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The concept of digital currency and payments is very vast and requires lot of clarifications to avoid any possible loopholes. Since the usage is extensive and multiple terminologies are being used, researches at IMF (International Monetary Fund) examined the Central Bank laws of 174 members to understand if digital currency is actually ‘Real Money’.
Survey & Results
A simple survey was conducted by the IMF over Twitter to understand if Digital Currencies are Real Money. Around 95,000 users participated and 80% of them agreed to it. The ground reality is quite different though:
- Only 40 Central banks are legally allowed to issue digital currencies (23%)
- 27 Central banks (16%) are not clear with the provisions of the law
- Remaining 104 banks (61%) only authorise issuance of coins and banknotes.
Building a Case for Digital Currency
For legally qualifying as a currency, means of payment must be considered by the law of the nation and denominated in its official monetary unit. A currency should enjoy legal tender status indicating that debtors can pay off their obligations by transferring this currency to the creditors.
Therefore, legal tender status is only provided for means of payment that can be easily transferred and utilised by the population of the nation. Thus, coins and banknotes are the most common form of currency.
The usage of cryptocurrencies requires extensive infrastructure support including Internet connectivity, smartphones and laptops. All of these have to be in place constantly for smooth execution throughout. However, since governments cannot impose on their citizens to have them, granting legal tender status to a central bank digital instrument could pose a strong challenge. Without the legal tender designation, achieving full currency status could be equally challenging. Still, many means of payments widely used in advanced economies are neither legal tender nor currency (e.g., commercial book money).
The overlapping of various characteristics and other design features can create highly complex legal challenges which could further influence decisions taken by individual monetary authorities. The creation of central bank digital currencies can lead to legal hurdles with respect to:
- Property & Real estates
- Insolvency laws
- Taxation
- Payment Systems
- Privacy and Data protection
- Prevention of Money laundering & Terrorist financing
Thus, for central bank digital currency (CBDC) to be the next product to dominate the ‘evolution of money’ there is a requirement for robust legal foundations which ensure smooth integration to the financial system, credibility and overall acceptance by the citizens of the nations and economic agents.
