Legal aspects of central bank digital currencies

Legitimacy, privacy, integrity, choice: towards a legal framework for central bank digital currencies

Agustín Carstens, General Manager, Bank for International Settlements
Introduced by: Fernando Restoy, Chair, Financial Stability Institute

Developing central bank digital currencies (CBDCs) is a focus of many central banks and facilitating legal clarity has been identified as a key challenge. The panel considered questions of the legal nature of CBDC, the mandate of central banks to issue CBDC, and its status as legal tender.

Panelists were generally of the view that the questions of legal classification and the relevant central bank's mandate to issue CBDC must follow from the design of the CBDC. Design and policy decisions should not be restricted by the scope of current legal frameworks. Amendment of existing legal frameworks may be required to clarify both the legal treatment of CBDC and the mandate of the central bank to issue it.

Granting CBDC legal tender status was considered to be a second order issue but panelists noted legal tender status could increase public acceptance of CBDC.

Chair

Cristiano Cozer, General Counsel, Central Bank of Brazil

• David Geen, Senior Technical Advisor, Legal Directorate, Bank of England
• Stefan Lindskog, former President of the Supreme Court of Sweden
• Panagiotis Papapaschalis, Senior Lead Legal Counsel, European Central Bank

The panel discussed how CBDCs, as public digital money, would fit into the existing monetary ecosystem with its public and private forms of money, noting that the power to discharge monetary obligations is key for all forms of money.

Private forms of money, including potentially stablecoins, need to be regulated to be able to discharge this function properly. The panel did not consider unbacked cryptocurrencies to have monetary potential.  

The introduction of CBDCs as one component of a monetary system would require social acceptance. This, in turn, would depend on the functionality of CBDC within the broader monetary ecosystem.

The singleness of money requires the conversion at par amongst all forms of money.  Remuneration of CBDC, CBDC holding limits and programmability of CBDC were discussed as design choices that could impact the singleness of money.

Finally, panelists noted that existing concepts like settlement finality and monetary sovereignty may need to be updated if they are to be fit for purpose in a digital world.

Chair

Ross Leckow, Head of Strategy and Operations, BISIH 

• Masaki Bessho, Head of Fintech Center, Bank of Japan 
• Timothy Massad, Research Fellow and Director, Digital Assets Policy Project, at the Harvard Kennedy School
• Rosa María Lastra, Sir John Lubbock Chair in Banking Law and Chair of the Institute of Banking and Finance Law the Centre for Commercial Law Studies (CCLS), Queen Mary University of London

The panel discussed how to balance data privacy and financial integrity, including in respect of anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance requirements, in the design of a retail CBDC system.

The panelists noted that existing privacy definitions were not necessarily applicable to the CBDC context. Determining what should be private and from who is a normative question, and the answer must balance the value of privacy with other conflicting values. Different jurisdictions will have different views.

Transparency, record-keeping, and suspicious transaction reporting are crucial to maintaining the integrity of financial transactions, including those made using CBDC. Panelists noted that taxation and AML/CFT were areas where there was generally accepted to be a legitimate interest in restricting privacy.

Panelists discussed the balance between integrity and privacy, highlighting that users might accept a lower degree of privacy for convenience. The question of how much, exactly, the public cared about privacy was raised, with panelists noting that the degree of trust the public has in its government is critical.

Finally, the feasibility and desirability of retail CBDCs was questioned, with panelists expressing the view that while they may be required in order to meet future challenges, it was not clear that CBDC were immediately necessary, and that their desirability varies by country and context.

Chair

Yan Liu, Deputy General Counsel, International Monetary Fund

• Jiaying Jiang, Assistant Professor of Law, University of Florida Levin College of La
• Jean Pesme, Global Director, Finance, Competitiveness and Innovation, World Bank
• Luc Thévenoz, Professor of Law and Director of the Centre for Banking and Financial Law, University of Geneva

Interoperability refers to the technical, operational and legal compatibility that enables one system to be used in conjunction with another system. Panel Four discussed interoperability in the context of cross-border CBDC and considered the legal issues that might arise.

New technology like CBDC offers an opportunity to streamline international payments, with the potential for faster and cheaper payments.  Atomic settlement with CBDC would eliminate some risks, for example settlement risks, but could create other risks, including around money laundering and terrorist financing.  

Some jurisdictions may choose to apply controls on the use of their CBDC for international payments and transfers ("exchange controls"). Panelists noted that the international framework on the regulation of international payments will continue to be relevant as jurisdictions consider the cross-border use of their CBDC.    

Jurisdictions will also need to decide whether and in what circumstances to grant access to their CBDC by non-residents. The "do no harm" principle envisages that jurisdictions take into account the effect that the circulation of their CBDC may have on other jurisdictions. Panelists pointed to the need for international guidance on what is meant by "harm".  

Other challenges will include issues of conflict of laws, with panelists noting these will not all be resolvable by choice of law between the parties. And at the international level, panelists noted bilateral or multilateral agreements may be needed if central banks will host, govern and operate joint infrastructure for international CBDC payments.

Chair

Rastko Vrbaski, Senior Advisor, FSI

• Douglas Arner, Professor in Law, University of Hong Kong
• Simon Gleeson, Consultant, Clifford Chance
• Corinne Zellweger-Gutknecht, Professor of Law, University of Basel