CBDC in legal terms.
The central bank digital currency can be issued value-based, like electronic money, or account-based, a currency comparable with deposits in a bank.
The design of value-based digital currency is governed by the Electronic Money Act. In legal term, most payment transactions according to a state’s Payment Service Act, a value-based CBDS is electronic money (e-money). Electronic money refers to an acquired monetary value (electronically or magnetically) that represents a claim on the issuer, issued for the purpose of exchanging it for funds.
Electronic money has cash-like properties and is typically used for payments of relatively limited amounts. It can be stored on a payment device in the form of an app or a card, alternatively on various sorts of payment accounts, in registers for electronic money or on other media. However, e-money that is stored on payment accounts does not constitute an account balance and is therefore not classed as a deposit. The definition of electronic money is a prepaid value that is either stored on a payment device that belongs to the holder or stored remotely on a server and managed by the money holder through a specific account. In cases where e-money is stored on a card, for instance, there are clear similarities to banknotes and coins.
*A central bank within the EU does not need a license to issue electronic money. And when a central bank acts in the capacity of monetary or public authority, it falls out of the scope of the E-Money Directive and does not need to observe the legislation regarding issuing electronic money. It’s most likely that when a central bank outside of the European Union (EU) also decides to issue e-money that they will be acting in its capacity as monetary authority. The issuance would therefore not fall within the field of application of the Electronic Money Act. One consequence of this is that the Act’s ban on issuers paying interest on e-money would not apply to the central bank. The CBDS can therefore be made interest-bearing, even if it is value-based.
Even though the central bank falls out of the scope of the E-Money directives when issuing a value-based CBDC, it can be obliged to observe other regulations, such as those aimed at preventing money laundering.
Account-based CBDC will most likely be referred to money held in accounts with the central bank (account balance in the Central bank). Legally, this almost equates to the activities as referred to in most of the Banking and Financing Business Acts, which include for instance, deposits from the general public.
Legally, the provisions in the Banking and Financing Business Act do not apply to the activities of the Central bank. Usually, it’s the states Central Bank Act that applies. And in most cases around the world, the central bank may accept deposits for monetary purposes. The legal issue is to see if the Act that allows the Central bank to offer accounts to banks gives the Central bank a mandate to supply accounts to the general public. If not, it will be necessary to propose amendments to the Central Bank Act. Usually, the Central Bank Act states that the Central bank may only conduct or participate in such activities for which it has been authorized by state law. If an activity or product contributes to one of the Central bank’s fundamental tasks, then the activity should be considered permitted. The purpose of issuing the CBDC is thus relevant to the question of whether the Central bank has the mandate to issue a central bank digital currency. Issuing of a CBDC must be formulated so that it is not in conflict with, or counter-productive to any of the Central bank’s statutory objectives, tasks, and assignments. In a legal sense, most central banks can be said to have only a few main general tasks; to promote a safe and efficient payment system, to conduct monetary policy and foreign exchange policy.
The task that should be highlighted in particular here with regard to the possibility to supply central bank digital currencies is to promote a safe and efficient payment system. Within the scope of this task, the Central bank usually has the right to provide systems for the settlement of payments. Since Central banks are tasked with the responsibility for the country’s supply of banknotes and coins, it’s reasonable to say that a CBDC can be issued in regard to the rapid changes in the payment market that is happening all around the world. The purpose of the central bank digital currency (CBDC) should be regarded as compatible with the mandate to promote a safe and efficient payment system, and compatible with the Central bank’s mandate and responsibility for supplying the general public with banknotes and coins.
The Central bank’s possibility to take deposits is usually stated in the state Central banks Act that the Central bank may do so, but this generally refers to deposit from banks and financial institutions. However, the Act usually do not explicitly prohibit receiving deposits from the general public. Deposits from the general public may be accepted for monetary policy purposes. Issuing an account based CBDC and a CBDC platform could be justified as having a monetary policy purpose and regarded as a monetary instrument.
Since the use of banknotes and coins will drastically decline in the future, there may be a reason to consider whether the central bank’s digital currency should receive the status of legal tender. Issuing a CBDC is not dependent on whether or not it receives the status of legal tender. But in connection with the review of the States Central Bank Act, it may be appropriate to look into this question. If the CBDC receives such a status, one should consider limiting the possibilities to waive the obligation to accept the central bank digital currency.
To give the central bank digital currency a strong position – and ensure that it becomes established and accepted by the market – there may be reason to state, for instance in the Payment Services Act, that there is an obligation to accept CBDCs in the case that a payee accepts electronic means of payment and payment instruments of the same type. Put simply, a trader should not be able to discriminate against a digital payment with state CBDC if they otherwise accept private digital money. Much like a similar obligation contained in most Interchange Fee Regulation, which applies to card-based payments. The regulation contains provisions entailing that a payee must accept all cards issued within the same brand (for instance, Mastercard or Visa) and in the same category regardless of which bank has issued the card. The aim is to strengthen consumer protection by ensuring that their cards will be accepted by all payees.
As the obligation in the Interchange Fee Regulation only concerns certain types of card, there may be a need to introduce a similar obligation with regard to CBDC that are on payment instruments other than cards, for instance, with regard to payment transactions made with a smart-device like a mobile phone, or in regards to Internet of things.
