Opinion: The Central Bank’s Digital Currency Regulation Urgently Needs to be Regulated

Source: Deng Yu from Ta Kung Pao/The author is a distinguished researcher of Shanghai Finance and Development Laboratory

With the rise of the digital economy and the emergence of decentralized financial technologies, the traditional dollar-dominated international monetary system is facing many challenges, and the negative spillover effects have become increasingly prominent. In this context, the central banks of major countries in the world have increased the research and development and testing of CBDC (central bank digital currency). The cross-border use of CBDC puts forward higher requirements for the financial supervision and governance of various countries, and issues such as the regulatory environment, consensus rules, security and stability need to be resolved urgently.

In the next few years, the global CBDC research and development progress will accelerate, and global central banks will coordinate around the legal norms and international rules of CBDC international coordination and supervision. It is expected that there will be more and more central banks, commercial banks, technology companies and other institutions. Extensively participate in diversified fields such as CBDC research and development, testing, scenario development, and technology updates. In addition to the pilot application of CBDC in domestic payments, international payments and cross-border payments will also have major breakthroughs.

Graph: By the end of 2022, more than 110 countries around the world have launched CBDC plans. profile picture

The current global CBDC development trend has two main characteristics:

**First, CBDC research and development will enter a new stage, and international competition may intensify. **Statistics show that by the end of 2022, more than 110 countries around the world have launched CBDC plans, of which 12 countries have launched CBDCs, and 17 countries are in the experimental stage. The author expects that the development and testing of digital dollars and digital euros and the formulation of regulatory rules will be further accelerated. However, in view of the competitive relationship between the US dollar and the euro, the digital currencies of the two may also compete with each other in the future. Europe may formulate CBDC regulatory legislation earlier.

**Secondly, the trial of CBDC cross-border payment application is accelerating, and the international regulatory system needs to be improved. **The author predicts that the transnational cooperation of CBDC will accelerate and the phenomenon of "campization" will appear. Judging from the current trend, the multilateral cooperation of CBDC in the Asia-Pacific region is closer, and the cross-border payment test effect is better. The development of global central bank CBDC adopts different technical standards. If there is a lack of extensive cooperation and discussion, the global CBDC ecosystem may face the risk of fragmentation. Strengthening cooperation on CBDC research and development can help facilitate international regulation.

Construct risk assessment mechanism

At present, global CBDC regulation mainly faces three major risk challenges:

**First, the traditional international monetary system will speed up the transformation, but the negative impact of the transformation should be reduced. **Represented by energy countries and commodity countries, take the lead in promoting "de-dollarization" in the energy field, increase non-US dollar currency settlements, and reduce the share of US dollar settlements. At the same time, represented by the European Union, Russia and Latin American countries, more and more countries have launched more independent financial information transmission systems. At present, international payment and clearing institutions and central bank departments have strengthened cooperative research and jointly coordinated and promoted the global design and research and development of CBDC. It is expected that this process will be accelerated and substantial progress will be made in the near future. At that time, the integration of the CBDC framework into the international monetary system will greatly change the global currency operation mode and financial ecology. Its influence will not only be in the fields of payment and settlement, but also have the possibility of further transmission to monetary policy and financial markets. Based on this, global central banks need to strengthen their assessment of the possible impact of CBDC on monetary policy and financial stability, and at the same time weigh strategies to reduce the negative impact of CBDC on the international monetary system.

**Secondly, global CBDC governance will face new challenges, and it is urgent to further strengthen the coordination of CBDC supervision. **Currently, the world’s major central banks, including the Federal Reserve, the European Central Bank, and the Bank of Japan, have not formulated detailed plans for the research and development of their own CBDCs. Even the European Union and the European Central Bank still hold cautious views on the launch of the digital euro. The main difficulty lies in The formulation of a series of regulatory rules such as CBDC application security and data privacy. If a national CBDC is created without taking into account the international dimension, different standards and a variety of different CBDC models may emerge, causing major problems for the operability of the international financial system. The author predicts that the CBDC international standard specification text may be born in the next few years, but there are still many obstacles in how to reach a consensus on CBDC technology and supervision in the future, and how to integrate it into new fields such as international payments, asset transactions, and reserve currencies.

**Third, the development of CBDC may face many security risks, and there is an urgent need to build a risk assessment mechanism. **Due to the rapid changes in the external situation, global central banks have renewed their understanding of CBDC. CBDC is not only a form of currency at the level of technological innovation, but its functions will be further enriched. At present, the risks of CBDC from all walks of life are mainly reflected in three levels: 1) Network system security risks. CBDC and paper currency have a large existence, and are also fundamentally different from other network payment carriers. The issuance and circulation of CBDC will be highly dependent on a strict network system. In the future, after the CBDC is embedded in the cross-border payment network, it will face a more complex international network environment, and the potential security risks of the network system may increase. 2) Risk of privacy leakage. Judging from the domestic surveys of BIS (Bank for International Settlements) and the CBDC of major central banks around the world, privacy protection is the most concerned topic of the public. 3) Public infrastructure security. The international monetary system dominated by the US dollar is highly dependent on the international funds settlement system (ie SWIFT), which is an international public product and usually has the principle of neutrality. However, in the past few years, SWIFT has been frequently abused by developed countries in Europe and the United States as a financial sanction tool, and its neutrality and independence have suffered serious setbacks, raising doubts about the security of international public infrastructure.

Explore cross-border coordination methods

The author predicts that the adjustment of the international monetary system will be accelerated in the future, and in the long process of transitioning to the new international monetary system, the performance of the world's major non-dollar currencies will accelerate the formation of the future "Bretton Woods System 3.0". Internationalization may lead to new models, in which CBDC will play an important role. Since the decoupling of the U.S. dollar from gold in 1971, the era of commodity-based currencies has come to an end, and mankind has moved towards credit currencies (Zoltan, 2022). If CBDC can be promoted and applied globally, it will completely bypass existing international payment and settlement systems such as SWIFT from a technical perspective. All in all, in the future, as the geopolitical crisis intensifies and the game of great powers is in full swing, the international monetary system may encounter many uncertainties, which may further accelerate the development of the global CBDC. BIS, IMF (International Monetary Fund), etc. Leading international institutions will promote more global central banks to participate in the construction of CBDC cross-border technology platforms, and jointly explore the formulation of regulatory rules.

Judging from the trends of international institutions and European and American central banks, CBDC international regulatory issues are receiving increasing attention. There are two main reasons. Second, emerging countries have shown greater interest in the development and application of CBDC. The test project of CBDC cross-border payment in the region is in its infancy and will play a greater role in the future. As an important mechanism for maintaining the traditional international monetary system, developed countries have a strong voice in authoritative international institutions such as BIS, FSB (Financial Stability Board), IMF, and SWIFT. In the future, they may lead the international regulatory agenda of CBDC and propose international rules for CBDC . The road map of G20 cross-border payment that FSB is responsible for is a clear evidence, and emerging countries should attach great importance to it.

It is even more important to explore a reliable path for CBDC regulatory coordination. In the future, we need to focus on three aspects: 1) Incorporate the development of CBDC global application into the international regulatory network. The IMF, WB, BIS, and the Basel Committee on Banking Supervision (BCBS) should strengthen regulatory communication with central banks around the world, and consider formulating operable and compatible CBDC international standards. 2) Establish and improve the international financial infrastructure of CBDC. The construction of a CBDC-based international financial infrastructure requires the cooperation of international institutions, central banks of various countries, commercial banks, and enterprises to continue to promote the existing cross-border payment plans and the construction of CBDC platforms, and to interconnect with the current international payment system. 3) Establish a privacy protection mechanism based on international financial regulatory norms. In addition to being protected by law, this privacy protection mechanism should also be integrated into CBDC technical design, secure network environment, anti-money laundering and terrorist financing and other fields.

The author expects that as the global CBDC process accelerates, it will rise to the stage of coordination or consultation. European and American central banks hope to enhance the strategic initiative of CBDC, while international institutions tend to incorporate CBDC into the existing international monetary system to maintain vested interests. In the next step, China should strengthen CBDC international coordination, initiate or propose regional or CBDC international regulatory initiatives and consensus principles through multilateral mechanisms, and strive for more voice. It is recommended to start from three aspects: 1) closely follow the G20 cross-border payment roadmap, maintain the first-mover competitive advantage, extensively participate in regional or international CBDC cross-border projects, and accumulate technical and management experience; 2) formulate and improve the digital RMB roadmap, keep up with RMB internationalization strategy, accelerate the promotion of high-level institutional opening-up in the financial market, service trade and other fields, and create a convenient environment for the development of CBDC; 3) Deepen cooperation with international institutions such as BIS and IMF, and provide more information on the international supervision of CBDC. plan.