The Group of Seven (G7) countries, consisting of Canada, France, Germany, Italy, Japan, the U.K., and the U.S., and the European Union (EU) are discussing stronger cryptocurrency regulation and exploring ways to help developing countries in introducing central bank digital currencies (CBDCs) that comply with international standards. The discussions are part of the G7’s efforts to address challenges arising from fast-moving digital technology. Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, emphasized that while the rapid innovation of digital technology has benefits, it has also brought new challenges, including cyber-security, the spread of misinformation, social and political divides, and the risk of destabilizing financial markets.
As a priority for this year, the G7 will consider how best to help developing countries introduce CBDCs that comply with appropriate standards, including the G7 public policy principle for retail CBDC, says Kanda. CBDC development is at different stages across various countries. The U.S., for example, has not yet decided whether to launch a digital dollar. Federal Reserve Chairman, Jerome Powell, recently said that the Fed’s CBDC is in the early stages of experimentation.
The vice finance minister emphasized the need to address risks from the development of CBDC by ensuring factors such as appropriate transparency and sound governance. On the crypto front, Kanda noted that “we need more regulation, particularly after the FTX shock.” The collapse of the crypto exchange FTX last year was a serious wake-up call for policymakers to create regulation across borders, he added.
The G7’s discussions on CBDCs are consistent with global efforts to explore digital currencies’ potential benefits and risks, particularly in the wake of Facebook’s proposed cryptocurrency Libra. In September 2019, the G7 warned that global stablecoins such as Libra pose significant risks to the global financial system and called upon regulators to work together to ensure appropriate regulation based on objective assessment, taking into account public policy objectives, including monetary and financial stability, consumer and investor protection, data privacy, and cybersecurity.
Central bank digital currencies (CBDCs) are digital versions of sovereign currencies that can be used for payments and transactions. Unlike cryptocurrencies like Bitcoin, CBDCs are issued and backed by central banks, making them more secure and stable, and they can be used alongside physical cash.
Developing countries have shown great interest in CBDCs, with China leading the way in rolling out its digital yuan, a pilot version of which has been tested in several cities. The Bahamas also launched the first fully integrated CBDC, the Sand Dollar, in October 2020. CBDCs may help mitigate some of the risks associated with traditional banking and financial systems in developing countries, such as financial exclusion, high transaction costs, and slow payment processing times.
CBDCs may also improve the effectiveness of monetary policies by enabling central banks to implement policies directly, even in a cashless system. This could mean that central banks have more direct control over money supply and inflation than they do in traditional systems.
However, the success of CBDCs depends on various factors, such as appropriate standards, effective governance, data privacy, cybersecurity, and interoperability with other payment systems. Therefore, it is crucial that policymakers, regulators, and other stakeholders work together to create a supportive environment that enables innovation while addressing risks and ensuring that CBDCs comply with international standards. The G7’s discussions on stronger crypto regulation and CBDCs are a step toward achieving this goal.
