Countries are rapidly moving towards the creation of digital currencies. Or so we are told by various surveys showing that a growing number of central banks are making substantial progress towards an official digital currency.
But, in fact, almost 80% of the world’s central banks are not authorized to issue digital currency under their existing laws, or the legal framework is unclear.
To help countries make this assessment, we looked at the central bank laws of 174 IMF members in a new IMF staff paper, and found that only about 40 of them are legally allowed to issue currencies. digital.
Not just a legal technicality
Any monetary issue is a form of debt for the central bank, so it must have a solid foundation to avoid legal, financial and reputational risks for institutions. Ultimately, it’s about ensuring that an important and potentially contentious innovation is consistent with a central bank’s mandate. Otherwise, the door is open to possible political and legal challenges.
Now, readers may wonder: if issuing money is the most fundamental function of any central bank, why is a form of digital currency so different? The answer requires a detailed analysis of the functions and powers of each central bank, as well as the implications of different designs of digital instruments.
Build a Case for Digital Currencies
To legally qualify as currency, a means of payment must be considered as such by the legislation of the country and be denominated in its official monetary unit. A currency generally benefits legal tender statuswhich means that debtors can pay their obligations by transferring them to creditors.
Therefore, legal tender is generally granted only to means of payment that can be easily received and used by the majority of the population. This is why banknotes and coins are the most common form of money.
To use digital currencies, a digital infrastructure (laptops, smartphones, connectivity) must first be in place. But governments can’t force their citizens to have it, so granting legal tender status to a digital central bank instrument could be difficult. Without the legal tender designation, obtaining full currency status could be just as difficult. Yet many means of payment widely used in advanced economies are neither legal tender nor currency (e.g. commercial fiat currency).
Digital currencies can take different forms. Our analysis focuses on the legal implications of the main concepts considered by different central banks. For example, where it would be “account-based” or “token-based”. The first is to digitize balances currently held in accounts on the books of a central bank; while the second refers to the design of a new digital token not connected to existing accounts that commercial banks hold with a central bank.
From a legal point of view, the difference is between centuries-old traditions and uncharted waters. The first model is as old as the central bank itself, having been developed in the early 17e century by the Exchange Bank of Amsterdam, considered the forerunner of modern central banks. Its legal status in public and private law in most countries is well developed and understood. Digital tokens, on the other hand, have a very short history and an unclear legal status. Some central banks are allowed to issue any type of currency (which could include digital forms), while most (61%) are limited to only banknotes and coins.
Another important design feature is whether digital currency should be used only at the “wholesale” level, by financial institutions, or could be accessible to the general public (“retail”). Commercial banks hold accounts with their central bank, thus being their traditional “customers”. Allowing retail accounts, as in the case of retail banking, would constitute a radical change in the organization of central banks and would require significant legal changes. Only 10 central banks in our sample would currently be allowed to do so.
A difficult business
The overlap of these and other design features can create very complex legal challenges and may well influence the decisions made by each monetary authority.
The creation of central bank digital currencies will also raise legal issues in many other areas, including tax, real estate, contract and insolvency laws; payment systems; confidentiality and data protection; more fundamentally, the prevention of money laundering and the financing of terrorism. To be “the next step in the evolution of money”, central bank digital currencies need solid legal foundations that guarantee smooth integration into the financial system, credibility and wide acceptance by citizens and economic agents of the country.
*About the authors:
- Catalina Margulis is an Advisor in the Financial and Tax Law Unit of the Legal Department of the IMF, on secondment from the Central Bank of Chile. She focuses primarily on central banking and financial stability issues, providing legal advice to other IMF departments and member countries.
- Arthur Rossi is a Research Fellow in the Financial and Tax Law Unit of the IMF’s Legal Department, providing legal analysis on public financial management, financial law frameworks, and fintech issues, for financial assistance programs , IMF surveillance and technical assistance.
Source: This article was published by the IMF Blog