Finance in the digital age
The Hiroshima Summit presents an opportunity for G7 leaders to work on stabilising the international payments system amid financial digitalisation
The global payments system has continued to function smoothly despite the turmoil created by Russia’s illegal invasion of Ukraine over a year ago. Its stability and smooth functioning are due to the fact that national and international payments have evolved to be able to withstand all manner of shocks and disruptions to the smooth transfer of global payments. Meanwhile, certain groups of countries have created payments mechanisms for the significant amounts of payments among themselves. One notable case is India’s UPI system, which Singapore uses for its trade with India, as the widely touted alternative to SWIFT (Society for Worldwide International Financial Transfers).
But these systems remain insignificant. The US dollar and the euro continue to be the dominant global currencies without any real challengers, as their share of use in global trade continues to dwarf that of other currencies and countries. Indeed, Larry Summers, former US treasury secretary, expects the dollar to remain the hegemonic currency, and his view of Europe as a museum, Japan a nursing home and China a jail is frequently quoted.
Moreover, the G7 price cap on Russian oil, announced at the G7’s Elmau Summit in June 2022, has been effective in reducing Russia’s revenue from that income source. By April 2023, the price cap was meeting its objectives and was unlikely to be terminated in the near future.
Difficulties in the G20
Nor has the broader, more diverse G20 offered an alternative to the existing G7-centred international payments system. Although the purview of the G20 is primarily economic and financial governance and this group of the world’s largest economies includes both Russia and China, their cooperation on core economic and financial matters is now severely constrained. G20 finance ministers could not produce a collectively agreed communiqué in Bengaluru in February 2023, due to the desire of G7 members to have such a declaration condemn Russia’s illegal attack on Ukraine. To the frustration of several G7 leaders, both Russia and China refused to agree to condemn Russia’s aggression, even in the way all G20 leaders did at their summit in Bali in November 2022. Indeed, the G20 Chair’s Summary and Outcome Document of the First G20 Finance Ministers and Central Bank Governors Meeting provided no direction on the international payments system, even within the many paragraphs on which all G20 members agreed.
Unless G20 leaders agree to change the fact that the group’s focus on economic governance differs from the social and political concerns of the smaller and arguably more politically cohesive G7, unanimity within the G20 will remain difficult to achieve.
It is thus left to the smaller, more cohesive G7 to ensure the essential stability and required strengthening of the international payments system, especially as the pace and path of financial digitalisation expand and even though G7 leaders and finance ministers remain focused on using financial instruments to counter Russia’s invasion of Ukraine.
Digitalisation intensifying
As financial digitalisation intensifies, the Hiroshima Summit presents G7 leaders with an opportunity to mitigate the risks inherent in potentially unstable and unreliable digital currencies and payments that are not backed by central banks. They can do so by promoting an understanding of central bank digital currencies and encouraging their development and spread as the best option for digital finance. Most G7 members have at least pilot projects underway in this regard, as do many G20 countries. According to the Bank for International Settlements, in 2020 80% of the world’s central banks were seriously considering the use of a CBDC. More recently, the BIS said that most central banks are exploring CBDCs, and more than a quarter are now developing or running concrete pilots. In fact, a BIS survey of 81 central banks found that the Covid-19 pandemic and the emergence of cryptocurrencies accelerated central bank work on CBDCs. In addition, the survey showed that more than two thirds of central banks were likely to issue a retail CBDC in the short or medium term.
Globalisation that works for all
The G7’s encouragement of CBDCs would bring the benefits of economic and financial stability to a potentially ungovernable and certainly less stable digital finance world populated by private digital currencies that carry no government backing. This would also respect and reinforce the G20’s core mission to make globalisation work for all.
