G7 tax pledge may be upstaged by CBDC work

By James Langton | June 10, 2021 | Last updated on June 10, 2021
2 min read
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Increased global coordination to develop central bank digital currencies (CBDC) is likely to accelerate the disruption faced by banks and other payment providers in the future of finance, says Moody’s Investors Service.

In a new report, the rating agency said that the G7’s call for greater coordination on CBDCs and global stablecoins was overlooked amid its recent pledge to adopt a global minimum corporate tax.

“Although the tax reform portion of the communique gained the headlines, the portion pertaining to CBDCs may have the more lasting and profound implications for the financial system, potentially generating significant public benefits through greater financial innovation, competition and inclusion,” the report said.

At the same time, these benefits may come at the expense of the traditional financial sector by creating “a more direct relationship between citizens and public money that may disintermediate payment companies and banks,” the report added.

One reason is CBDCs could create “an alternative set of payment rails, disrupting payment providers and lowering banks’ fee income,” the report said, adding that banks’ funding costs could rise too if traditional deposits decline.

The speed and severity of the disruption will depend on the details of CBDC development, and “whether authorities can find an optimal level and pace of change that both supports innovation and gives payments companies and banks room to adapt,” Moody’s said.

If disruption is too significant over a short period of time, that could be negative for some  business models, “but too little too slowly risks exposing monetary regimes to new forms of stateless digital monies that may ultimately prove even more disruptive,” the rating agency noted.

In either case, governments and central banks could see their ability to steer monetary and fiscal policy constrained.

“The G7 communique is a powerful statement advancing the global development of CBDCs through international cooperation, which could help all central banks seeking to launch CBDCs harmonize their efforts and maintain their relevance as money and payments evolve into the digital age,” Moody’s said.

On the heels of the G7 statement, the BIS Innovation Hub along with a pair of central banks — the Swiss National Bank and the Bank of France — and a consortium from the private sector (including Credit Suisse, Natixis, R3, SIX Digital Exchange and UBS) announced a new experiment to test a wholesale CBDC to settle cross-border payments.

The experiment is designed to help further the G20’s commitment to enhancing cross-border payments, by “exploring how CBDC could enhance speed, efficiency and transparency in cross-border use cases,” said Benoît Cœuré, head of the BIS Innovation Hub, in a statement.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.