Thirteen public policy principles for the implementation of retail central bank digital currencies (CBDCs) – including principles on ‘payments to and from the public sector’ and international development – have been published by the Group of Seven (G7) nations.
The principles ‘should support and inform policy deliberations as we respond to a new wave of innovation in money and payments’ and ‘will be useful to jurisdictions and international organisations considering CBDC, in the G7 and beyond’, according to the foreword of the 27-page document.
None of the G7 – the UK, US, Canada, France, Germany, Italy and Japan – has yet to commit to launching a CBDC. China is seen as the CBDC front-runner among major nations. But a growing number of central banks have started experimenting with retail CBDCs (also known as ‘general purpose’ CBDCs – CBDCs that would be available to households and businesses).
The ‘Public Policy Principles for Retail CBDCs’ document states that CBDCs, if launched, ‘would have important public policy considerations, beyond the central bank’s remit alone, which any jurisdiction considering CBDC issuance must consider from the outset’.
It divides the principles into two categories – ‘foundational issues’ covering monetary and financial stability, legal and governance frameworks; data privacy; operational resilience and cybersecurity; competition; illicit finance; spillovers; and energy and environment. The second category, ‘opportunities’, focuses on supporting the digital economy and innovation; financial inclusion; payments to and from the public sector; cross-border functionality; and international development.
Public sector payments opportunity
The ‘payments to and from the public sector’ principle (principle 11) will catch the eye of those interested in the possibilities of CBDC who work in government departments (and other public authorities) that handle payments.
This (short) section of the document states that ‘any CBDC, where used to support payments between authorities and the public, should do so in a fast, inexpensive, transparent, inclusive and safe manner, both in normal times and in times of crisis.’
‘The introduction of a CBDC could potentially enhance the efficiency of payments between authorities and the public, through benefits such as real-time settlement, a more resilient payments ecosystem through provision of an additional payment infrastructure, (potentially) improved coverage of unbanked populations, improved identity verification and the possibility of efficiency-enhancing capabilities of CBDCs,’ the document states. It adds, however, that ‘achieving some of these benefits may require CBDCs to be adopted at scale within a jurisdiction’.
The 13th principle – the possibilities of CBDC for international development – is, like principle 11, an area that has had a relatively low profile to date in the CBDC context. But those working in this area will note that the risks and opportunities for development assistance are described as ‘important considerations’ as the G7 considers CBDC design and use-cases and that CBDCs’ use ‘should be aligned to the principles of aid effectiveness and effective development co-operation’.
Environmental impact reporting should be ‘considered’
The G7 document is the latest principles-based public authority-authored document on the hot topic of CBDCs to be released. ‘Central bank digital currencies: foundational principles and core features’ was published in October 2020 by the Bank for International Settlements (BIS) and the Bank of England (BoE) set out a quintet of ‘core principles’ that would form the backbone of its digital pound explorations four months ago.
With the UK holding the rotating presidency of the G7, the document’s foreword is co-authored by UK chancellor Rishi Sunak and BoE governor Andrew Bailey.
Further elements of particular interest or newness in the G7 report include reference to the recently published G7 ‘Roadmap for Co-operation on Data Free Flow with Trust’, which the document states ‘may be relevant’ in respect of data privacy (principle three).
In the ‘spillovers’ section (principle seven) the document states that ‘some access by non-residents [to a nation’s CBDC] 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’. But it warns that ‘in the extreme, 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’.
For reasons including the mounting scrutiny of the high levels of energy consumed by cryptocurrencies, the ‘energy and environment’ section (principle eight) is also interesting, stating 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’. Central banks that publish climate-related disclosures should ‘consider disclosure of the environmental impact of CBDC operations in their reporting’, the document adds.
*** The Digital Pound Foundation – an ‘independent forum to support the implementation of a well-designed digital pound and digital money ecosystem’ – launched in the UK on 14 October. Billon Group, CGI, Electroneum, Quant and Ripple are listed on its website as members, with two further companies – Accenture and Avalanche – referenced as associate members. Its chairman is Jeremy Wilson, a former vice-chairman of Barclays Corporate Banking. The initiative has similarities with the Digital Dollar Foundation, which is behind the ‘Digital Dollar Project’ in the US.
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‘BIS Innovation Hub head flags CBDCs’ fiscal potential’ – our news story (13 Oct 2021) after a speech given by Benoît Cœuré in which he outlined how a CBDC would be an “easier” way for governments to make, for example, Covid-19 relief payments than relying on traditional cheques
‘D€: unanswered questions (and quirks) amid Europe’s CBDC ‘nitty-gritty’” – our analysis (20 Sep 2021) of eurozone central banks’ digital currency explorations to date as the European Central Bank prepares to launch the investigation phase into a potential digital euro (D€)