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The G7, including countries such as the United States, United Kingdom and Germany, has published Public Policy Principles for Retail Central Bank Digital Currencies (CBDC), with issues such as financial stability and cybersecurity taking centre stage.
Finance ministers and central bank governors in the G7 have agreed upon standards for a potential CBDC, stating that these factors should all be considered when designing and potentially delivering a CBDC that would be fit for the future.
"The decision on whether to launch a CBDC is for each country to make, and no G7 jurisdiction has yet made this choice,” the report outlines.
The principles agreed focus on several key themes: monetary and financial stability; legal and governance frameworks; data privacy; operational resilience and cybersecurity; competition; spillovers; energy and environment; digital economy and innovation; financial inclusion; public sector payments; cross-border functionality; and international development.
“Strong international coordination and cooperation on these issues help to ensure that public and private sector innovation will deliver domestic and cross-border benefits while being safe for users and the wider financial system,” the cohort said in a statement accompanying the report.
The finance ministers have struck an optimistic tone when it comes to the threat of disintermediation, i.e., customers switch to holding CBDC funds as an alternative to bank deposits, which has been a concern for many bankers globally.
“Whilst recognising CBDCs would have implications for financial intermediation that would need careful design and implementation, the group’s recent analysis suggests the impacts on bank disintermediation and lending could be manageable for the banking sector,” the report says, noting that the financial sector has shown it can withstand structural changes in the past.
The introduction of CBDC may generate additional innovative opportunities for banks and other financial intermediaries, echoing the thoughts of both public sector and private sector actors, including Citi and officials at Germany’s Bundesbank.
“Nevertheless, central banks will have to carefully consider how they would manage these impacts, particularly through any transition phase for CBDC,” the report notes.
Cross-border alignment
The G7 has also committed to aligning governance and legal frameworks when it comes to the use of a CBDC. This could potentially help support improvements to cross-border payments, which have been raised as a priority by the G20.
“The international use of CBDC, including for cross-border payments, could bring important benefits,” the report notes.
However, if a CBDC design is not carefully calibrated, this could also pose unintended consequences, which in part explains the G7’s principles surrounding spillovers — the term used to describe when a CBDC gains widespread use beyond its native jurisdiction.
“When considering the level of access to CBDCs, some access by non-residents could be desirable, for example, for cross-border payments, trade and financial flows, as well as for retail use, such as for remittances and use by foreign visitors,” the report says.
However, there are concerns that significant use of any CBDC by residents of a foreign country could lead to currency substitution and loss of monetary sovereignty in both the issuing and foreign country.
This, in turn, could end up impeding the ability of authorities to achieve their own policy objectives, including monetary and financial stability, and the countering of illicit finance.
Although not a member of the G7, China’s issuance of a CBDC has led to speculation that it could end up replacing the dominance of currencies such as the dollar in South East Asia, where the US currency has gained a foothold in the financial services sector.
Managing the environmental impact
The current drive globally for more sustainable world and well-documented energy consumption requirements for some cryptocurrencies, such as Bitcoin, energy and the environment have also been established as a key principle by the group.
The G7 has agreed that energy usage of any CBDC infrastructure should be as efficient as possible to support the international community’s shared commitments to transition to a "net zero" economy.
“Energy usage should be factored into the design and implementation of any CBDC from the outset,” the G7 has said.
In addition, the central banks that publish climate-related disclosures, for example, those consistent with the Task Force on Climate-related Financial Disclosure (TCFD) framework, should consider disclosing the environmental impact of CBDC operations in their reporting.
Stablecoins
Stablecoins were also a topic of discussion for the G7, with the relevant ministers and supervisors committing to common standards for the regulation of stablecoins.
“We are committed to continued coordination and cooperation to ensure that innovation in private digital money and payments is responsible, safe and consistent with our shared policy objectives,” the statement read.
The cohort also reiterated that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to applicable standards.
This echoed similar sentiments made by the G20, who used an October 13 communique to declare that it was committed to no global stablecoin commencing operation until all relevant legal, regulatory and oversight requirements are adequately addressed through appropriate design and by adhering to applicable standards.
