The 13 principles for central bank digital currencies (CBDCs) released this week by G-7 finance officials show that, even as none of those countries have issued their own digital currencies, caution seems to reign.
The G7 exists as an inter-governmental group comprised of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
And as the report Public Policy Principles for Central Bank Digital Currencies shows, there can be a range of benefits to be realized, but only if the legal and financial stability ramifications are carefully examined.
“Innovation in digital money and payments has the potential to bring significant benefits but also raises considerable public policy and regulatory issues,” the G-7 said in a statement.
Delving into some of the principles (and we stress, not all of them, at least in this article), in definition of what CBDCs actually are, the G-7 strongly asserted in the report that “CBDCs are not ‘cryptoassets.’ Cryptoassets are not issued by a central bank, can be highly volatile, and are not currently widely used for payments.”
Use cases and initial benefits might be found in cross-border payments, done through central banks and “other organizations working openly and collaboratively to consider the international dimensions of CBDC design.” Cross-border payments can be improved, said the report, as those transactions face the challenges of higher costs, low speed and limited access.
“Through cooperation to consider the potential for cross-border and cross-currency interoperability, central banks could develop complementary CBDCs that might help ease frictions in international payments,” the G-7 noted in the report.
In addition, according to the report, CBDCs differ from stablecoins, as the latter exist as a “liability of private entities that seek to maintain stability in their price.” By way of contrast, the CBDCs can be considered in two parts: as an instrument issued by the central bank that can be used as a means of payments; and as part of “wider infrastructure [that] could involve both public and private participants (such as banks, digital wallet providers or other payment entities).”
CBDCs must be designed so that financial stability is ensured. Central banks may need to explore safeguards, said the report, “that could be built into any CBDC to address financial stability risks, although such measures may need careful consideration before they were used.”
Risks to Be Addressed
There are risks that need to be addressed. All entities in a CBDC ecosystem — both public sector and any private sector — should have “operational resilience, data security and cybersecurity strategies,” as well as operating frameworks consistent with national and international standards. The report pointed to Fundamental Elements of Cybersecurity for the Financial Sector, published in 2016.
Users of any CBDC “should have a high degree of transparency” regarding the use of their personal data, said the G-7 in the report. With a nod toward competitive structure, the paper went on to note “measures may be needed to ensure that users can easily switch between different types of money such as between CBDCs, bank deposits and cash, and also between payments interfaces, such as wallets, within any CBDC ecosystem.”
Ultimately, according to the statement, “Any CBDC must support, and ‘do no harm’ to, the ability of central banks to fulfil their mandates for monetary and financial stability.”