World Bank, G20, IMF: Rules for digital currencies, CBDC and stable coins
Central Banks and Cryptocurrency
A cryptocurrency for each Central Bank?
Central bank digital currencies: basic principles and essential features
Controlling risks to monetary and financial stability
According to a report called “Regulation, Supervision and Monitoring of the Global Stablecoin Agreements” which was published on October 13th, 2020; international financial authorities including the International Monetary Fund (IMF), the World Bank, the Bank for International Settlements (BIS) and the Group of Twenty (G20) are working together to establish formal standards for the regulation and issuance of sovereign digital currencies (CBDCs).
Central Banks and Cryptocurrency
Since their appearance in 2008, several new digital currencies have emerged and have even become a threat to the current traditional banking system that operates under the jurisdiction and the control of a country’s regulatory authority.
Cryptocurrencies such as Bitcoin and Ether have an increase in popularity because of the decentralization they bring as opposed to the more traditional currencies that are regulated.
In the face of the volatility of cryptos, the Stablecoins were also created, their purpose is to solve the transaction speed of cryptocurrency and the stability of a fiduciary currency for the benefit of the general public and the financial markets.
Thus, in 2019, Facebook unveiled its Libra project, which aimed to foster the development of a simple global currency and financial infrastructure, serving billions of people.
In response to the Libra project and stable coins, the Central Banks were opposed to the project. For Mr. Bruno Lemaire, the French Minister of Finance: “It was out of the question for the Libra to become a sovereign currency”.
Following the advent of the Libra project, many governments have addressed the issues of digital currencies and in particular the CBDCs (Central Bank Digital Currency).
The CBDC, which represents the digital form of a fiduciary currency of a particular nation, and is issued and regulated by the competent monetary authority of the country was created.
A cryptocurrency for each Central Bank?
At the beginning of 2020, no less than six major central banks embarked on the adventure and decided to take significant steps to develop and encourage the use of CBDCs. Among these central banks are the following:
- The Chinese Central Bank: the Digital Yuan
- The Bank of Japan: the Digital Yen
- US Federal Reserve: the Digital Dollar
We can say that China is ahead of the game! Indeed, the Chinese central bank has just launched its very first airdrop for its own digital currency.
According to an article from the South China Morning Post, the Chinese city of Shenzhen has distributed a total of 10 million yuan ($1.49 million) in digital currency from the country’s central bank (CBDC) to 50,000 residents in an effort to boost its use.
The airdrop is part of the digital yuan pilot program being conducted in several major cities in China, making it the first public test of digital currency worldwide.
For Europe, the e-Euro is about to be created, the president of the European Central Bank, Christine Lagarde, declared on Monday, October 12th, that the European Central Bank is considering “very seriously” the creation of a digital euro.
Without forgetting the case of Japan, which recently stated that it would begin testing a digital central bank currency (CBDC) in early 2021.
It turns out that the Japanese Central Bank will even speed up preparations in response to initiatives led by China, which is already ahead of other countries in this race.
For Japan, the test will take place in three different stages, with the final stage of the test involving private companies and consumers to examine the feasibility and security of digital currency as a payment method on a par with cash.
Central bank digital currencies: basic principles and essential features
“Central Bank Digital Currencies: Basic Principles and Essential Features” is a report published on Friday, October 9th, 2020 that sets out the first principles on how digital currencies can help the implementation of monetary policies.
The report was prepared by the central banks of Canada, the United Kingdom, Japan, Sweden and Switzerland, as well as the US Federal Reserve, the European Central Bank and the Bank for International Settlements (BIS).
It sets out the basic principles of central bank digital currencies (CBDCs) and how they should be designed. Thus a CBDC should :
- Operate alongside cash and other current payment types “in a flexible and innovative payment system”.
- Support “broader policy objectives” and “do no harm” to monetary and financial stability.
- Promote innovation and efficiency.
It was agreed that in order to move to issuing a CBDC, a nation must meet these three fundamental criteria. The report states:
“A CBDC that firmly meets these criteria and offers the characteristics defined by this group could be an important instrument for central banks to achieve their public policy objectives”.
As a result of this report, a roadmap for G20 members on stable coins has thus emerged.
Stablecoin: A promotion for financial inclusion
According to the report Regulation, Supervision and Control of Global Stablecoin Agreements, “stablecoins” are not just crypto-currencies, they offer the possibility of :
- Improve the efficiency of financial service delivery
- Generate risks to financial stability.
- Resolve the high volatility of “traditional” cryptomoney.
- Make payments more efficient and promote financial inclusion.
However, often linked to physical currencies such as the US dollar, a widely adopted stable wedge could become systemically important in one or more jurisdictions, including as a means of payment.
Hence, the creation of arrangements that allow for compliance with applicable regulatory standards and consideration of financial stability risks.
The G20 then works 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 (CBDCs) in banking systems.
The report states that the aforementioned international organizations will have the technical capacity to facilitate CBDC transactions by the end of 2025.
Controlling risks to monetary and financial stability
The regulatory frameworks for the stable coins and the research and selection of CBDC designs, technologies and experiences will be completed by the end of 2022.
The G20 Financial Stability Board (FSB) stated :
“Countries will explore the development of new multilateral platforms, global agreements on Stable Coins and digital central bank currencies to address the challenges facing cross-border payments without compromising minimum supervisory and regulatory standards to control risks to monetary and financial stability”.
According to “Regulation, Oversight and Monitoring of Global Stablecoin Agreements”, the additional measures are a key element of the roadmap for improving international payments commissioned by the G20 and are detailed as follows :
- Completion of international standardization work by December 2021.
- Establishment or, if necessary, adjustment of cooperation agreements between authorities by December 2021 (and as required by market developments).
- Domestic regulatory, supervisory and control frameworks are adjusted, where necessary, in accordance with FSB recommendations and international standards and guidelines by July 2022 (and as required by market developments).
- Review of implementation and assessment of the need to refine or adapt international standards by July 2023.
The world is becoming increasingly digitalized; Central banks have begun to see the opportunities and risks associated with the creation of digital currencies in order to provide guidelines for G20 members.
Written by Laetisia Harson, Project Manager at Magna Numeris
