What are some of the conceptual legal & regulatory challenges faced by CBDCs?

Updated: Jul 6, 2021

Central Banks face the challenge of inadequate legal & regulatory regimes to recognize and facilitate CBDCs. Questions relating to accommodate CBDCs into the existing payment infrastructure, transactional frameworks, re-evaluation of legacy banking principles in the world of CBDCs, and user privacy will require a lot more scholarship and attention before a deeper understanding is developed. This post is an attempt to identify some of those questions.


1. Legal Recognition: Central banks are grappling with the question of whether recognition of CBDC should be as electronic version of cash or as a separate asset class altogether. To the extent CBDCs are inevitably created as representative tokens of actual cash, it may require formulation of a new legal & regulatory regime to accommodate a new asset class. The choice of the type of recognition would have several implications ranging from whether new laws are required, and whether the market will produce digital solutions to bridge gaps in the payment system. Depending on the said choice, CBDCs could either become natural extensions of existing payment systems and infrastructures, or become a parallel system altogether.


2. A question of interest: CBDCs are different from digital cash stored with banks, because such cash is held in accounts maintained in a central bank ledger. In this case, cash is deposited as a form of asset that the bank repurposes for bank's lending business. So long as the cash is stored with the bank - it represents user's claim on the bank, which is then incentivized with an interest so that the user does not call/enforce such a claim. A CBDC represented by tokens may not be interest bearing if the tokens are stored in a digital wallet created for such a purpose. This is because the bearer of such tokens stores them for safe storage. Therefore they wouldn't be having a claim on the tokens like an account holder has on the banks.


3. Legal vacuum for transactional architecture: The architecture for facilitating transactions is to be figured out. Central banks are grappling with the question of whether they should facilitate users to hold CBDC's details/meta data and the private keys with them on their device. Alternatively, central banks are also tinkering with the following options: (a) of letting users hold CBDCs at a participating node's database while retaining private keys with them, or (b) holding both CBDCs and the private keys together either at the participating node's database or at a third party digital safe.


Among the above two options (a) and (b), the second option would be easier to integrate with existing payment technological systems. Whichever way gets adopted eventually, will need to be recognized under a suitable legal & regulatory regime.


4. Privacy considerations: Central banks would need to figure out the extent to which transactions may be permitted anonymously keeping in mind user's right to privacy and also considerations for anti-money laundering and terror financing. The principles of banking secrecy also come into direct conflict with the inherent nature of a blockchain system which per se requires that transactions be traceable as per the longest chain of transactions.


Important Disclaimer: The information provided herein this article is our interpretation and understanding of the law. The legal analysis presented hereinabove is not given for application to any specific set of facts or circumstances peculiar to you or your organization. You may rely on the write-up for your peculiar facts or circumstances at your sole risk only. We will not be liable, answerable or responsible to you under any client-attorney relationship.


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