The Legal and Regulatory Concerns with Central Bank Digital Currency (CBDC).
What is CBDC?
A CBDC is an electronic version of central bank currency that companies and people may use extensively to make payments and store value. It is digital money issued by central banks denominated in national units (such as the US dollar), which functions as legal tender and is subject to central bank liability just like circulation-level physical cash. Because of this, compared to other digital currencies, CBDCs are less volatile and safer.
Digital money issued by central banks is:
- Digital versions of traditional money that are issued and managed by a nation’s central bank;
- Supply and value are influenced by a nation’s central bank, trade surpluses, and monetary policies;
- They are also based on a digital ledger and may or may not make use of distributed ledger technology or blockchain.
CBDCs are a fast developing concept, and different central banks may choose to implement them in various ways. There are certain design choices that are not widely agreed upon, such as the following:
- CBDCs’ capacity to totally replace coins and notes
- Level of privacy or anonymity
- Availability and accessibility
- Capacity to bear interest
Globally, central banks are investigating several CBDC designs while considering variables including distribution method, access, and privacy. For CBDCs, there are two typical design formats: account-based and token-based. There are differences in the technological infrastructure, access and privacy levels between each strategy.
All things considered, CBDCs would provide a novel kind of central bank money in addition to a paradigm shift in the payments infrastructure. Understanding the advantages of CBDCs and their effects on the larger payments environment is crucial for this reason.
How CBDC impact commercial Banks
Commercial banks are granted CBDC design options and are crucial partners in the successful implementation of a CBDC because of their emphasis on customer-facing operations, secure transactions, and regulatory reporting. In addition to introducing a great deal of complexity for commercial banks, CBDCs bring an electronic version of central bank currency. To stay up to date with the requirement to develop products that work with them, the organization may need to undergo major changes.
The introduction of CBDCs by central banks into the digital currency space has the potential to completely change the way both national and international economies function. The structure of a CBDC will affect the whole financial system, even if many things remain to be decided.
Legal and Regulatory Issues of CBDC
It is clear from researching the potential effects of issuing CBDC on central bank legislation, monetary law, and the function of financial authorities that there would be several legal obstacles that would need to be overcome before the currency could be issued. To begin with, CBDC does not seem to have “currency” status from the perspective of monetary law. Second, the majority of legislation pertaining to central banks prohibit the issuance of CBDC to the general public.
Last but not least, the degree of anonymity set for CBDC will determine whether or not AML/CFT legislation needs to be changed. Overcoming monetary law obstacles to the CBDC will be significantly more challenging than doing so with regard to central bank legislation. It is important to note that constitutional constraints may restrict a state’s capacity to undertake monetary law reform in order to promote the issuance of CBDC.
