Central Bank Digital Currencies: Preliminary Legal Observations

Abstract

Breakthroughs in financial technology (fintech), ranging from early coins and banknotes to card payments, e-money, mobile payments, and more recently, cryptocurrencies portend transformative changes to the financial and monetary systems. Bitcoin (BTC) and cryptocurrencies bear a significant resemblance to base money or central bank money (CeBM). This functional similarity can potentially pose several challenges to central banks in various dimensions. It may pose risks to central banks' monopoly over issuing base money, to price stability, to the smooth operation of payment systems, to the conduct of monetary policy, and to the stability of credit institutions and the financial system. From among several potential policy responses, central banks have been investigating and experimenting with issuing central bank digital currency (CBDC). This paper investigates CBDC from a legal perspective and sheds lights on the legal challenges of introducing CBDC in the euro area. Having studied the potential impact of issuing CBDC by the European Central Bank (ECB), particularly on the banking and financial stability, on the efficient allocation of resources (i.e., credit), as well as on the conduct of monetary policy, the paper concludes that issuing CBDC by the ECB would face a set of legal challenges that need to be resolved before its launch at the euro area level. Resolving such legal challenges may prove to be an arduous task as it may ultimately need amendments to the Treaty on the Functioning of the European Union (TFEU).

Research contributions and challenges in DLT-based cryptocurrency regulation: a systematic mapping study

“…Cryptocurrency poses equally specific challenges to the financial and monetary systems, such as the potential threats to price stability, to the smooth operation of payment systems, to the implementation of monetary policy, to the prudential supervision of credit institutions, to the stability of the financial system and to the central banks’ exclusive right to issue base money [ 23 ].…”

“…Cryptocurrency impact on central banking has sparked a policy debate on how to address the potential threats of cryptocurrencies [ 23 ]. Central banks have expressed various positions with respect to cryptocurrency including central banks’ policy to lead further development of cryptocurrency by restrictions, robust surveillance and licensing [ 21 ].…”

Legal and Economic Implications of Central Bank Digital Currencies (CBDC)

“…The procedure for implementing such powers is not provided for by current models of legal regulation, and the possible positive and negative consequences of their application have not yet been sufficiently studied [3]. In particular, central banks cannot simply start issuing CBDC as a replacement or "improved" form of cash, since CBDC are fundamentally different from cash [11].…”

“…There is a risk that if the entire CBDC system is controlled by the central bank, then a person, even if mistakenly underprivileged from the right to open an account/wallet with CBDC, will be cut off from the financial system. This issue can be resolved by making the process of opening CBDC accounts as easy as possible, and bans on this are allowed only for the purposes of compliance with the law, including (AML/CFT) regulations [10,11]. Alternatively, the issue can be resolved in the case of hybrid CBDC hybrid CBDC, where citizens can access the CBDC system through many different firms.…”

Assessment of Potential Risks of Regional for Global Financial Security

“…Traditionally, it is customary to distinguish three varieties of stable coins: those secured by a fiat currency or other liquid assets (Tether, TrueUSD, USDC); secured by cryptocurrency, where tokens/coins (MakerDAO) are used as a security deposit instead of the fiat currency, and not secured coins, where the nominal value is ensured thanks to the work of a smart contract (Nabilou, 2019).…”