G7 Finance Ministers and Bankers Adopt Guidelines for Central Bank Digital Currencies

Any digital currency issued by a central bank must support financial and monetary stability, finance leaders from G7 member states have insisted. State-issued coins should also ensure privacy, transparency, and data protection, the officials stated. The forum adopted 13 public policy principles for retail digital currencies and stressed that “CBDCs are not ‘cryptoassets.’”

CBDCs Must ‘Do No Harm’ to Stability, G7 Finance Chiefs Say

Recognizing the potential benefits of innovation in digital money and payments, finance officials from the Group of Seven (G7) major economies addressed relevant public policy and regulatory issues at their latest meeting which also produced over a dozen guidelines for central bank digital currencies (CBDCs). In a released statement, the participants reaffirmed:

Any CBDC should be grounded in our long-standing public commitments to transparency, the rule of law and sound economic governance.

A sovereign digital currency designed to be used by households and businesses must “support and do no harm” to a central bank’s ability to maintain monetary and financial stability, the G7 finance leaders said after the meeting on Wednesday. “A CBDC would complement cash” and could serve as “an anchor for the payments system,” they added. It should also meet “rigorous standards” of privacy, transparency, and data protection and be resilient to various risks such as cyber threats, fraud, and illicit use.

The G7 finance ministers and central bankers acknowledge the role CBDCs could play in enhancing cross-border payments. At the same time, the high-ranking officials recognize their shared responsibility to minimize what they describe as “harmful spillovers to the international monetary and financial system.”

Discussing innovation in private digital money, the policymakers reiterate a commitment to ensure that developments there are safe and consistent with the group’s policy objectives. If not properly regulated, a stablecoin could pose significant risks to financial stability, they point out while also warning that volatile, unbacked cryptocurrencies could not be widely used as a means of payment.

G7 Issues 13 Public Policy Principles for Retail CBDCs

In a report published by the inter-governmental forum, the differences between digital currencies issued by central banks, on one hand, and cryptocurrencies and stablecoins, on the other, are further highlighted. “CBDCs are not ‘cryptoassets,’” the group’s financial leaders emphasize, noting that the latter are not issued by a central bank and that fiat-backed digital coins are a liability of private entities. The wider infrastructure of CBDCs, however, could involve participants from both the public and the private sector.

Pointing out that no monetary authority in G7 has yet made a decision to issue its own digital currency, the authors have organized their recommendations by formulating 13 public policy principles for retail CBDCs meant to facilitate policy deliberations. National governments and international organizations can refer to these guidelines which have been divided into two categories: “Foundational Issues and Opportunities.”

Monetary and financial stability is one of the foundational principles. By designing a CBDC that supports public policy objectives, central banks can use the digital currency as an instrument to enhance stability and manage the impacts on financial intermediaries, the report notes. Under legal and governance frameworks, G7 officials mark the need to observe the rule of law and maintain economic governance. Policymakers stress:

Appropriate national legal, regulatory, supervisory and oversight frameworks are essential to ensure trust, resilience, security and confidence in any CBDC.

Data privacy is another important principle that requires regulators to ensure accountability for the protection of users’ data and transparency in terms of how information is secured and used. This is considered essential for the trust and confidence in a CBDC. Operational resilience and cyber security is the fourth principle that calls for all entities involved in a CBDC ecosystem to adopt data security and cybersecurity strategies.

Competition is a key aspect and the G7 finance chiefs believe that “CBDCs should coexist with existing means of payment and should operate in an open, secure, resilient, transparent and competitive environment that promotes choice and diversity in payment options.” While state-issued digital currencies are expected to offer more accessible, faster and cheaper payments, the illicit finance principle puts an emphasis on the commitment to mitigate their use in facilitating crime.

Spillovers should be addressed to avoid risks of harming the international monetary and financial system, including the monetary sovereignty and financial stability of other countries. The energy usage of a CBDC is another major consideration. The energy and environment principle envisages the building of efficient digital currency infrastructures that support the international commitment to a ‘net zero’ economy.

According to the G7 report, CBDCs present a number of opportunities in areas such as payments to and from the public sector and cross-border functionality where the new digital fiat currencies can potentially reduce frictions. The Opportunities category of principles that the Group of Seven advises monetary authorities to consider also includes digital economy and innovation, international development, and financial inclusion.

The new G7 guidelines come after a meeting in June when the group’s finance leaders agreed to publish a set of common rules for central bank digital currencies. The U.S. Federal Reserve, the European Central Bank, and Bank of Russia are among dozens of monetary authorities currently working to develop and issue CBDCs. So far, the People’s Bank of China has the most advanced project, having already launched numerous trials with the digital yuan.

Do you expect monetary authorities to follow the public policy principles for CBDCs outlined by the G7 finance chiefs? Let us know in the comments section below.