Central bank digital currencies (CBDCs) “could have a substantial role to play” in maintaining a resilient, stable, and transparent financial system, but only if they’re done right. The Group of Seven (G7) finance ministers and central bank governors meeting in Niigata, Japan, this week issued a statement that included a “financial digitization” segment which had the hope that a first set of deliverables could be published in time for the 2023 World Bank and International Monetary Fund (IMF) Annual Meetings.
The statement reiterated member nations’ views that technology should play a role in pursuing new efficiencies but also be monitored constantly for new risks and threats to the financial system’s integrity.
Any CBDC “should be grounded in, amongst others, transparency, the rule of law, sound economic governance, cybersecurity, and data protection,” it said. This echoed the Public Policy Principles for Retail CBDCs document of October 2021, and the IMF is set to produce its own CBDC handbook based on inputs from various stakeholders and experts.
Coincidentally (or perhaps not), these issues are also central to developing data-heavy applications on a blockchain with unbounded scaling capacity, such as Bitcoin SV (BSV). Though the G7 finance ministers’ statement appears to contain the same broad and in-principle statements as so many others before it, many see CBDCs as an inevitability, and their introduction could have major implications for national economies and monetary policy, as well as individual freedoms and privacy concerns, which also need to be addressed at some point.
Monitoring digital assets, DeFi, and peer-to-peer transactions
The statement also called for heightened monitoring and oversight of the “integrity risks posed by crypto-asset activities and markets.” This is also something that has occupied the minds of finance ministers and central banks for over a decade now, though it has risen to new prominence in recent years with the rise of stablecoins.
A more unified approach among nations would prevent “regulatory arbitrage,” it added. The online nature of digital assets has allowed some international businesses to operate simultaneously both locally and without a clear location, shuffling funds between HQ and branch offices with ease with little external oversight. There were also references to digital assets as enablers of criminal activity, including ransomware, terrorism financing, “proliferation financing,” and theft.
While “crypto-asset” trading presents a set of price volatility warnings and investment risks everyone should be familiar with by now, stablecoins seem to concern policymakers differently. These assets, while not volatile in market value, provide the opportunity for users to transfer fiat-denominated amounts outside any official banking/transfer networks, as well as introducing new risks that stablecoin projects could effectively “print money” the way central banks often do, without any of the nominal checks and balances those institutions face.
The G7 statement supported initiatives from the Financial Action Task Force (FATF) to implement standards on the “travel rule” for digital assets and more examination of the methods used by decentralized finance (DeFi) networks and peer-to-peer transactions.
How important is this really?
All said, CBDCs and new monitoring concerns appeared rather low on the G7 ministers’ priority list at the moment, coming in on page 10 of the 14-page statement. The first half of the document contains pages of statements supporting Ukraine in its war against Russia, concerns about the international economy’s resilience and vulnerability to inflation, the environment, and other development goals.
That’s not to say the G7 only pays lip service to digital assets and its plans to oversee their development and use. Regulation plans are always chugging away in the background and will most definitely be implemented once they’re ready. If central banks see real merit in directly issuing digital currencies to the masses, then CBDCs will also be inevitable. The general public has a role to play here in learning to understand these technologies, leading to more effective lobbying efforts while the G7 and international regulatory bodies are still in the process of investigating.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Deploying CBDCs on the original Bitcoin
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