Money talks

China should make its voice heard to ensure governance of digital currencies takes needs of Global South into account

In recent years, the accelerated development of digital currencies has promoted efforts to strengthen global governance of them. As a digital currency is intrinsically linked with cross-border applications, it requires coordination among different organizations, agencies and jurisdictions to synergize global responses to the risks arising from a digital currency. Against the background of rapid growth of digital currencies, the building of a comprehensive architecture for global governance is urgently needed.

There are several aspects to global digital currency governance that need to be addressed.

First, the identification and monitoring of the risks created by crypto-assets. The G20 started assessing the risks of crypto-assets in 2018. And in a report released that year, the Financial Stability Board pointed out the impacts crypto-assets can have on financial stability. The Basel Committee on Banking Supervision launched a consultation on the prudential treatment of banks' crypto-asset exposures in 2021, and drafted detailed rules on crypto-assets in 2022.

Second, the establishment of an international supervision framework for global stablecoins, a digital currency that is linked to an underlying asset such as a national currency or a precious metal such as gold. Mandated by the G20, the FSB started in 2019 to examine the regulatory issues raised by stablecoins, and submitted 10 high-level recommendations for the supervision of global stablecoin arrangements in 2020. The International Monetary Fund, the G7 and the Committee on Payments and Market Infrastructures jointly released a report on global stablecoins in 2019. And the CPMI and the Board of the International Organization of Securities Commissions published a guidebook on stablecoin arrangements confirming that the Principles for Financial Market Infrastructures apply to systematically important stablecoin arrangements that transfer stablecoins in 2022.

Third, international cooperation on the establishment of standards on central bank digital currencies (CBDCs). The governance of CBDCs is mainly undertaken by the Bank for International Settlements. In January 2020, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank, the Swiss National Bank and the BIS declared to form a working group, which the United States Federal Reserve joint later, to share CBDC experiences and assess use cases. In October that year, the working group jointly published a first-phase report, outlining the foundational principles and core features of CBDCs, and said they would collaborate on exploring the interoperability of domestic CBDCs in cross-border applications.

Fourth, charting a road map for cross-border payments. In 2020, the G20 Road Map for Enhancing Cross-border Payments was proposed at the G20 summit. According to the timetable drawn up by the FSB under the initiative, work related to global stablecoins and CBDCs will be finished by July 2023 and December 2022, respectively.

The IMF has carried out studies on the macro-financial implications of global stablecoins and the cross-border usage of CBDCs. In the past two years, the BIS Innovation Hub and central banks of major countries have conducted a series of cooperation projects on cross-border payments of CBDCs, such as Project mBridge and Project Dunbar.

Today, the rapid innovation of digital technologies, intense competition among major countries, and the emergence of new regulated entities have brought challenges to the governance of digital currencies.

First, the evolution of global regulations on digital currencies lags behind the innovation of digital technologies. Digital currencies have wide-ranging implications for the economy, the governance of which is complicated, thus hampering the evolution of global governance. And global governance institutions find it hard to foresee the huge potential of the innovation of digital currencies, which holds back the formulation of global rules on digital currencies.

Second, major countries are divided into different camps in terms of global digital currency governance. As for the governance of private digital currencies, the main challenge is how to manage the related risks, and countries with varied capacities in risks management and response hold different attitudes toward digital currencies. Western nations mostly allow the development of private digital currencies and roll out rules to regulate the sector, whereas the majority of developing countries ban digital currencies for fear of financial risks. The main task in the governance of CBDCs is setting standards, in which major countries have been engaged in a fierce competition by forming different groups. After China rolled out its fiat digital currency, the e-CNY, Western nations have ratcheted up their cooperation in setting standards for CBDCs.

Third, some hurdles remain in the implementation of global digital currency governance at the national level. With the emerging of new types of service providers, and the expansion of the boundaries for digital currency operation, the new rules of digital currency governance must incorporate new entities of monitoring and shift to activity-based supervision, which add to the difficulties for countries with poor supervision capacity to implement related rules.

There are several ways in which China can take part in the global governance of digital currencies to start with.

First, it can accelerate the building of a domestic digital currency monitoring system. Facing the fast development of digital currency technology, China needs to evaluate the development trend of digital currencies based on which it can formulate its own digital currency development strategy, which requires enhanced cooperation between the public and private sectors. Then, relevant departments should establish the country's digital currency rules, and identify the gaps and weaknesses in the system as quickly as possible to pave the way for the rollout of new regulations in the long run.

Second, the country should strengthen coordination with Western nations in digital currency governance. On the one hand, China should draw experience from them to improve its oversight capacity. On the other hand, it should enhance communication and cooperation with other countries to dispel misunderstandings and build trust, so as to prevent it being excluded from the formulation of international standards for CBDCs.

Last but not least, China should assume the role of a major country in global digital currency governance by assisting other developing nations to solve their problems, and raising the voice of the Global South in the international arena.

China should listen to other developing countries to learn about their difficulties and demands, and represent the interests of the developing world and seek solutions to their problems in global institutions. China's attitude toward digital currencies is in line with the rest of the Global South. Standing in solidarity with other developing nations could help China gain an advantageous position in global digital currency governance.

Song Shuang is an assistant research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Xiong Aizong is a senior research fellow of the same institute. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn