Rising global financial risks
Slowing inflation, rapid private credit growth, cyber risks and decentralised finance all pose threats to the stability of the global financial system; coordinated regulatory strategies are essential for mitigation
The risks to financial stability in the current global economy include the effects of slowing inflation, the massive growth of private credit and digital threats such as cyber risks, according to the International Monetary Fund. The inflationary pressures observed in the past few years are lessening, and most G20 central banks are expected to reduce interest rates by the end of 2024. Corporate private credit, especially in developing and emerging economies, has grown very rapidly with no strict regulation and with weak capitalisation, leading to an increase in credit risks. The cyber resilience of the financial systems of G20 members needs to be strengthened by implementing coordinated regulatory and supervisory strategies. The reduction of these risks contributes to reducing economic uncertainty and promoting the food security, health and educational security of all G20 members.
In the financial system, cryptocurrencies are among the most popular traded assets, but they are entirely deregulated and unsupervised. The benefits of cryptocurrencies, especially for developing and middle-income countries, mainly come from financial inclusion, reduced transaction costs and enhanced payments’ efficiency. The costs depend on competition and the illicit use of digital money.
The vast popularity of crypto assets has pushed most central banks in G20 members to develop central bank digital currencies. CBDCs are digital counterparts to legal money and are managed by the national central bank, with or without the intermediation of the domestic banking system. CBDCs are not cryptocurrencies and are aimed at enhancing financial inclusion, reducing costs and limiting money laundering and other illicit uses of digital money. Risks related to CBDCs mainly come from the lack of proper regulation for consumer protection, data privacy and anti-money laundering, and from the disintermediation of the banking system in developed countries. Of the 20 central banks in the G20, 19 are involved in CBDCs. Smaller countries such as Nigeria, Jamaica and the Bahamas have also introduced CBDCs, but the percentage of transactions that are paid with CBDCs in these countries is very low – indeed below 1%.
The creation of digital currencies by those countries in whose currency most foreign reserves are denominated will definitely change the landscape of the monetary system. Among these countries, China is the pioneer. It launched its project for the e-yuan in 2019, and is willing to introduce the CBDC soon. However, the privacy of e-yuan trading is not a priority for the People’s Bank of China. The European Central Bank is in the technical phase of its digital euro project. It is willing to let Europeans have access to it in the safest possible way by 2026. Other G20 members are more conservative and are still at the pilot stage.
At their Rio Summit, G20 leaders should agree on the principles on which digital financial intermediaries and trades can be smoothly regulated and supervised. Following the positive growth rates of digital markets and the preventive and constructive approach of G20 members, a market-based approach, as opposed to a strict regulatory one, is more likely to prevail among members.
Another relevant issue for digital governance is the need for data standardisation in the digital financial system, overcoming the fragmentation of blockchain and of decentralised finance. This would contribute to enhancing the market’s transparency and accuracy, and to reducing market manipulation and insider trading.
