Legal Status Needed for CBDCs

Central Bank Digital Currencies (CBDCs) are much talked about. The IMF has published a detailed paper – ‘Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations’ – which explains the legal position of CBDCs and has investigated the position of 171 IMF members to see which are currently able to issue a CBDC. The paper will help central banks think through this element of their CBDC preparations.

The paper starts by asking three questions: 

1. Do central banks have the authority to issue digital currency?

2. Can CBDC be a real ‘currency’?

3. Should digital currency be legal tender?

First of all, every country is different and any statement is a generalisation until you look at your own Central Bank Law (what establishes the central bank, provides its decision making body, lays its foundations for autonomy and gives it its mandate – functions and powers) and Monetary Law (legislative and regulatory framework providing the legal foundations for the use of monetary value in society, the economy and the legal system).

This subject gets complicated fast because you have to differentiate between token- and account-based CBDCs. In brief, account-based CBDCs are really an extension of existing arrangements used for interbank settlements. Most of the legalese is well trodden ground, except for the ability to have members of the public having accounts at the central bank.

There is also an issue of ‘fairness’ if a proportion of the population are not able to access account-based CBDCs. Token-based CBDCs are very new and need significantly more work to enable them in law.

One of the major challenges around token-based CBDCs is the concept of ownership. If you want to record a token-based CBDC in a register or ledger operated by the central bank, legally this is not the same as the booking of a credit balance in a cash current account. A cash current account is established with a contractual legal relationship between a financial institution and the account holder. A ledger account is not a contractual concept.

If a token is to be issued, the two key questions are, does the Central Bank Law allow tokens to be issued? Is the term ‘currency’ defined, or how broadly is it defined? The challenge for account-based CBDCs is whether current accounts are allowed.

The authors of the report investigated both questions for 171 IMF members and found that only 40 central banks, 61%, were not limited to only issuing banknotes and coins. Only 10 central banks, 6%, were allowed to directly or indirectly open accounts with the public.

Legal tender status is the power to validly and definitively extinguish monetary obligations. This is decided in law and is, therefore, a choice. Whether the law can be changed will involve debate and this is where the issue of ‘fairness’ will need to be addressed, including what happens if a merchant or individual does not have the digital tools necessary.

It is worth noting that for both types of CBDC, protection in law against criminal activity needs consideration.

So the answer to those questions? It all depends what your current Central Bank Laws and Monetary Law say. The more narrowly they were originally written, the greater the likelihood that new legislation will be needed.

But since CBDCs represent a major new development and will touch so many other legal areas, tax, property, insolvency, contract law etc, the paper suggests that it will be worth putting in place carefully crafted, or amended, legislation.