To help countries make this assessment, we have reviewed the central bank laws of 174 IMF members in a new IMF staff paper.
Countries are rapidly developing digital currencies. Or we hear of various surveys that show that more and more central banks are making significant strides towards becoming an official digital currency.
In fact, nearly 80 percent of the world’s central banks are either not allowed to issue digital currency under their current laws or the legal framework is unclear.
To help countries make this assessment, we reviewed the central bank laws of 174 IMF members in a new IMF staff paper and found that only about 40 are legally allowed to issue digital currencies.
Any money 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 the institutions. The ultimate goal is to ensure that a significant and potentially controversial innovation meets a central bank’s mandate. Otherwise, it will open the door to potential political and legal challenges.
Now readers may ask: if issuing money is the most basic function of a central bank, why is digital money so different? The answer requires a detailed analysis of the functions and powers of each central bank, as well as the impact of different digital instrument designs.
To legally qualify as a currency, a means of payment must be regarded as such under the laws of the country and be denominated in its official currency unit. A currency usually has legal tender status, which means that debtors can meet their obligations by transferring them to creditors.
Therefore, legal tender status is usually only given to tender that is easily received and used by the majority of the population. That is why banknotes and coins are the most common form of currency.
In order to be able to use digital currencies, a digital infrastructure – laptops, smartphones, connectivity – must first be available. However, governments cannot impose on their citizens to have it. As a result, it could be difficult to give legal tender status to a central bank digital instrument. Without legal tender designation, achieving full currency status could be just as difficult. However, many tender methods widely used in advanced economies are neither legal tender nor currency (e.g. commercial book money).
Digital currencies can take several forms. Our analysis focuses on the legal implications of the key concepts considered by various central banks. For example, if it were “account-based” or “token-based”. The first means digitizing the balances currently held in accounts on the books of a central bank. The second relates to designing a new digital token that is not linked to the existing accounts that commercial banks maintain with a central bank.
From a legal point of view, there is a difference between centuries-old traditions and uncharted waters. The first model is as old as central banking itself and was developed by the Exchange Bank of Amsterdam in the early 17th century – as the forerunner of modern central banks. Its public and private legal status is well developed and understood in most countries. In contrast, digital tokens have a very short history and an unclear legal status. Some central banks are allowed to issue any type of currency (including digital forms), while most (61 percent) are limited to banknotes and coins only.
Another important design feature is whether the digital currency should only be used at the “wholesale” level by financial institutions or whether it could be accessible to the general public (“retail”). Commercial banks keep accounts with their central bank and are therefore their traditional “customers”. Allowing retail accounts, as in retail banking, would be a tectonic shift in the organization of central banks and would require significant legal changes. Currently, only 10 central banks in our sample are allowed to do this.
The overlap of these and other design features can lead to very complex legal challenges – and influence the decisions of the individual monetary authorities.
The central bank’s creation of digital currencies will also raise legal issues in many other areas, including tax, real estate, contract, and bankruptcy law. Payment systems; Data protection and privacy; above all, prevent money laundering and terrorist financing. In order to be “the next milestone in the development of money”, digital currencies of the central bank need a solid legal basis that ensures smooth integration into the financial system, credibility and broad acceptance by the citizens and economic actors of the countries.
– IMF
