmatic foreign policy, one that is multiple aligned, and is characterized by a focus on commercial utility and not confrontation with the West, to avoid destabilizing fragmentation.

Cyber warfare dangers and data privacy issues arise from the technological aspect of using interlinked CBDCs and distributed ledger technology (DLT). Implementing encrypted payment rails and protecting sensitive financial information with strict national data-sovereignty safeguards protects financial information and supports fast and efficient cross-border trade settlement.

BRICS' transformation signifies a move towards a multipolar monetary system. Instead of trying to produce an imperfect solution to launch a single competitor currency, the bloc's decentralized structure secures the sovereign monetary independence, upholds international legal borders, and minimizes systemic exposure to the hegemony of a single currency. The world financial architecture will gradually shift to a more balanced, resilient and multi-currency model as local currency clearing mechanisms, CBDC networks, and neutral arbitration venues become more developed.

Author Priyanka Kumari is a 4th year Law student at National University of Study and Research in Law, Ranchi & Dheeraj Bhagat is a 2nd year Law student at National University of Study and Research in Law, Ranchi. Views are personal.

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