G7 Economies Start to Coordinate Plans for Banking System Digital Currencies

Leading global economies including the UK and EU are moving closer to the adoption of Central Bank Digital Currencies (CBDC) that would provide new opportunities for financial institutions to use a digital currency. The G7, which is currently chaired by the UK, has published a set of Public Policy Principles for Retail Central Bank Digital Currencies (CBDC) alongside a G7 Finance Ministers and Central Bank Governors’ Statement on the issue.

It establishes a number of principles for the adoption of CBDCs around operational resilience, data security, cybersecurity strategies, operating frameworks and the need for national and international standards. 

Central bank-backed digital currencies are seen to have numerous benefits, including reduced dependency on cash, higher seigniorage (the value of money versus the cost of producing it) due to lower transaction costs, reduced settlement risk, and increased reliability as a result of the underlying use of distributed ledger technology (DLT).

A CBDC can interoperate with existing and future regulated payment solutions on both a domestic and cross-border basis, including other digital currencies. Financial institutions would form part of the broader CBDC “ecosystem” by using the currencies for real-time payments so are seen as critical participants. 

In the UK, the Bank of England and HM Treasury created a Central Bank Digital Currency Taskforce in April this year to explore a potential UK CBDC. In doing so, it announced a CBDC Engagement Forum to engage stakeholders and gather input on the potential use, the roles of public and private sectors, financial and digital inclusion considerations, and data and privacy implications. Members are being drawn from financial institutions and other groups. 

In the EU, the European Central Bank launched an investigation project in July for a digital euro project that would last 24 months. It recently conducted experimental work involving the ECB and the euro area national central banks lasting nine months, which involved participants from academia and the private sector. The experiments involved a series of tests around a digital euro ledger, privacy and anti-money laundering, limits on using a digital euro in circulation, end-user access while not connected to the internet and facilitating inclusiveness.