digital currency

International financial authorities and 20 of the world’s largest economies are establishing official standards for regulating and issuing sovereign digital currencies.

The Group of Twenty (G20), an organization of finance ministers and central bank governors representing the European Union and 19 countries across every continent, said in a report today that it is working with the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements (BIS) to formalize the use of central bank digital currencies (CBDC) in banking systems.

According to the report, by the end of 2022, the G20 members, the IMF, the World Bank and the BIS will have completed regulatory stablecoin frameworks and research and selection of CBDC designs, technologies and experiments.

Stablecoins are digital currencies that are often linked to physical currencies like the U.S. dollar. The IMF and the World Bank will have the technical capabilities to facilitate CBDC transactions between the countries by the end of 2025, the report said.

The countries will “examine the scope for new multilateral platforms, global stablecoin arrangements and central bank digital currencies to address the challenges that cross-border payments face without compromising on minimum supervisory and regulatory standards to control risks to monetary and financial stability,” said the G20 Financial Stability Board (FSB).

The FSB, a body formed after the 2008 financial crisis, is an international body that monitors and makes recommendations about the global financial system.

Multinational alliances

The G20 roadmap about stablecoins follows a joint report released by seven central banks last week through the BIS in sketching out a transnational front around nationalized digital currencies.

Last week’s report, authored by the U.S. Federal Reserve (Fed), the Bank of Canada, the European Central Bank (ECB), the Bank of England (BOE), the Swiss National Bank, Sweden’s Sveriges Riksbank and the Bank of Japan (BOJ), outlined properties the central banks would require from CBDCs in their countries.

The North American, European and Japanese banks said CBDCs would need to be interchangeable with existing money forms and resemble cash in its ease of use in a swathe of payment types at little or no cost.

CBDC systems should also connect to legacy financial technologies, settle high volumes of transactions instantaneously around the clock, be impervious to cyberattacks and outages, and comply with regulations and monitoring that apply to money already in circulation and that retain central bank power, the report said.

CBDCs could improve cross-border payments, counter Facebook Libra-like corporate digital currencies and transfer emergency fund payments to consumers during the coronavirus pandemic, the report said. But CBDCs would not be anonymous and self-running, the report said, diverging from the virtual currencies whose distributed ledger technology they would borrow.

Bitcoin transactions run on a blockchain network that masks and silos personal data from central actors, while central banks would maintain access and visibility into CBDC payments and identities.

The ECB and the BOJ also stated this month that they were looking into issuing CBDCs. An ECB report said that a decision to issue a digital euro would be announced in April next year. BOJ officials have said digital yen experiments are starting in the spring and called for a concerted effort to match China’s digital yuan, the most expansive central bank digital currency being trialed yet.

Regulation, supervision and oversight of “Global Stablecoin” arrangements

The FSB said:

This report sets out high-level recommendations for the regulation, supervision and oversight of “global stablecoin” (GSC) arrangements. GSC arrangements are expected to adhere to all applicable regulatory standards and to address risks to financial stability before commencing operation, and to adapt to new regulatory requirements as necessary.

So-called “stablecoins” are a specific category of crypto-assets, which have the potential to enhance the efficiency of the provision of financial services, but may also generate risks to financial stability, particularly if they are adopted at a significant scale. Stablecoins are an attempt to address the high volatility of “traditional” crypto-assets by tying the stablecoin’s value to one or more other assets, such as sovereign currencies. They have the potential to bring efficiencies to payments, and to promote financial inclusion. However, a widely adopted stablecoin with a potential reach and use across multiple jurisdictions (a so-called “global stablecoin” or GSC) could become systemically important in and across one or many jurisdictions, including as a means of making payments.

The emergence of GSCs may challenge the comprehensiveness and effectiveness of existing regulatory and supervisory oversight. The FSB has agreed on 10 high-level recommendations that promote coordinated and effective regulation, supervision and oversight of GSC arrangements to address the financial stability risks posed by GSCs, both at the domestic and international level. They support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches.

The recommendations call for regulation, supervision and oversight that is proportionate to the risks. Authorities agree on the need to apply supervisory and oversight capabilities and practices under the “same business, same risk, same rules” principle.

The performance of some functions of a GSC arrangement may have important impacts across borders. The recommendations also stress the value of flexible, efficient, inclusive, and multi-sectoral cross-border cooperation, coordination, and information sharing arrangements among authorities.

The FSB has agreed to the following further actions as a key building block of the roadmap to enhance cross-border payments commissioned by the G20:

  • Completion of international standard-setting work by December 2021.
  • Establishment or, as necessary, adjustment of cooperation arrangements among authorities by December 2021 (and as needed based on market evolution).
  • At a national level, establishment or, as necessary, adjustment of regulatory, supervisory and oversight frameworks consistent with the FSB recommendations and international standards and guidance by July 2022 (and as needed based on market evolution).
  • Review of implementation and assessment of the need to refine or adapt international standards by July 2023.

Mandate of the FSB

The FSB was established to:

  • Assess vulnerabilities affecting the global financial system as well as to identify and review, on a timely and ongoing basis within a macroprudential perspective, the regulatory, supervisory and related actions needed to address these vulnerabilities and their outcomes.
  • Promote coordination and information exchange among authorities responsible for financial stability.
  • Monitor and advise on market developments and their implications for regulatory policy.
  • Monitor and advise on best practice in meeting regulatory standards.
  • Undertake joint strategic reviews of the international standard-setting bodies and coordinate their respective policy development work to ensure this work is timely, coordinated, focused on priorities and addresses gaps.
  • Set guidelines for establishing and supporting supervisory colleges.
  • Support contingency planning for cross-border crisis management, particularly with regard to systemically important firms.
  • Collaborate with the IMF to conduct Early Warning Exercises.
  • Promote member jurisdictions’ implementation of agreed commitments, standards and policy recommendations, through monitoring of implementation, peer review and disclosure.

China is seeking first-mover advantage in building digital currency: says Japan official

China is seeking to win a first-mover advantage in its efforts to develop a digital version of its currency, Japan’s top financial diplomat said on Thursday.

The People’s Bank of China is one of many central banks across the world looking at creating their own digital currencies, spurred on by demand for electronic payment methods and potential competition from privately-issued tokens.

“The (digital) renminbi is moving at a relatively fast pace – presumably they are aiming to take the first-mover advantage,” said Kenji Okamura, vice-finance minister for international affairs.

“First-mover advantage is something we should be afraid of,” he told a digital seminar organized by the Official Monetary and Financial Institutions Forum and Center for Strategic and International Studies think tanks.

A central bank digital currency (CBDC) that gains wide traction across international trade and payments could ultimately erode the dollar’s status as the de facto currency of world trade and undermine U.S. influence, many analysts say.

“This advantage is setting the standards of scheme design because it’s the first mover (and) the technology platform which would facilitate further wide adoption of that digital currency,” Okamura said.

The PBOC is widely seen as the most advanced of major central banks on issuing a digital version of its currency. Some of China’s major state-run commercial banks have already started large-scale internal testing of a digital wallet, local media reported last month.

A commentary published by the PBOC last month said China needs to become the first nation to issue a digital currency in its push to internationalize the yuan and reduce its dependence on the global dollar payment system.

Major central banks stepped up their research into CBDCs in the wake of Facebook’s move last year to unveil its Libra digital token, something regulators feared could undermine their control over monetary policy and upset the financial system.

The European Central Bank last week said it will decide in mid-2021 whether to go ahead with issuing a digital euro.

Bank of Japan to begin experimenting with digital currency next year

The Bank of Japan said on Friday it would begin experimenting next year on how to operate its own digital currency, joining efforts by other central banks to catch up to rapid private-sector innovation.

The move came in tandem with an announcement by a group of seven major central banks, including the BOJ, on what they see as core features of a central bank digital currency (CBDC) such as resilience and a clear legal framework.

It also falls in line with new Japanese Prime Minister Yoshihide Suga’s focus on promoting digitalisation and administrative reform to boost the country’s competitiveness.

In a report laying out its approach on CBDC, the BOJ said it will conduct a first phase of experiments on basic functions core to CBDCs, such as issuance and distribution, early in the fiscal year beginning in April 2021.

The experiments will be part of the BOJ’s efforts to look more closely into how it can issue general-purpose CBDCs, intended to be used widely among the general public including companies and households.

Such CBDCs will complement, not replace, cash and focus on making payment and settlement systems more convenient, it said.

The BOJ also plans to have financial institutions and other private entities serve as intermediaries between the central bank and end users, rather than have companies and households hold deposits directly with the BOJ, the report said.

“While the BOJ currently has no plan to issue CBDC … it’s important to prepare thoroughly to respond to changes in circumstances,” the report said.

In the second phase of experiments, the BOJ will look at the potential design of CBDCs such as whether it should set a limit on the amount issued and pay a remuneration on deposits.

As the final step before issuance, the BOJ will launch a pilot programme involving private firms and households, it said.

The BOJ added it would be desirable for the CBDC to be used not only for domestic but cross-border payments.

Japan has been cautious about moving too quickly on digital currencies given the social disruptions it could cause in a country that has the world’s most cash-loving population.

But China’s steady progress toward issuing digital currency has prompted the government to reconsider, and pledge in this year’s policy platform to look more closely at the idea.

The BOJ’s recent efforts to catch up include creating a new team focusing on issuing digital currency and conducting joint research with other central banks.


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