Countries are rapidly moving towards creating digital currencies – or, we mean various polls showing a growing number of central banks making substantial progress towards an official digital currency.
But, in fact, nearly 80% of the world’s central banks are not allowed to issue digital currency under their existing laws, or the legal framework is unclear.
To help countries make this assessment, we examined the central bank laws of 174 members of the International Monetary Fund (IMF) in a new IMF staff document, and found that only about 40 are legally allowed to issue digital currencies.
Not just legal technicality
Any issuance of money 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 a meaningful and potentially contentious innovation is consistent with a central bank’s mandate. Otherwise, the door is open to political and legal challenges.
Now readers may be wondering: if issuing money is the most fundamental function of any central bank, then why is a digital form of money 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 be legally considered 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 is generally legal tender, which means that debtors can pay their obligations by passing it on to creditors.
Therefore, legal tender status is generally only granted 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, the digital infrastructure – laptops, smartphones and connectivity – must first be in place. But governments cannot 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, achieving full currency status could be just as difficult. However, many payment methods widely used in advanced economies are neither legal tender nor currency (for example, commercial accounting currency).
Digital currencies can take different forms. Our analysis focuses on the legal implications of the main concepts considered by various central banks. For example, when it would be “account-based” or “token-based”: the former means digitizing balances currently held on accounts in the books of a central bank, while the latter refers to the design. a new digital token that is not connected to existing accounts that commercial banks hold with a central bank.
From a legal standpoint, 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 17th 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 banknotes and coins.
Another important design feature is whether digital currency is to 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 the accounts of private citizens, such as in retail banking, would constitute a tectonic shift 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; privacy and data protection; more fundamentally, the prevention of money laundering and the financing of terrorism. If they must be “the next step in the evolution of money», The digital currencies of central banks need a solid legal basis that guarantees smooth integration into the financial system, credibility and broad acceptance by citizens and economic agents of countries.
A version of this coin originally appeared on the International Monetary Fund Blog.