The economic law of (central bank) digital currency

ABSTRACT

The digital transformation of money has raised concerns about how it affects sovereignty. The rise of cryptocurrencies and the possibility of global payment systems based on stablecoins and digital currencies issued by central banks require a re-evaluation of the effects of these changes on the concept of money as a public good and legal tender. The analysis will start focusing on this experience and its implications to shift to the case where a cryptocurrency is used as a central bank currency. Then an attempt will be made to frame the distinctive features of a digital currency issued by a central bank.

KEYWORDS:

• CBDC
• legal tender
• digital currency
• distributed ledger technology
• blockchain
• payment system
• international monetary system

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Sarah Green, ‘It is Virtually Money’ in David Fox and Sarah Green (eds), Cryptocurrencies in public and private law (OUP 2019) 13 et seq.; Maria Rosa Lastra, ‘Central Bank Digital Currencies (CBDCs) and the Case for Public Money’ (Centre for Commercial Law StudiesNews, 7 April 2022) <https://www.qmul.ac.uk/ccls/news/2022/items/professor-rosa-lastra-delivered-the-4th-edinburgh-fintech-law-lecture.html>.

2 See, forward, n 4 and n 6.

3 See 'Box 1: Public versus private money, or a mix of both?' in Jean-Pierre Landau and Markus K Brunnermeier, ‘The Digital Euro: Policy Implications and Perspectives’ [2022] 53 Policy Department for Economic, Scientific and Quality of Life Policies Directorate-General for Internal Policies 12.

4 ‘The use of money is limited, as in the case of the park bench, and therefore, money is, according to the currently common scientific definition, an ‘impure public good.’ However, there is an important aspect of money which constitutes a ‘pure public good’: money creates trust between people who do not know each other. The State establishes and supports the trust in legal tender and the official currency, making this trust a ‘pure public good’ – non-excludable and non-rivalrous. The State puts various measures to create and maintain this trust: it issues money via the central bank; prescribes compulsory acceptance for legal tender; secures a portion of bank deposits; protects private property, and bails out banks:’ see Christian Felber, Money – The New Rules of the Game (Springer 2017) 30. For a different conclusion about non-excludability and non-rivalry in money, see Lawrence White, The Theory of Monetary Institutions (Blackwell 1999) 89 et seq.

5 For the concept, see at length Ann Pettifor, The Production of Money: How to Break the Power of Bankers (Verso 2017).

6 On this point, see, for instance, the considerations proposed by White (n 4) 134-37.

7 See Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ 2 <https://bitcoin.org/bitcoin.pdf>.: ‘In the mint-based model, the mint was aware of all transactions and decided which arrived first. To accomplish this without a trusted party, transactions must be publicly announced. We need a system for participants to agree on a single history of the order in which they were received.’

8 See SEC – The Office of Investor Education and Advocacy, ‘Ponzi Schemes Using Virtual Currencies’ <https://www.sec.gov/files/ia_virtualcurrencies.pdf>.

9 As stated by the Deputy Governor of the Reserve Bank of India: Shri T Rabi Sankar, 'Cryptocurrencies – An Assessment' (March 2022) Reserve Bank of India – RBI Bulletin 11, https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20870 quoting Robert McCauley, 'Why Bitcoin Is Worse than a Madoff-Style Ponzi Scheme' (Financial Times, 22 December 2021) https://www.ft.com/content/83a14261-598d-4601-87fc-5dde528b33d0.

10 Jason G Allen, Henry Wells and Marco Mauer, ‘Cryptoassets in Private Law: Emerging Trends and Open Questions from the First 10 Years’ (2022) <https://www.ssrn.com/abstract=4206250>; Chiara Zilioli, ‘Crypto-Assets: Legal Characterisation and Challenges under Private Law’ (2020) <https://www.ssrn.com/abstract=3532316>; JG Allen, ‘Property in Digital Coins’ (2019) 8 European Property Law Journal 64, 69.

11 For more on this concept, see the valuable contribution by Emilios Avgouleas and Sir William Blair, ‘The Concept of Money in the 4th Industrial Revolution – A Legal and Economic Analysis’ (2020) <https://www.ssrn.com/abstract=3534701>.

12 See Michel Camdessus, ‘International Financial and Monetary Stability: A Global Public Good’ in Peter B Kenen and Alexander K Swoboda (eds), Reforming the international monetary and financial system (International Monetary Fund 2000) 10: ‘When non-residents use national money, as is extensively the case for the world’s major national monies, national monetary policies acquire aspects of global public goods. Exchange rates always, to some extent, involve issues of international public goods because an exchange rate is the relative price of two national monies and is affected by the corresponding national monetary policies. This international public goods aspect rises to global significance for exchange rates among the world’s major currencies because their use is global and movements in their exchange rates have widespread effects.’

13 As in the case of art 47, Constitution of the Italian Republic. In the Italian legal system, the legal tender of the currency is mentioned in the civil code and is functional for fulfilling a contract. The Italian civil code at art 1277, in its book of obligations, provides that ‘pecuniary debts are extinguished in the currency which is legal tender in the State at the time of payment and for its nominal value.’

14 'Ley Bitcoin', Decree No. 57, published in the Official Gazette No. 110, volume No. 430, 13 (June 9, 2021).

15 As Steve Hanke, professor of applied economics at Johns Hopkins University, pointed out: see Shawn Tully, ‘El Salvador’s Plan to Create the First Bitcoin-Powered Nation Is Tanking the Economy – and Is a Mess by Every Measure’ (Fortune, 20 January 2022) <https://fortune.com/2022/01/19/el-salvador-bitcoin-economy-distressed-debt/>.

16 And how they can be addressed: see the El Salvador country team and IMF Western Hemisphere Department, ‘El Salvador’s Comeback Constrained by Increased Risks’ (IMF, 16 February 2022) <https://www.imf.org/en/News/Articles/2022/02/15/cf-el-salvadors-comeback-constrained-by-increased-risks>.

17 It is important to note that El Salvador renounced its national currency for the US dollar in 2000 and is experiencing growing indebtedness in a political context classified as illiberal. The Monetary Integration Act (El Salvador) 2020 [201]., which came into force on 1 January 2001, states in Art 3 that ‘The dollar will have an unrestricted legal tender with the unlimited release for payment of obligations in money in the national territory.’ Colón is still legal tender but not in circulation anymore. The fixed exchange rate was determined as follows: 1 $ for 8,75 ₡.

18 As it is confirmed by its willingness to issue a bitcoin-denominated bond equal to a maturing bond valued in US dollars and with a high interest rate. Joshua Oliver and Tommy Stubbington, ‘El Salvador Courts Crypto “Whales” as Traditional Investors Shun Bitcoin Bond’ (Financial Times, 30 March 2022) <https://www.ft.com/content/4fa63c8c-51f5-4512-b522-76dd75e62916>.

19 Banco Central de Reserva de El Salvador, ‘Inclusión y educación financiera’ (Inclusión Financiera) <http://inclusionfinanciera.gob.sv/>.

20 ‘Topic: Bitcoin in El Salvador’ (Statista, 7 September 2021) <https://www.statista.com/topics/8401/bitcoin-in-el-salvador/>; ‘El Salvador Is Betting on Bitcoin to Rebrand the Country – and Strengthen the President’s Grip’ (Time,1 October 2021) <https://time.com/6103299/bitcoin-el-salvador-nayib-bukele/>.

21 ibid.

22 According to the 2022 first business survey of the Chamber of Commerce and Industry of El Salvador ‘About the role of bitcoin as a legal tender and its impact on the performance of their businesses, 91.7% of the participants said that the implementation of bitcoin has been indifferent to their business, and 86% report that they have not made sales using cryptoassets. These percentages face only 3.6% of respondents claiming that bitcoin has contributed to increasing its sales, and 13.9% report having made sales in bitcoin.’ See Chamber of Commerce and Industry of El Salvador, ‘Businessmen Plan to Invest in El Salvador despite the Challenges Facing the Country’ (10 March 2022) <https://camarasal.com/empresarios-proyectan-invertir-en-el-salvador-pese-a-los-retos-que-enfrenta-el-pais/>.

23 Gobierno de El Salvador, ‘Chivo Wallet’ <https://chivowallet.com/chivowallet.com>.

24 ‘Without prejudice to the actions of the private sector, the State will provide alternatives that allow users to carry out bitcoin transactions, as well as automatic and instant bitcoin-to-dollar convertibility if desired. The State will promote the necessary training and mechanisms for the population to access bitcoin transactions.’

25 ‘Ley De Creación Del Fideicomiso Bitcoin’, Decree No. 137, published in the Official Gazette No. 165, volume No. 432 (31 August 2021). See also BANDESAL, ‘Reglamento Para El Funcionamiento Del Fidebitcoin’ <https://www.bandesal.gob.sv/reglamento/>.

26 Art 1 ‘Ley De Creación Del Fideicomiso Bitcoin’ under the rules established by the Comité de Normas del Banco Central de Reserva de El Salvador, ‘Normas Técnicas Para Facilitar La Aplicación de La Ley Bitcoin’ <https://www.bcr.gob.sv/regulaciones/upload/Normas_Tecnicas_para_Facilitar_la_Aplicacion_de_la_Ley_Bitcoin.pdf>. As mandated by art 14, ‘Prior to the entry into force of this law, the State shall guarantee, through the creation of a trust in the Banco de Desarrollo de El Salvador BANDESAL, the automatic and instantaneous convertibility of bitcoin to dollars of the alternatives provided by the State mentioned in article 8 of this law.’

27 The ‘Licensing Principles of Digital Wallet Platforms for Bitcoin and USD’, the ‘Technical Standards to Facilitate Bitcoin Law Enforcement’ and the ‘Technical Standards to Facilitate Financial Institutions’ Participation in the Bitcoin Ecosystem’ issued by the Central Bank of El Salvador, and the ‘Guidelines for the Authorisation of the Operation of the Bitcoin and Dollar Services Technology Platform’ published by the El Salvador Superintendency of the Financial System.

28 This refers to a type of currency that is supported by a digital asset and is legally recognised as a financial instrument due to its unique features, including the use of a Blockchain with a specific algorithm.

29 ‘El Salvador’s Experiment with Bitcoin as Legal Tender’ (NBER, July 2022) <https://www.nber.org/digest/202207/el-salvadors-experiment-bitcoin-legal-tender>.

30 Erik HB Feyen, Yusaku Kawashima and Raunak Mittal, Crypto-Assets Activity around the World: Evolution and Macro-Financial Drivers (The World Bank 2022).

31 Clemens Graf von Luckne, Carmen M Reinhart and Kenneth S Rogoff, ‘Decrypting New Age International Capital Flows’ <http://www.nber.org/papers/w29337>.

32 ‘SEC.Gov | Paper, Plastic, Peer-to-Peer’ <https://www.sec.gov/news/speech/peirce-paper-plastic-peer-to-peer-031521>.

33 Republic of the Marshall Islands, ‘Declaration and Issuance of the Sovereign Currency Act 2018’, Pub. L. No. 125ND2 P.L. 2018-53 (2018), para. 102, https://sov.foundation/law.pdf (Sovereign Currency Act).

34 Sovereign Currency Act, para 104(4).

35 Sovereign Currency Act, para 103(a).

36 Sovereign Currency Act, para 105(2).

37 Sovereign Currency Act, para 104(1).

38 Sovereign Currency Act, para 104(5).

39 Sovereign Currency Act, para 110(2).

40 Budget and other national causes, mitigation of damages caused by global warming and climate change, protection of the fisheries and marine resources to ensure sustainable harvesting of tuna and other specials in the territorial waters, implementation of solar and other renewable energy facilities to reach 100 per cent sustainable energy resources, management and recycling of waste, investment into ecotourism projects, special needs of the people as a consequence of the US Nuclear Test Program, and distribution of SOV to Marshallese residents-citizens.

41 SOV Foundation, ‘The Marshallese Sovereign (SOV): Fair, Sustainable, Money’ <https://perma.cc/XX2Y-MZ4X>.

42 ibid 20.

43 ‘IMF Executive Board Concludes 2021 Article IV Consultation with the Republic of the Marshall Islands’ (IMF) <https://www.imf.org/en/News/Articles/2021/05/27/pr21142-marshall-islands-imf-executive-board-concludes-2021-article-iv-consultation>.

44 Sonja Davidovic, ‘The Marshall Islands SOV Deconstructed’ (The Global Fintech Intelligencer, 8 June 2021) <https://theglobalfintechintelligencer.com/2021/06/08/the-marshall-islands-sov-deconstructed/>.

45 See SOV whitepaper, Annex A.

46 Sonja Davidovic, 'The Marshall Islands SOV Deconstructed' (Global Fintech Intelligencer, 8 June 2021) <https://theglobalfintechintelligencer.com/2021/06/08/the-marshall-islands-sov-deconstructed>.

47 SOV Foundation (n 41) 22.

48 The Bahamas: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Bahamas (International Monetary Fund 2022) para 27 <https://www.imf.org/en/Publications/CR/Issues/2022/05/06/The-Bahamas-2022-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-517631>.

49 ‘The Future of Digital Assets in The Bahamas – Office of the Prime Minister’ (20 April 2022) <https://opm.gov.bs/the-future-of-digital-assets/>.

50 Co-Pierre Georg and Katharina Pistor, ‘The Right Response to the Libra Threat’ (Project Syndicate, 5 August 2019) <perma.cc/3WJW-FJ4K>.

51 Daniel Pinchbeck and Ken Jordan, What Comes After Money?: Essays from Reality Sandwich on Transforming Currency & Community (Evolver Editions 2011) 127.

52 Toni M Whited, Yufeng Wu and Kairong Xiao, ‘Central Bank Digital Currency and Banks’ (2022) <https://www.ssrn.com/abstract=4112644>.

53 ‘Digital Currencies: The US, China, And The World At A Crossroads’ (Hoover Institution Press 2022) 55 ff. <https://www.hoover.org/research/digital-currencies-us-china-and-world-crossroads>.

54 See for more details Toni Ahnert and others, The Economics of Central Bank Digital Currency (European Central Bank 2022); Ratikant Bhaskar and others, ‘Central Bank Digital Currencies: Agendas for Future Research’ (2022) 62 Research in International Business and Finance 101737.

55 Wouter Bossu and others, ‘Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations’ (2020) 20 IMF <https://www.imf.org/en/Publications/WP/Issues/2020/11/20/Legal-Aspects-of-Central-Bank-Digital-Currency-Central-Bank-and-Monetary-Law-Considerations-49827>.

56 Marie-Thérèse Boyer-Xambeu, Ghislain Deleplace and Lucien Gillard, Private Money & Public Currencies: The 16th Century Challenge (ME Sharpe 1994).

57 Kazuaki Sono, ‘Legal Tender: A Notion Associated with Payment’ in IMF, Current Developments in Monetary and Financial Law, Vol. 2 (International Monetary Fund 2003) 679 ff. <https://elibrary.imf.org/openurl?genre=book&isbn=9781589061767>. On this specific point, see also Vincenzo De Stasio, ‘Verso Un Concetto Europeo Di Moneta Legale: Valute Virtuali, Monete Complementari e Regole Di Adempimento’ (2018) 6 Banca, Borsa e Titoli di credito 749 ff.

58 Aminu Adamu Ahmed, Alhaji Adamu Saidu and Jibril Hussein Kawure, ‘The Roles of Central Bank Digital Currency over Physical Currency’ (2022) 1 International Journal of Social Science, Education, Communication and Economics 75.

This is especially so if a decentralised financial ecosystem (DeFi) is developed. Moreover, what is happening in the payment system is emblematic of the changing needs and objectives of economic policy in the EU. The announcement of a European sovereign wealth fund can no longer be read in terms of cooperative regulation or regulatory competition. Still, a single public policy and policy design sounded on resilience. It is to wonder if monetary policy would be neutral in the long term.

60 In the Euro Area, a draft on digital euro legal tender was released in June 2023.

61 FinTech Department, ‘Concept Note on Central Bank Digital Currency’ 14 <https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF>.

62 Civil Code of the People’s Republic of China 2020, art 514.

63 On this specific point see Rosa Giovanni Barresi ‘La Convivencia Entre Digital Euro Y Digital Asset’ in Filippo Zatti and Rosa Giovanna Barresi, ‘La futura gobernanza del sistema monetario internacional: primeras consideraciones sobre el papel del euro digital’ in Carmen Pastor Sempere (ed), Dinero digital y gobernanza TIC en la UE (Editorial Aranzadi 2022).

64 It is at most five times the illegal amount; if it cannot be determined, a fine of not less than 100,000 yuan but not exceeding 500,000 yuan shall be imposed. If the circumstances are severe, a penalty shall be imposed under art 61(2) of the Law on the People’s Bank of China. See Law of the People's Republic of China on the People's Bank of China (Draft for Comments on the Revised Draft) State Council of the PRC, ‘中国人民银行关于《中华人民共和国中国人民银行法(修订草案征求意见稿)》公开征求意见的通知_银行_中国政府网’ (23 October 2020) <http://www.gov.cn/zhengce/zhengceku/2020-10/24/content_5553847.htm>.

65 ‘See the Speech by Vice Chair for Supervision Quarles on Central Bank Digital Currency’ (Board of Governors of the Federal Reserve System) <https://www.federalreserve.gov/newsevents/speech/quarles20210628a.htm>.

66 G7 United Kingdom, ‘Public Policy Principles for Retail Central Bank Digital Currencies (CBDCs)’ <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1025235/G7_Public_Policy_Principles_for_Retail_CBDC_FINAL.pdf>; FSB, ‘G20 Roadmap for Enhancing Cross-Border Payments: Consolidated Progress Report for 2022’ (2022) <https://www.fsb.org/wp-content/uploads/P101022-1.pdf>; Options for Access to and Interoperability of CBDCs for Cross-Border Payments (Report to the G20) (BIS 2022) <https://www.bis.org/publ/othp38.pdf>; Chusu He, Alistair Milne and Markos Zachariadis, ‘Central Bank Digital Currencies and International Payments’ (17 May 2022) <https://papers.ssrn.com/abstract=4112382>.

67 See namely Filippo Zatti, ‘Nuevas Oportunidades Y Desafíos De La Emisión De Digital Asset Por El Banco Central Para La Gobernanza Del Sistema Monetario Internacional’ in Zatti and Barresi (n 63).