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The legal aspect of the central bank's digital currency: thinking about the central bank and currency law.



In response to digital ledgers, blockchains and the possible issuance of private virtual currencies (“stablecoins”), the central banking community is actively considering the benefits of issuing so-called “central bank digital currencies”. Many central banks have begun in-depth discussions on the appropriateness and feasibility of issuing digital currencies. Central banks and other policymakers have suggested that establishing a CBDC would raise important legal issues. The International Monetary Fund (IMF) released a report titled "Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations", which analyzed the legal issues faced by issuing CBDC from the perspective of central bank law and currency law and possible solutions. Abstract This article analyzes the legal basis for a central bank digital currency (CBDC) under the Central Bank Act and Currency Act. In the absence of a strong legal basis, the issuance of CBDC poses legal, financial and reputational risks for central banks. The appropriate design of the legal framework depends in part on the design features of CBDCs. The paper draws a number of conclusions, firstly, most central bank laws currently do not authorize the issuance of CBDC to the public. Second, from the perspective of currency law, the "currency" status of CBDC is not yet clear. Although the central bank's legal problems can be resolved through more direct legal reforms, currency law issues pose challenges to basic legal policy. Federal Reserve Mester: Central Bank Digital Currency May Affect Demand for Federal Reserve Currency Reserves: February 18 News, Federal Reserve Mester: Central Bank Digital Currency May Affect Demand for Federal Reserve Currency Reserves, Depending on Its Specific Design . One of the more prominent application scenarios of central bank digital currency is cross-border payment. (Golden Ten) [2022/2/18 9:59:26] Introduction Central banks and other policymakers have suggested that establishing a CBDC would raise important legal issues. These questions touch upon the most fundamental relationship between money, state and law. For example: Do central banks have the power to issue digital "currency"?   Could CBDC be a real "money"? Should digital currencies be legal tender? These questions are highly relevant and practical: in the absence of a clear response, the monetary system will struggle to adopt CBDCs widely, and the digital space may be "occupied" by private choices. This article seeks answers to these legal questions by analyzing the two most important public laws of CBDC, namely, the legal basis of CBDC under the Central Bank Law and the treatment method under the Currency Law. Of course, the issuance of CBDC will naturally raise questions about tax law, private law (including property law), contract law, payment system and settlement finality law, bankruptcy law, privacy and data protection law, and private international law. The purpose of this article is not to advocate the issuance of CBDC (which is a matter of policy and politics), but to hope that the issuance of CBDC has a strong legal basis. The Bank for International Settlements released three necessary basic principles of central bank digital currency: Central bank digital currency has been one of the hottest financial topics in 2020, and many countries have expressed interest in this asset type. According to the Bank for International Settlements, a group of central banks from seven countries worked with it to compile the report "Central Bank Digital Currency: Fundamental Principles and Core Features", which listed three basic principles necessary for central bank digital currency, which means If the central bank issues such assets in the future, the relevant ecosystem should be based on this principle. These three basic principles are: (i) the central bank should not harm legal tender or financial stability by issuing central bank digital currency; (ii) Central bank digital currencies must coexist with and complement existing forms of money; (iii) central bank digital currencies should promote innovation and efficiency. However, the Bank for International Settlements revealed that the People's Bank of China did not participate in the preparation of the report this time, but China has already begun to promote the digital renminbi plan and has started testing related central bank digital currency transactions. [2020/10/9] CBDC: concept, design function and legal meaning CPMI emphasizes: CBDC is not a clearly defined term, it is used to refer to many concepts. However, most envision it as a new form of central bank money. That is to say, central bank liabilities denominated in existing account units can be used not only as a transaction medium, but also as a reserve of value. The IMF staff defined CBDCs as "a new form." Although the definition of CBDC has not yet been determined, the main feature of CBDC is digitization. If a CBDC is a digital currency, then whether it can be called "electronic money" will depend on the circumstances of a particular jurisdiction. The "C" in CBDC means that this "new form of money" is "currency." But to qualify as a currency, a currency law (defined below) must take into account the method of payment it employs. This will raise a series of questions, such as: Can monetary law treat CBDC as money? If so, what are the legal consequences of CBDC issuance? If not, what does a CBDC mean? The answers to these questions are equally crucial, in particular to recognize the role that CBDCs can play within a legal framework as a means of payment, i.e., by eliminating monetary obligations. Central bank digital currency pilot transactions have reached 1.1 billion yuan: According to the South China Morning Post, the People’s Bank of China (PBOC) has processed 1.1 billion yuan (about $162 million) worth of digital currency through pilot transactions. According to reports, Fan Yifei, deputy governor of the People's Bank of China, disclosed the news at the 2020 Society for Worldwide Interbank Financial Telecommunication (SWIFT) Sibos virtual conference. He also revealed that the central bank's digital currency has currently processed 3.13 million transactions. The official disclosed the specific details about the digital renminbi for the first time. Fan Yifei also confirmed that the pilot projects were mainly carried out in big cities such as Shenzhen and Xiongan, and "positive progress" has been made. The pilot projects will also be carried out in the upcoming 2022 Winter Olympics. [2020/10/7] The legal treatment of CBDC by central bank law and currency law will largely depend on its operational and technical design functions. As of the publication date of this article, few central banks have formally issued CBDCs. Currently, many central banks are transitioning from general research to more specific proofs-of-concept followed by hands-on trials. The design features envisioned by central banks can be drawn on four axes: (i) account-based vs token-based (ii) wholesale vs retail (iii) direct vs indirect (iv) centralized vs decentralized. These dichotomies raise important legal questions. Voice | Deputy Director of the Central Bank’s Digital Currency Research Institute: The next step of the trade finance platform will solve problems such as standardization and blockchain performance: On November 6, at the Fintech Week held in Hong Kong, Di, Deputy Director of the Central Bank’s Digital Currency Research Institute Just said in the roundtable discussion that the platform focuses on "neutrality, professionalism, and authority" to serve cross-border trade. "The central bank is completely serving the market. Our technology accumulation in the blockchain ranks high among central banks around the world. Now many blockchain technologies have low barriers to entry, and are even open source. But everyone doesn't like him very much. Trust, and worry that the data will not be safe, but the central bank is an authoritative platform." Digitization of trade finance is a rigid need, and Di Gang introduced the process of trade finance digitization. The 1.0 stage is a digital stage, the business process is as simple as possible, but the stage of "manual moving"; the 2.0 stage is a platform stage, around the scene, based on the blockchain as a platform, many are currently in the 2.0 stage, the biggest feature is in Risk prevention on the chain. However, new problems are encountered in the 2.0 stage. Every scene has a blockchain, lack of standardization, and islands are formed between each chain; and the next step, the 3.0 stage, is the ecological stage, to realize the connection between chains, today and The Hong Kong Monetary Authority's signing cooperation is to move forward for 3.0. (PANews) [2019/11/6] Account-based/token-based CBDCs: Some central banks are building CBDCs by digitizing account cash balances in central bank books. Other central banks are exploring CBDCs in the form of digital tokens that are not tied to an account relationship between the central bank and the holder. From a legal point of view, the two are quite different. The legal status of account cash balances in central bank books under private and public law is well understood, whereas the legal status of token-based CBDCs is less clear. News | ING report: Central bank digital currency may soon enter the wholesale market: ING released the latest report entitled "New Currency V: Central bank digital currency may soon enter the wholesale market". The report pointed out that central banks of various countries may cooperate with financial institutions to launch digital currencies within 5 to 10 years. But it's mostly businesses that are feeling the impact. This wholesale approach could be the first step towards popularizing CBDC. It is less disruptive and could also make global payments cheaper, faster and more secure. The experimental w-CBDC (wholesale central bank digital currency) is aimed at cross-border from the beginning, involving multiple commercial banks and central banks, and should have the greatest chance of success. We foresee the next few years of prototype building and testing. Within 5-10 years, a limited number of new wholesale digital currencies may emerge, competing with existing global payment networks. Network effects are strong in this industry, so time will tell which solution wins out. [2019/6/22] Wholesale/Retail/Universal CBDC: Wholesale CDBC refers to the central bank issuing CBDC only to its existing account holders and participants of its RTGS payment system. The targets are mainly (large "liquidations") banks and public institutions ("wholesale"). Retail CDBC is when the central bank puts out outlets more widely and wants to make CBDC available to the public (“retail”) rather than offering it to wholesale customers. Universal CDBC refers to a CDBC issued by the central bank that can be used for wholesale and retail transactions. From a legal point of view, this distinction between retail and wholesale is crucial when designing a CBDC as a cash balance in an account. Many central bank laws restrict the categories of entities and individuals who can open such accounts. CBDC with single-layer/two-layer structure: CBDC with single-layer structure means that the central bank issues CBDC and manages its issuance by itself. A two-tier CBDC means that debt is issued by commercial banks, but fully backed by central bank liabilities. From a legal perspective, two important issues arise. First, to be a true CBDC, the "currency" must be a direct liability of the central bank. Liabilities of commercial banks, even if 100% cash is deposited in the accounts of the central bank, are not liabilities of the central bank. Centralized/decentralized CBDC: Central banks are debating whether to settle CBDC transfers in a centralized way (like their current RTGS) or in a decentralized way (notably through distributed ledger technology (DLT)). For the latter, consideration needs to be given as to whether the DLT will operate on a permissioned or permissionless basis. Because of the implications that permissionless DLT could have on the operation of a CBDC, including potentially complicating the central bank's ability to manage the money supply, it is highly likely that central banks will opt for permissioned DLT. The legal consequences of such a choice must still be fully clarified. While these design features all have some legal implications, the distinction between account-based and token-based CBDCs has the greatest legal impact. Central Bank Law 1. Concept of "Central Bank Law" and relationship with CDBC All central bank activities are governed by the Central Bank Law. These laws establish (or authorize) the central bank, which finances its decision-making body, lays the foundations for its autonomy, and defines its terms of reference. Without the central bank being explicitly authorized to issue a CBDC, the question arises as to whether the central bank is legally empowered to issue the currency, which is ultimately a liability of the central bank. The issuance of unauthorized debt by the central bank poses serious legal, financial and reputational risks to the central bank and its decision-making body (members). At present, most central bank laws clearly stipulate the power of the central bank to issue three standard debts. Central bank functions: There are two typical central bank functions that are closely related to issuing CBDC. The first is the function of currency issuance, which is the traditional function of the central bank to issue currency to the national economy. This function is related to token-based CBDC. For example, whether to authorize the issuance of token-based CBDC depends on the issuance function of the central bank. The second is the payment system function, which is another traditional function of the central bank to operate and supervise the payment system. The authors argue that for a token-based CBDC, the technology and process of transferring CBDC on a permissioned distributed ledger could constitute a payment system. The issuance of a retail CBDC will also establish a payment system open to the public. If this is the case, the question arises as to whether central banks have the legal mandate to open their payment systems to the public. Central bank powers: There are two typical central bank powers associated with CBDC-based token and account-based models respectively. The first is the power to issue certain types of currency. Many central bank laws include specific powers to issue currency, and some central bank laws also include specific powers related to the production, circulation, and withdrawal of banknotes and coins. However, are these powers extended or should they be extended to token-based CBDCs? The second is the power to open accounts in the books of the central bank. Since an account-based CBDC is essentially book money, it would only be authorized to issue money for those entities for which the central bank has the authority to open a cash checking account. Most central bank laws only authorize the issuance of cash currency, that is, banknotes and coins. Regarding whether central bank laws authorize token-based currencies, the authors propose a two-step approach to determine. First of all, it is necessary to analyze whether the central bank law clearly and directly authorizes the issuance of currency through the issuance function or power. Otherwise, other indirect legislative provisions related to currency issuance need to be considered to determine the background, purpose and historical interpretation of central bank law. Direct issuance function or power: Central bank laws show two variants in terms of the wording of the money issuance function. The first variant consists of central bank laws that expressly limit the function of issuing money to banknotes and coins only. The second variant is worded more broadly and authorizes the central bank to issue "currency", not just banknotes and coins. The article points out that the power to issue currency may also vary in different central bank laws. There are some central bank laws that are not empowered because the function of currency issuance is clear enough and provides a sufficient legal basis for issuing currency. And some central banks contain only powers related to currency issuance but not functional banking laws. This may be because the central bank law does not contain a list of functions. In addition, there are some central bank laws that have functions and powers related to currency issuance.


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