Will the gold-backed UNIT Challenge U.S. Dollar Dominance?
Later this month, Russia will host the sixteenth BRICS Summit, bringing together its member countries for Head of State level discussions on trade, monetary policy, security, and other matters. This capstone summit follows a months-long series of ministerial and subject matter meetings amongst the BRICS alliance. Members in attendance (alongside host nation Russia) include Brazil, China, Egypt, India, Iran, South Africa, and the United Arab Emirates. Additionally, prospective member applicants from 34 countries, including regionally important, non-aligned nations like Nigeria and Turkey, are expected to participate on the sidelines.
One of the main topics to be discussed at the BRICS Summit is the alliance’s monetary alternatives to the U.S. dollar-dominated global system for cross-border trade and payments. Wearied of the weaponization of the dollar through U.S. led economic and financial sanctions, the BRICS are contemplating introducing a new, alternative global currency system, commonly referred to as the UNIT.
The BRICS countries are already trading with each other in their respective domestic currencies rather than using the U.S. dollar. Specifically, since 2022, the BRICS are using mBridge — a multi-central bank digital currency (CBDC) platform developed by central banks in China, Hong Kong, Thailand, and the United Arab Emirates, under the cover of the Bank for International Settlements (BIS) Innovation Lab — as an alternative to the U.S. controlled SWIFT network to conduct cross-border payments and settlements. (Notably, Russia was kicked off of SWIFT in 2022, as Iran had been years before.) The inclusion of the UAE in mBridge is interesting, primarily because Dubai hosts one of the largest physical gold trading exchanges in the world, a fact which will become relevant below.
The mBridge network uses member countries’ currencies for cross-border trades, but ultimately, Indians wants to hold Yuan no more than the Chinese want to hold Rupees. The UNIT takes the mBridge project to the next level, by introducing a common store of value, medium of exchange, and unit of account (i.e., money) not dependent on any one country’s currency.
Assuming agreement at the BRICS Summit, the UNIT may be formally launched as early as summer 2025. According to the UNIT whitepaper, the digital token is designed to be “apolitical currency” and “a solution to … lack of trust … stemming from the politicization of the use of a single global currency.” In other words, the U.S. dollar. But introduction of the UNIT has concerned some observers, who see the alternative currency as little more than a tool of control and surveillance by the Chinese Communist Party and governments writ large.
The developers’ white paper describes the UNIT as fully-collateralized, backed 40 percent by gold and 60 percent by currencies, presumably such as the Chinese Yuan (RMB), the Indian Rupee, or the Russian Ruble, all participating countries in BRICS. The intrinsic value of the UNIT token would be linked to the underlying collateral. No one currency would ever represent more than 30 percent of the collateral basket, reducing but not eliminating concerns of Chinese dominance in the network. The UNIT run on a blockchain, i.e., a distributed digital ledger, where the individual nodes each redundantly record transactions, thereby ensuring the security and integrity of the network. Nonetheless, participation in the UNIT network is not permissionless. A centralized authority can allow participation, or equally well, cut off access. The UNIT is therefore not a cryptocurrency like Bitcoin or Ethereum, both of which represent private, permissionless, and decentralized networks. Since there is no plan to enable reverse convertibility (you can’t walk into a bank and redeem your UNIT token for gold and currencies), the UNIT token is not a stablecoin like USDC. Nor is the UNIT intended to replace local currencies or become legal tender in any country. Rather, its stated intent is to make global trade and capital flows more resilient and less sanctionable.
The introduction of the UNIT represents a new phase in the long, if slowly evolving, decline of the U.S. dollar as the global reserve currency.
Earlier this summer, the International Monetary Fund (IMF) published an update entitled “Dollar Dominance in the International Reserve System.” The IMF was founded as part of the U.S. sponsored Bretton Woods Conference (1944), which accord firmly established the U.S. dollar as the world’s reserve currency. The IMF was established for the purpose of “overseeing the international monetary system to ensure exchange rate stability” and “encouraging members to eliminate exchange restrictions that hinder trade.” In other words, the IMF exists in part to defend the U.S. dollar. Closely aligned over the decades with U.S. monetary and financial policies, the IMF is now subtly signaling that the dominance of the U.S. dollar is slowly but surely being challenged.
While noting that the U.S. dollar remains “the preeminent reserve currency,” the IMF reports that the U.S. dollar’s share of global foreign reserves has fallen from over 70 percent to approximately 55 percent during the past twenty-five years. The IMF observes that this shift out of dollar reserves has been masked by the rise in the value of the U.S. dollar against other foreign currencies. According to an index provided by the Federal Reserve, the U.S. dollar has appreciated by over 22 percent against other major currencies since 2006.
Interestingly, the U.S. dollar is not being crowded out in foreign reserves of other major global currencies such as the Euro, the British Pound, or the Japanese Yen. Instead, it is being replaced by non-traditional currencies such as the Canadian and Australian dollars, and the Chinese Yuan (RMB). Collectively, these non-traditional currencies now represent over ten percent of foreign exchange reserves globally, up from three percent a decade ago. Fears that China’s RMB is poised to replace the U.S. dollar as the global reserve currency seem unfounded, or at least premature. The RMB accounts for a mere three percent of global FX reserves. Trade tells a similar story. While the RMB’s share of global cross-border transactions has grown from less than three percent to over seven percent, the U.S. dollar, despite a modest decline, continues to represent the vast majority (84 percent) of cross-border trade transactions.
One of the more interesting findings of the IMF’s update is that central bank accumulation of gold reserves, in decline for four decades since the 1960s, is now strongly rebounding towards post-World War II highs. The IMF finds that financial and economic sanctions, such as those imposed on Russia by the U.S. and its allies, have “induced central banks to shift their reserve portfolios” away from confiscatable foreign currencies into hard assets such as gold. Central banks outside of the U.S. dollar dominated system, including those in China, Russia, India, and Turkey, have all recently been accumulating gold reserves.
The potential introduction of the UNIT, along with continued use of mBridge, confirm that the BRICS nations are moving with all possible haste out of the U.S. financial and monetary orbit. This comes at a time when U.S. government borrowing is at an all-time high (some $35 trillion, and growing exponentially), and the United States’ net international investment position is at an all-time low (negative $22.5 trillion). While for the moment the U.S. dollar’s continued dominance as the global reserve currency persists, its days appear numbered.