Countries are developing rapidly in the direction of creating digital currencies. In other words, the various surveys we have learned show that more and more central banks have made substantial progress in realizing official digital currencies.
However, in fact, nearly 80% of central banks in the world either do not allow the issuance of digital currency under current laws, or the relevant legal framework is not clear.
To help countries make this assessment, we reviewed the central bank laws of 174 IMF member states in a new IMF staff report, and found that only about 40 (about 23%) member states are legally permitted to issue numbers currency.
Not just a legal technical issue
Any currency issuance is a form of debt for the central bank, so it must have a solid foundation to prevent these institutions from facing legal, financial and reputational risks. Ultimately, this is to ensure that a major and potentially controversial innovation meets the authorization of the central bank. Otherwise, this initiative will face potential political and legal challenges.
Now, readers may ask themselves: If issuing currency is the most basic function of any central bank, then why is the form of digital currency so different? The answer requires a detailed analysis of the functions and powers of each central bank, and the meaning of different designs of digital tools.
Build digital currency use cases
In order to qualify as currency in law, a means of payment must be regarded as currency by national laws and denominated in its official currency unit. Currency usually enjoys legal tender status (legal tender status), which means that debtors (debtors) can repay debts by transferring them to creditors.
Therefore, legal tender status is usually given only to payment methods that most people can easily accept and use. This is why banknotes and coins are the most common forms of currency.
To use digital currency, you must first have digital infrastructure, such as laptops and smart phones. But the government cannot force its citizens to own these, so granting central bank digital tools legal tender status may be a challenge. Without the name of legal tender (legal tender), achieving full currency status is also challenging. Nevertheless, many payment methods widely used in advanced economies are neither legal tender nor currency, such as commercial book money.
Unknown water domain?
Digital currencies can take different forms. Our analysis focuses on the legal implications of the main concepts being considered by central banks. For example, what should be "account-based" and what should be "token-based". The first is to digitize the account balance currently in the central bank's books; the second is to design a new digital token that is not connected to the existing accounts held by commercial banks in the central bank.
From a legal point of view, this difference exists between centuries-old tradition and uncharted waters. The first model is as old as the central bank itself. It was developed by the Exchange Bank of Amsterdam in the early 17th century and is considered the predecessor of the modern central bank. In most countries, its legal status in public law and private law has been well developed and understood. In contrast, digital tokens have a short history and their legal status is unclear. Some central banks are allowed to issue any type of currency (which may include digital forms), while the majority (61%) are limited to paper money and coins.
Another important design feature is whether the digital currency is only for "wholesale" use by financial institutions or for "retail" use by the public. Commercial banks hold accounts with their central bank and are therefore their traditional "customers". However, the central bank’s support for citizens’ personal accounts, just like in the retail banking industry, will be a structural change in the way the central bank organizes and will require major legal changes. In our sample, only 10 central banks are currently allowed to do so.
Challenging move
The overlap of these features and other design features can create very complex legal challenges and is likely to affect the decision-making of each financial authority.
The creation of central bank digital currency will also raise legal issues in many other areas, including taxation, property, contract and bankruptcy laws; payment systems; privacy and data protection; the most fundamental is anti-money laundering and terrorist financing. If they are to become the "next milestone in currency evolution," central bank digital currencies need a strong legal foundation to ensure smooth integration with the financial system, credibility, and wide acceptance by citizens and economic entities of various countries.
Source of this article: IMF Blog