The head of the Bank for International Settlements (BIS) has urged countries to step up the pace towards getting the legal foundations in place to launch central bank digital currencies (CBDCs).
Just a handful of nations – including the Bahamas, Jamaica and Nigeria – have to date formally issued a CBDC. But China’s authorities continue to progress the rollout of a digital yuan, India is stepping up the pace towards the launch of a digital rupee and the European Central Bank is due to decide imminently whether to green light next steps towards a potential digital euro.
CBDC issuance requires a legal framework that provides the authority to do so. But surveys by the International Monetary Fund (IMF) and BIS have showed unpreparedness – and even significant levels of uncertainty – among central banks over whether local laws allow them to proceed.
“It is simply unacceptable that unclear or outdated legal frameworks could hinder their deployment,” Agustín Carstens warned in a speech – titled ‘Legitimacy, Privacy, Integrity, Choice: Towards a legal framework for central bank digital currencies’ – at a BIS Innovation Hub-Financial Stability Institute conference in Switzerland on 27 September.
“The work to address these issues needs to begin in earnest. And it needs to proceed at pace,” said Carstens, a former governor of the Bank of Mexico who has been at the helm of BIS – which has been undertaking numerous CBDC technical experiments alongside member central banks – for almost six years.
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‘Legal frameworks must advance’
In his speech, delivered in BIS’s ‘home’ city of Basel, Carstens set the scene by pointing out that “much of the discussion around CBDCs focuses on technology” before stating that “legal frameworks must also advance if we want CBDC to deliver on its potential.”
He referenced an International Monetary Fund (IMF) working paper, ‘Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations’, published almost three years ago that found that close to 80 per cent of central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is unclear.
BIS itself published a report in July stating that the number of central banks engaged in CBDC activity had risen slightly during 2022 with ‘almost a quarter’ undertaking retail CBDC pilots (a retail CBDC is a CBDC available for the general population).
‘Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto’, based on a survey of 86 central banks, reported that the share of central banks engaged in CBDC work had risen from 90 per cent to 93 per cent.
Compared with the previous year’s survey, the share of central banks reporting that they possessed the legal authority to issue a CBDC increased marginally to 27 per cent (from 26 per cent, which was up from 18 per cent the year before). About eight per cent of jurisdictions said they were changing their laws or clarifying legal authority to allow for CBDC issuance (down from 10 per cent the previous year). But one quarter of central banks said they lacked the required legal foundation for CBDC issuance and about 40 per cent said they were ‘unsure’ – the same findings as the previous year’s survey.
International co-ordination ‘critical’
“The public rightly demands forms of money that meet their needs and expectations. Central banks have a mandate to meet those demands and have made significant investments to address the technical and operational requirements for CBDCs,” Carstens said in his speech, before issuing his call to pick up the pace on the legal front.
He went on to state that a CBDC “also needs to function within a framework of clearly defined rights and obligations”, saying that, in his view, “at least three core elements must be preserved”: the privacy of CBDC users and the protection of their data; “the integrity of the financial system”; and “the ability of users to choose between CBDC and other forms of money”.
He concluded that “different legal systems approach these questions in different ways” and that “it is for each jurisdiction to decide whether to issue CBDC and how to balance the rights and obligations of its users at a national level.”
“At the same time, international co-ordination and co-operation is critical,” he said. “It would be unfortunate if we ended up with a fragmented system and legal framework in which different digital currencies don’t interoperate.”
Carstens comments have echoes of a speech more than two years ago by the then-head of the BIS Innovation Hub, Benoît Coeuré, who urged central bankers “roll up our sleeves and accelerate our work on the nitty-gritty” of CBDC design. Cœuré, who is now president of France’s Autorité de la concurrence, said in a speech in September 2021 that “CBDCs will take years to be rolled out, while stablecoins and cryptoassets are already here. This makes it even more urgent to start.”
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Wholesale CBDC ‘automated market maker’ project completed
In a separate CBDC development, BIS has also announced (on 28 September) the successful completion of a project testing cross-border wholesale CBDCs (CBDCs for interbank use).
‘Project Mariana’, summarised in a 37-page report, involved three BIS Innovation Hub centres working with the Banque de France, Monetary Authority of Singapore and Swiss National Bank. The parties involved created a proof-of-concept to successfully test the cross-border trading and settlement of hypothetical euro, Singapore dollar and Swiss franc wholesale CBDCs between simulated financial institutions.
The process relied on three elements: a common technical token standard provided by a public blockchain to facilitate exchange and interoperability between the different currencies; ‘bridges’ for the seamless transfer of wholesale CBDCs between different networks; and an automated market maker (AMM), which is a specific type of decentralised exchange to trade and settle spot foreign exchange (FX) transactions automatically.
‘As tokenisation and DeFi [decentralised finance] technologies are still nascent, further research and experimentation is needed,’ BIS states in a project-specific page on its website.
‘Project Mariana pioneers the use of novel technology for interbank foreign exchange markets. It successfully demonstrated that it is feasible to exchange wholesale CBDC across borders using novel concepts such as automated market makers. Bringing together a diverse team of software engineers, policy, and FX experts across three Innovation Hub centres and central banks was key to this success,’ BIS states.
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