Since Facebook unveiled its Libra stablecoin in June, there’s been an acceleration in the discussion of Central Bank Digital Currencies (CBDC). Japan has been exploring the topic for years. In November 2018, the Bank of Japan (BoJ) created the Legal Issues Study Group on CBDC and published its report today.
The publication starts by outlining the possible forms such a digital currency might take. The Account-type CBDC is similar to the deposits that individuals and firms have in private banks, and the Token-type CBDC is more like a digital form of banknote. From a legal perspective, accounts have extensive existing legislation. Furthermore, there are options on how both of the currency-types might be issued.
It could be distributed directly by the Bank of Japan in which case the private information accumulated by the central bank will be protected under the Personal Information Protection Law. Alternatively, a currency could be distributed through intermediaries such as banks or payment companies. Middlemen are proposed to reduce the administrative burden on the Bank and will also help to avoid the accumulation of detailed personal information.
The report highlighted that the main constraint on the central bank is the Bank of Japan Act. The Act limits the Bank of Japan to issuing banknotes. Hence to issue a CBDC, an amendment to the Act is needed. The Bank also has a concern that it could end up in competition with the private banks.
Anti-money laundering (AML) and counter-terrorism vetting procedures would be required. Hence there could be restrictions relating to which organizations can act as intermediaries, and also on individuals that can use a CBDC. This contrasts with cash which has no limitations.
In the case of an indirect CBDC the intermediaries will be responsible for executing AML procedures. But the ultimately responsible entity is the Bank of Japan. Consequently, there’s a question re the legal nature of the relationship between the central bank and the intermediary. For example, is it acting as agent for the central bank?
The Bank has also considered what might happen in some challenging situations. For example, what if the digital data is duplicated or disappears? Or what if a legal seizure of money is required? In the latter case, the account type of CBDC is covered by existing legislation. In the case of a token-based CBDC, while theoretically one could seize the data, that’s not something fully considered to date.
Other central banks are raising legal topics relating to CBDC. Last week U.S. Federal Reserve chair Jerome Powell responded to inquiries from legislators and stated there was a question as to whether the U.S. Federal Reserve had the authority to issue a CBDC.
Meanwhile, the Bank of Japan released a paper exploring the practical aspects of retail CBDC’s earlier this year.
The European Central Bank and the BoJ have been jointly exploring the application of blockchain or distributed ledger technologies (DLT) since 2016. The Project Stella initiative has had three phases so far. They covered DLT for liquidity savings, DLT for Delivery v Payment (or instant settlement of securities transactions), and most recently, DLT for cross border payments.
Given that 70% of central banks are exploring CBDC at some level, there will be plenty more news to come.