XIII. CBDC Legal Issues and the Bank of England
A number of specific legal and regulatory issues would arise in issuing CBDC. Necessary statutory and other operational amendments would have to be adopted, as necessary. These would principally relate to the following, which can be considered from the perspective of the Bank of England to illustrate the issues and considerations that arise. These apply with regard to the operating central bank itself, the account or coin model used, and other more general rights and remedies:
A. Central Bank
A series of specific issues would apply with regard to the issuing central bank as follows.
1. Power and Authority
The central bank would have to have the necessary legal power and authority to act. The Bank of England was originally created under the Bank of England Act 1694, which established it as a public corporation. The Bank was given the title of The Governor and Company of the Bank of England, with incorporation being conditional upon it not borrowing more than the sum of £1,200,000, which was lent to the government. This was subject to government redemption. Further sums were ordered by the government between 1709 and 1796, and the Bank was given unlimited power to borrow and grant security under the Bank of England Act 1716. The Bank was declared under an act of 1763 to be a body corporate and politic forever, with all immunities and privileges granted under the 1694 Act, although this was still conditional upon redemption of all amounts due before 1786. As no notice of redemption was served, the Bank became a body politic in perpetuity from 1786.
The Bank would accordingly have all necessary legal powers and capacities to act. The Bank is a body corporate incorporated by royal charter, with the charter setting out its capital stock and authorising it to hold land and property, sue and be sued, and hold its common seal. All other central banks would have to ensure that they have the necessary legal power and authority to act. Difficulties may be avoided where the specific form of CBDC may be considered to constitute an extension of the central bank’s reserve account management function, as no legal restrictions are generally imposed on balance sheet size and composition directly. Where the central bank must rely on more specific banknote issuance powers, significant difficulties may arise, such as with regard to the ECB.
2. Mission, Mandate, and Objectives
The original mission statement of the Bank was set out in its charter, signed in the Peacock Room at 66 Lincoln’s Inn Fields in 1694. This provides, inter alia, that, “Now know ye, that we being desirous to promote the public Good and Benefit of our People . . . .” While this may not constitute a legal impediment as such, providing an alternative mode of payment in the form of a digital currency can clearly be considered to be in the public good, provided that no counterbalancing disadvantages arise. The Bank is also subject to other voluntary standards, such as in relation to its code, which embodies the principles of integrity and leadership and gives effect to its conflicts-of-interest policies.
Further statutory objectives, which are legally binding, are imposed on the Bank, such as the Bank being required to protect and enhance the stability of the financial system of the UK (the Financial Stability Objective), although the Court determines its strategy with regard to financial stability. The Bank has two statutory objectives in relation to monetary policy, which consist of maintaining price stability and, subject to that, supporting the economic policy of the government, including with respect to growth and employment.
The PRA was initially created as a subsidiary of the Bank, although these were later merged and the Bank was appointed PRA under the Bank of England and Financial Services Act 2016, with a separate Prudential Regulation Committee (PRC) being set up within the Bank to carry out the equivalent functions. The general objective of the PRA is to promote the safety and soundness of PRA authorized persons, with the PRA having a separate insurance objective and with an additional competition objective being imposed with regard to ring-fenced bodies under the Financial Services (Banking Reform) Act 2013.
Issuing CBDC would arguably support all these objectives, provided that this is managed effectively and all relevant technical specifications are complied with. Issuing digital coins would arguably not conflict with any of these objectives if it does not undermine monetary policy, financial stability, the soundness of PRA firms, or the competitive position of ring-fenced bodies within PRA firms.
3. Monetary Framework
Digital coins should not interfere with the operation of the Sterling Monetary Framework, as set out in the Bank’s Red Book, as amended, to allow for quantitative easing measures following the global financial crisis. This is not a legal requirement as such, which provides for how the Bank carries out its related operations. This could be amended to include the provision of set amounts of official digital currency, to the extent necessary. Debate remains as to whether CBDC should be remunerated and attract interest. Any new digital currency should arguably not be remunerated on a day-to-day basis, to the extent that this may compete with commercial bank accounts, cause monetary distortion, or have other distributed effects, although a reserve power to do so may be exercised for use in exceptional or emergency situations.
4. Note Issuance and Note Cover
The Bank was required to maintain separate banking and issuance departments under the original Bank Charter Act 1844. Any digital coin may have to be issued through the Issue Department. The Bank is subject to a fiduciary note issue limit, which was set at £83.5 billion as of July 11, 2013, although this applies to banknotes and may not restrict other extensions of its balance sheet, especially where a CBDC account, rather than coin model, is used. Any new digital issuance may otherwise have to be covered by government securities. Relevant disclosures would have to be made in the Bank’s Weekly Return.
Scottish and North Ireland banks are required to cover their physical banknote issues, protected under the Treaties of Union, with Bank of England notes. Revised provision was included within the Banking Act 2009 following the global and UK financial crises. These arrangements may have to be amended to provide for cover if Scottish and Northern Ireland are going to be allowed to issue local digital currency in place of physical banknotes, although it is more likely that only the Bank of England would issue digital sterling, as no such reserve power would otherwise have been provided for under the acts of the devolved administrations.
5. Competition
Authorities should monitor the effects of new coin production on dominance and competition in the markets. This could apply to the monopoly position of the central bank and to relations between the central bank and commercial banks, between the banks themselves, and between the banks and other financial institutions. Competition considerations have become a significant component of modern regulatory policy and, specifically in the UK, under the revised terms of the FSMA 2000, as amended by the FSA 2012. The PRA and FCA have new competition responsibilities in discharging their regulatory functions. Central banks should also consider their responsibilities in this regard, with specific reference to their own statutory objectives and mandates.
EU and UK monopoly and competition laws apply to undertakings that carry out economic activities, subject to fact assessment. The term “undertaking” is not separately defined and will include public bodies with economic activity consisting of the offering and supply of any goods or services of a commercial, and not exclusively of a social, nature. This does not apply to the exercise of “public powers” consisting of state prerogatives or essential functions of the state. Specific exemptions are also provided for “services of general economic interest,” to “revenue-producing monopolies,” or where the conduct is carried out under a separate “legal requirement.” Substantial penalties are imposed in the event of a breach. When a central bank provides supplemental CBDC on a delegated basis, this is generally not considered a state prerogative, nor of an exclusively social nature, especially where other forms of money and payment are already available. This is still arguably in the general economic interest because it is possible to include a specific legal obligation to avoid any uncertainty. Even if there is a dominant position through market concentration, there must also be an abuse or breach to create an infraction. The central bank and relevant authorities will still try to ensure that any damaging effect on competition and market conduct are limited. This will help ensure that the new regime enjoys maximum benefits and protect choice and competition in public markets.
Care should be taken to ensure that no unfair access advantage is conferred on specific banks or other financial institutions and that the central bank is not competing unfairly with major commercial banks or ring-fenced bodies. It may be preferable to allow all regulated deposit-taking institutions to be eligible to provide currency account access. A decision may be taken to limit this on objective operational or stability grounds, as with the Bank’s NCS. The existing NCS could then be revised to include provision for the creation of new digital currency in place of blocks of banknotes. Otherwise, a parallel “Digital Circulation Scheme” (DCS) could brought be into effect with equivalent, but necessarily adjusted, provisions.
6. Legal Status
The conferral of legal tender status means that a payee cannot refuse to accept an offer or tender in the currency concerned, which discharges the legal obligation to make payment. Legal tender was originally introduced under the Bank of England Act in 1833 to promote confidence in the use of Bank of England banknotes. Legal tender in the UK is set out in the Coinage Act of 1971, as amended by the Currency Act of 1983. These provisions would have to be amended if CBDC received legal tender status. As the objective would be to create an identical currency convertible at par, this would be considered desirable to promote use and confidence in the new currency instrument. This may, nevertheless, only be considered necessary if a digital coin is provided, such as on a blockchain. This may not be relevant where the account system used effectively operates as an extension of the Bank’s reserve account facilities, although this may still be considered desirable for clarification purposes.
7. Counterfeiting
It is an offence under the Forgery and Counterfeiting Act of 1981 to make a counterfeit of a currency note or protected coin without lawful authority or excuse and to pass or tender it as genuine. Additional offences are imposed in relation to the passing, custody, and control of materials, including with importation and exportation. Separate offences may be committed by reproducing currency notes or imitating coins. Offences attract up to ten years imprisonment on indictment.
A “coin” is defined as any coin that is legal tender in any part of the UK, which may include a digital coin if legal tender status is conferred. A “protected coin,” in relation to the offences under Sections 14 and 15, means any coin that is customarily used as money in any country (or specified by Treasury order), which could again include a digital coin. These provisions could be further clarified to ensure that they apply equally to digital currency, as necessary. An equivalent regime could be created for the false creation or presentation of CBDC or manipulation of the CBDC system.
8. Anti-Money Laundering and Terrorist Financing
Anti-money laundering regulations traditionally apply to commercial banks, with central banks being exempt. The European Money Laundering Directives generally only apply to credit institutions and financial institutions. This includes professional parties under the Fourth Money Laundering Directive, as well as trust or company service providers, estate agents, goods merchants (receiving cash over €10,000), and gambling service providers. A credit institution generally excludes central banks. The government may, nevertheless, wish to consider extending the 2017 Regulations to include wallet service providers or other institutions providing specialist digital currency accounts. Central banks will still need to ensure that any new CBDC is not used for criminal or terrorist purposes, for policy or reputational purposes, or for sanctions or taxation avoidance reasons.
CBDC systems are generally set up to operate some form of initial KYC identification system, although this may be most conveniently delegated to commercial banks or another specialist agencies appointed. Many central banks may wish to outsource such activities, including data management functions. While this may require compliance with any relevant regulatory provisions, such as a regulated institution’s FCA outsourcing measures, central banks will again generally be exempt from such provisions. They may, nevertheless, wish to adhere to equivalent standards on a policy and reputational basis where they are not subject to strict legal coverage and application.
9. Data Protection
It remains unclear whether data protection laws apply to many private digital currencies. “Personal data” is broadly defined under the EU and UK GDPR as any information relating to an identified or identifiable natural person, with “identification” including direct or indirect sources. Parties processing personal data are subject to the general requirements imposed under the GDPR, including the six principles. UK transactions are subject to the equivalent measures applied following the UK’s withdrawal from the EU and additional provisions set out in the Data Protection Act 2018, which includes other specific measures on enforcement of actions and official surveillance. Several more specific issues may arise in connection with distributed ledger and blockchain technology. Any new single centralised ledger or decentralised blockchain will generally be subject to the provisions set out in the GDPR. These functions could most effectively be carried out in practice on a delegated or outsourced basis through regulated institutions.
10. Information Request
As a public body, the Bank of England must comply with legitimate requests for information under the Freedom of Information Act 2000. Persons making a request are entitled to be informed, in writing, by public authorities whether they hold information of a specified description and to have the information communicated to them. An economy exemption is provided, although this only applies to disclosures prejudicial to the economic interests of the UK (or any part of the UK) or the financial interests of any administration in the UK. The Bank of England, or its delegated agent, would otherwise generally have to comply with the terms of the Act and the code published under the Act.
11. Financial Capability and Financial Inclusion
Issuing official digital currency could support financial capability and financial inclusion. Improving financial capability was one of the original statutory objectives of the FSA under the FMSA before these objectives were revised. FSA functions were transferred to the FCA and PRA under the Financial Services Act 2021. Financial capability in the UK is now managed by the Money and Pensions Service.
Financial inclusion in the UK is overseen by the Financial Inclusion Commission. Financial inclusion refers to belonging to a modern mainstream financial system, which is fit for everyone regardless of income and allows anyone to participate fairly and fully in everyday life without exclusion and without damage to education, employment, health, housing, and well-being. Specific objectives are specified in connection with banking and financial services. Concerns may arise where people do not have a mobile telephone or technological access to a wallet to allow them to use digital coin. Financial inclusion, however, does not require that everyone have equal facilities—only that everyone have access to core facilities. People already use different types of sophisticated and unsophisticated financial products in various ways.
The Equality Act of 2010 imposes on the public sector a duty to reduce socioeconomic inequalities, although this may not apply to the Bank of England. The Equality Act of 2010 prohibits direct and indirect discrimination in relation to protected characteristics, which consist of age, disability, gender reassignment, marriage and civil partnership, race, religion or belief, sex, and sexual orientation. Public service providers are subject to a separate duty not to discriminate against any person requiring the service. While the Bank of England may be considered to provide a service in the form of CBDC, there is arguably no discrimination on the basis of any of the protected characteristics covered. The only relevant provision may be disability, which covers physical or mental impairment and may include learning difficulties. It is unlikely that the issuance of a digital coin could breach these requirements. This should, however, be confirmed.
B. Digital Asset
Separate legal and regulatory issues arise depending on the digital asset involved and whether it is account-based or coin-based. Several complex legal issues are generated, particularly regarding the nature of digital information and digital data and digital property, including whether digital coins and cryptoassets constitute property in law today. Many significant questions have still not been resolved, and legislatures would be advised to clarify these issues at the time of establishment of any new CBDC framework or wider digital asset or digital society or economy regime. These would, for example, include such factors as:
(i) Legal nature of digital claim created (account or asset);
(ii) Legal nature of digital information and data;
(iii) Legal definition of digital property in law;
(iv) Individual digital identity;
(v) Digital contracts;
(vi) Digital implied terms and protections;
(vii) Digital signatures and contract execution;
(viii) Digital assets as deposits and securities for regulatory purposes under FSMA;
(ix) Collective investment scheme application under FSMA;
(x) Online dispute resolution;
(xi) Digital international private law; and
(xii) Digital public international law.
All of these would have to be considered and fully dealt with in supporting law or legislative provision or in any relevant CBDC TCUs or operational manual.
C. Digital Remedy
A series of further considerations arise with ensuring that an appropriate remedy system is in place to protect all relevant rights and entitlements. All applicable data protection laws would have to be complied, and all data protection rights would have to be respected. Separate fundamental human rights or related social or political rights would have to be considered and given effect to, as well as any other constitutional protections where the country has a formal written constitution. This may, for example, apply to arguments concerning issues such as the move towards a cashless society, extending financial inclusion, limiting the “digitally unbanked,” and promoting digital literacy.
Appropriate protections would specifically have to be incorporated into any relevant TCUs. This would include, for example, remedies in the event of payment instruction refusal, denial of account access, cancellation of account access, forfeiture of account balance, restitution, compensation loss, and damages, including for possible reputation damage. Effective continuity planning arrangements must be in place to always protect access to the ledger and data integrity. This may be supported by an adjusted form of deposit protection, deposit insurance, or other recovery, as necessary.
A full range of private law remedies and rights of action would have to be provided, including under contract, restitution, and tort. This is a complex area of law with a number of different underlying legal causes of action and separate rights of action. Additional complications arise in technology-related private international law and public international law. All relevant public institutions, including the central bank itself, would separately be subject to full judicial review and specifically to potential liability for misfeasance in public office. This occurred when an action was commenced against the Bank of England by the former depositors with the Bank for Credit and Commerce International (BCCI), although the Bank was appropriately cleared of any liability. All of this will have to be reviewed.
XIV. CBDC Comment and Challenge
While issuance numbers for the creation of private digital currencies (CoinTech) have exploded in recent years to over 14,000, large-scale official digital currency use has generally remained limited and more experimental to date, apart from in China. Central banks are naturally cautious, wishing to examine all of the relevant monetary and financial implications of sovereign currency and coin production, confirm and test the efficiency and efficacy of the technology available, and research wider market and social impacts. Assuming that all relevant aspects of technology continue to advance as expected, it is only a matter of time before CBDCs are more generally issued in smaller, then larger, currencies and in increased volume currency amounts. The following comments may be made regarding the current state of law and technology in this area.
A. Model Options
The possible issuance of CBDC has attracted a considerable amount of attention over time. Many papers have been issued, with some more significant recent official documents produced. A substantial amount of confusion and misunderstanding may have arisen, although much of this has increasingly been cleared with choices settled and resolved. One of the purposes of this paper has been to attempt to clarify some of the underlying options, conditions, benefits, concerns, and possible solutions that arise.
Central bank electronic or digital value can essentially be created in the form of either an account or a coin, with some more limited private token options available. While both the account and the coin option may involve a digital ledger or register, an account model operates by way of keeping a record of entitlement to a claim for payment against the bank while a coin model operates by way of transferring a digital asset created on the ledger. An account is only a claim in law against the account provider while a coin is an asset, although it is still unclear whether this will be recognized as property in all jurisdictions.
Several specific choices and options arise with regard to core CBDC design. These include whether this system is direct or indirect, centralised or decentralised, blockchain or non-blockchain based, wholesale or retail, volume or time constrained, net or gross settled, rewarded or non-rewarded, legal tender or not legal tender, compatible with other payment systems or incompatible, usable as collateral or unusable, localized or unrestricted, and single (unconnected to other CBDC) or multiple (connected to other CBDC).
A range of new options may be created in practice in relation to CBDC more generally. These may include more specific types of sovereign coin (SovCoin) or government coin (GovCoin), with separate “central bank digital accounts” (CBDA), as opposed to “central bank reserve accounts” (CBRA), being available. “Central bank crypto currencies” (CBCC) or “central bank digital coins” (CBDCn) may be created, or “central bank digital tokens” (CBDT) used with synthetic CBDC. CBDC may be issued on a direct or disintermediated (dCBDC) or indirect or intermediated (iCBDC) basis with wholesale (wCBDC) or retail (rCBDC), anonymous (aCBDC) or non-anonymous (nCBDC), localised (lCBDC) or global (gCBDC), and single (sCBDC) or multiple (mCBDC) models. One or more of these can be incorporated within CBDC over time, depending upon the specific model selected.
B. Model Design and Correction
Central banks and other policymakers must monitor the effects of any design choice made. There may be no simple or absolute model choice because a particular selection will create a corresponding series of relative advantages and disadvantages. Thus, the overall effectiveness of the system is dependent upon subsequent corrective action and adjustment, rather than initial model selection. Similar issues, for example, arose regarding whether countries should adopt a single or multiple agency model, as part of a wider “single regulator debate” that took place. The most appropriate choice depends upon a range of relevant local factors and conditions, with no single model being appropriate in all cases. Each selection generates its own mix of relative advantages and disadvantages, with the key not being initial model choice but later corrective operational adjustment. Central banks must monitor and review the effectiveness of any original model and design choice made and ensure that any consequent disadvantages or limitations are dealt with in an appropriate and effective manner.
CBDC may generate substantial advantages and disadvantages. Against this, a series of relevant design conditions must be considered in relation to CBDC in each country application. These are essentially concerned with market and monetary policy factors, general systems capability prerequisites, possibly more specific digital coin conditions and other operational characteristics, and relevant legal and regulatory compliance.
C. CBDC Benefits
A large number of possible benefits have been identified for private and official digital currency usage and for wider financial technology advances. These would be dependent upon the specific CBDC model selected and associated corrective measures adopted to ensure that any consequential disadvantages have only a limited effect. A series of substantial benefits may accrue, which have been summarized in terms of centralisation, convertibility, cost, certainty, continuity, confirmation, control, compliance, cover, confidentiality, cooperation, coordination, compatibility, and cross-border effectiveness.
Other advantages may arise from the operational conditions imposed, including capability, performance, efficiency, resilience, security benefits, increased choice and quality of service, financial inclusion, increased growth, infrastructure integrity, monetary and financial policy control, and overall financial stability. Additional points have been structured in terms of technology, service provision, users and stakeholders, markets, governance and regulation, infrastructure, monetary policy, and financial stability.
D. CBDC Challenges
A series of associated challenges will also necessarily arise. These should not be used to limit financial technological advances but rather to identify possible areas of concern and necessary responses. Challenges can be summarized in terms of capture, continuity disruption, conversion loss, choice and confidentiality defects, confusion, contagion, collapse and crisis, concentration, loss of competition, currency substitution, and loss of policy control. A number of separate issues have also been identified in terms of technology, service provision, users and stakeholders, markets, regulation and control, infrastructure, central banking and monetary policy, and wider financial stability. Assuming that all of the necessary policy, technology, monetary, and legal objectives referred to above have been satisfied, the potential advantages may manifestly outweigh the potential disadvantages. Wider concerns arise in the financial technology area regarding issues such as loss of privacy, concentration, commercial bank viability, technological dependence, and cyber disruption, with possibly wider policy damages.
Technology has become a dominant element of almost all forms of government, financial, business, commercial, corporate, and individual activity. The focus must accordingly be on managing technology risk, rather than limiting innovation outright. It is necessary to ensure that all associated risks and exposures are properly identified within all new technologies and innovation systems and processes. This includes all forms of more general financial, legal, and operational risks, as well as conduct-related risks and wider management or environmental risks. Operational risk may be considered specifically to include technology, information, and data risk, as well as knowledge and archive risk. Technology risks can specifically be examined in terms of technology operational risk, technology impact risk, information processing risk, information content risk, and record risk. Separate exposures also arise with regard to cybersecurity risk, which must be controlled. All forms of direct and indirect exposure, as well as any liability and risk, must be managed with the creation of new digital societies and economies. Each of these must be properly identified and contained in terms of any legal or regulatory reform or revision program.
E. Market and Monetary Policy Choices
Central banks have been carrying out advanced research to assess all necessary market and monetary impacts and effects of different CBDC options. The goal is to ensure that these options are consistent with legitimate objectives, as well as existing policy mandates and targets, without any conflict or detrimental impacts or effects. A number of specific areas of concern can be identified, each of which would have to be confirmed and satisfied by the central bank before it proceeds to issue any official digital account or coin device. These are principally concerns with possible monetary policy conflicts, inter-bank and payment system integrity, infrastructure support, competition, narrow banking, free banking, sovereign banking, direct banking, and credit banking, as well as possible cross-border relevance and substitution and overall financial stability. Appropriate research would have to be carried out on the relevance of each of these concerns in any specific country or particular CBDC situation.
F. Account and Asset Characteristics and Conditions
A range of wider policy objectives would also have to be achievable in creating an official central bank, rather than private, account or coin model. The specific model adopted would have to be able to secure certain general systems and technology objectives. These would include speed and capacity, cost and efficiency, resilience and durability, scalability, functionality, interoperability, security, continuity, and confidence, with associated disadvantages being avoided.
In light of the technical options available, a series of more particular technical specifications can be identified if a coin option is to be used, as discussed above. These would principally be concerned with identity (including pseudonymity and privacy), authentication (hashing), transfer (transactions), verification (consensus and incentives), record structures, scalability, functionality, interoperability (including hyperlinks), wallet provision, resilience, code control, and governance. A number of further operational considerations must also be managed effectively.
The objective in each case would be attempting to ensure that the digital coin operated as far as possible, in a manner parallel to existing physical coin and note usage, with a high degree of confidence and security. The central bank would also wish to retain the necessary degree of oversight and control at all times.
G. Intermediate Choice
The most significant residual point of choice is the extent to which the central banks wish to retain a meaningful commercial bank sector within any new revised monetary and payments system or architecture. The adoption of a direct full retail CBDC model could substantially remove the deposit and payment functions of the existing commercial banks. Banks are already under substantial pressure as increasingly sophisticated forms of account management and credit risk assessment processes are being developed and other sources of funding are becoming available through capital markets, DeFi, crowdfunding, microfinance, and other online platforms. This could create substantial domestic and cross-border substitution risk. Technological advances would allow the central banks to assume an increasingly substantial direct market function, although this would also substantially increase the administrative burden, obligation, and cost involved; the possibility of systemic risk failure and consequent direct reputational damage; and indirect damage to other functions, including monetary policy and infrastructure management.
The most desirable short or medium-term model may then be to retain some intermediate commercial bank function, specifically allowing banks to continue with traditional deposit and account management, credit assessment, lending, and other processes in competition with other service providers. While larger central banks may wish to control their systems as much as possible, they could still delegate substantial amounts of financial and operational risk to the commercial bank sector in this way. More significant changes in overall market structure and consumer preference can then be monitored over time, and appropriate action taken, as necessary.
H. Composite and Combination Model
It is possible to construct a central bank digital account or coin model in accordance with the series of tests and objectives referenced above. This would be designed to fulfill all general policy objectives; capacity, technical, and operational specifications; and other considerations. This can also operate on a direct or intermediate basis depending upon local circumstances, specifically on the size and sophistication of the commercial bank sector and local markets.
In most situations, it is further likely that the central bank will wish to operate any new CBDC regime with other existing forms of money, including coins, banknotes, commercial bank accounts, central bank reserve accounts, and electronic money mechanisms. It would be appropriate to avoid any substantial domestic, and possibly cross-border, money substitution. The central bank can also, at least in the short term, retain new CBDC with other existing forms of payment to provide choice and continuity, including additional systems options if any CBDC function is not available at any particular point in time. This may then be reviewed over time as the relative benefits and limitations of each option become clearer and market and consumer preferences begin to emerge. The most desirable position may, nevertheless, always be to provide some additional choice and availability under a composite or combination model.
I. Laws and Regulations
An appropriate legal and regulatory framework must be constructed to ensure that the account or coin issuance selected is consistent with, and does not breach, any relevant laws and regulatory conditions. All financial and technology functions can only operate effectively if it complies with relevant laws and regulations. Appropriate amendments will have to be made, where necessary. A series of specific issues can again be identified with regard to central bank and systems considerations; asset choice; and wider rights of action and remedies. With regard to the issuing central bank, these include the necessary powers, objectives, or mandates; coin consistency; monetary framework compliance; competition law; legal tender status; liabilities; anti-money laundering and terrorist financing exemptions; counterfeiting; data protection; information provision; financial inclusion; international obligations; and overall legal and regulatory reconciliation and restatement. A separate range of issues must be taken into account regarding the specific type of legal account or asset model selected for use. It is also necessary to ensure that an appropriate private and public law remedy system is in place to protect all relevant rights and entitlements.
J. Technical, Cross-Border and Global Delivery
It would appear from the research papers on CBDC design produced to date that an appropriate central bank currency model could be developed that would secure all conditions and objectives identified at the domestic level. Certain adjustments may be required in operational testing to ensure that an appropriate set of detailed technical parameters are secured. Technical delivery should be possible, even if this may be subject to some delays in terms of technical accommodation and advance. The principal issue may then become when, rather than if, central banks should issue digital currency. Related cross-border payment, exchange, and convertibility issues may then be considered under emerging multiple or mCBDC system models. Central banks are working through the BIS Innovation Hub to develop appropriate arrangements to allow multiple or overlapping CBDC systems to work together in an integrated and consistent manner.
K. Market Support and Reputation
One of the principal concerns that arises regarding both a central bank and a private coin model is protecting the continuity of supply and avoiding wider financial and economic damage. This may be even more significant in the context of CBDC. It is necessary to protect confidence in the CBDC and the value of the associated domestic currency. This may be partly dealt with by developing more specific correction or continuity planning measures. This may include support, or parallel, ledgers where multiple copies are not kept under a DLT system. Central banks may, nevertheless, wish to consider having other contingent options or facilities in place, such as some form of currency or coin of last resort (CLR) or digital lender of last resort (DLR or DLLR), as opposed to more traditional LLR support facilities. The objective would be to allow customers to convert digital coin holdings, subject to clear proof of entitlement, into some other form of account value or banknote in appropriate cases. This could again operate through commercial banks, with customers being able to convert CBDC into other forms of money, such as through existing account balances that would be settled through central bank accounts. This could create a form of delegated LLR, although this would still constitute a central bank liability.
The overall objective would be to protect the stability of the currency and financial system, as well as the standing and reputation of the central bank. One of the concerns that arose with central banks assuming, or re-assuming, regulatory functions is that perceived regulatory damage could have a detrimental impact on confidence in the discharge of other central bank functions, including monetary policy and financial stability. A defective or failed digital currency issuance could have equally significant wider effects, including significant cross-function or cross-policy disruption and dislocation. All the measures referred to above may be able to prevent this from eventually occurring if appropriate support measures are adopted, as needed.
L. Contingent Preparation
It remains unclear at this time whether, and to what extent, all central banks may issue digital currency in the short or long term, and on which model basis. Significant pressure has been created by associated market developments; this includes a decrease in cash usage and large technology and BigTech companies assuming an increasingly dominant role in the financial area by offering innovative new forms of digital payment systems or possible coin options, such as Facebook’s Diem (Libra) coin. The development and testing of other advanced models, including the Chinese DCEP system, also creates separate pressure not to fall behind technologically because of the associated dangers of possible loss of competitive advantage and currency substitution. If any one of the major international currencies is issued with a digital format option, this will, in and of itself, place considerable pressure on other central banks to provide equivalent facilities. Other social or political pressures may also emerge. A responsible central bank should, therefore, undertake all necessary preparatory monetary, technological, and legal research to be able to issue its own currency in a digital form, to the extent necessary. An informed and balanced response at this time may accordingly be contingent preparation and conditional full model design and construction.
XV. CBDC Close
Sovereign or digital central bank currency provision could bring substantial benefits and advantages, especially in terms of speed, cost, efficiency, and growth, as well as increased innovation, financial capability, and inclusion. Many other direct and indirect consequential benefits may arise. An associated range of challenges and considerations must be managed against this, especially in terms of possible monetary and financial impact and control, as well as legal and regulatory compliance, including private data privacy and control. Other concerns arise, regarding technological dependence and delivery, concentration, and commercial bank viability, as well as ongoing systems security, integrity, and continuity, consequential cross-function disruption, central bank policy, and reputational damage. Further technological advances may be able to respond to many of these over time, while appropriate policy and legal adjustments can be made to deal with residual areas of exposure or concern. Significant policy decisions, nevertheless, remain, especially with the nature of underlying market control. Many of the immediate and future developments that arise may be driven by further technological advances and by market and user pressure. The regulatory treatment of FinTech more generally is still being reviewed across the globe, and many official CBDC projects are at an advanced stage of development, with central banks having to consider issuing their own CBDC either on a reactive and protective basis or for proactive and stimulatory reasons. Innovation and evolution may then become increasingly official, rather than private market led, over time and, consequently, centralised and controlled, rather than decentralised and open. The next stage in the CBDC policy and product development cycle will then be a further shift from informed conditional preparation and contingent capability design to full model construction and operational verification and validation. Whether this will evolve in parallel to private markets or replace and subsume them outright remains to be seen. This will form a core part of all future financial technological change and more general social and market evolution and development over time.
