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Hook, Alexander --- "Central Bank Digital Currencies: Definitions, Regulatory Challenges And Lessons Learned From Digital Currency Law" [2020] UNSWLawJlStuS 3; (2020) UNSWLJ Student Series No 20-03


CENTRAL BANK DIGITAL CURRENCIES: DEFINITIONS, REGULATORY CHALLENGES AND LESSONS LEARNED FROM DIGITAL CURRENCY LAW

ALEXANDER HOOK[1]

I INTRODUCTION

On 18 June 2019, social media giant Facebook struck a momentous blow in the contemporary arms race between governments and the private sector over the control of digital money. It was announced that Facebook was launching its own digital currency to be called ‘Libra’.[2] Given this development, there is now more reason than ever for nation states to manage technical change on their own terms through the implementation of central bank digital currencies (‘CBDCs’). Facebook already reaches approximately two billion people through its flagship platform. By announcing it will issue a new global digital currency, it is potentially defying the sovereignty of nations to control their own monetary systems.

If Facebook’s digital currency goes ahead, it would amount to a fundamental redistribution of authority and control of global money markets from sovereign nations to a multinational corporation. It also comes dangerously close to a ‘one world’ currency with profound socio-economic and geopolitical implications, given the level of uptake expected. While the philosophical implications of a universal currency have been debated elsewhere at length, what is concerning is the lack of choice in the matter by nation states and their constituents in adopting privatised money.

Although currently circulating private sector digital currencies have not yet undermined wider financial stability, the potential for future digital currencies like Libra to disrupt the global financial system is significant. If nation states do not undertake to act soon, they may find a global currency driven by the private sector thrust upon them. Despite this, amidst rational concerns about how to execute CBDCs, nation states and international agenda-setting organisations have so far been slow to act in offering a viable alternative.

This paper identifies to what extent lessons learned over the last decade can be used to better regulate private sector digital currencies and CBDCs so that they can overcome the current inertia. The first lesson is that there needs to be a balance between privacy and disclosure in the design of CBDCs. It is argued that where CBDCs are available for public use, the hybrid model of creating both account-based and token-based CBDC is likely to provide the most appropriate balance between these two competing factors. Secondly, there is a need for clarity regarding the domestic and international legality of CBDCs. It is proposed that legal reform is a likely consequence of determining the functional aspects of CBDCs, including whether they can be issued as legal tender, where liability for errors should fall, how they are taxed and their use or abuse under public international law. The third and final lesson is that there is a need for a collaborative international response to private sector digital currencies and CBDCs. It is argued that harmonising legal approaches will enable nation states to better manage cross-border regulatory risks and preserve sovereign control over currency.

In this paper four such issues will be considered: the current context of CBDCs and how they are defined; the primary domestic and international actors that would be affected by CBDCs and their regulation; what the main regulatory challenges of CBDCs are envisioned to be; and lastly a discussion of the extent to which the lessons learned over the previous decade in digital currency laws will prove useful for improving regulation of private sector digital currencies and CBDCs in the future. Each issue will be outlined in turn with an emphasis on comparative international approaches to private sector digital currencies and CBDCs.

II HOW ARE CBDC’S DEFINED?

A Context and the Political Economy

In March 2018, the Bank for International Settlements (‘BIS’) released a report co-prepared by the Committee on Payments and Market Infrastructure (‘CPMI’) and Markets Committee (‘MC’) on CBDCs.[3] Significantly, the report noted that CBDCs were not a well-defined term.[4] There is a consensus amongst the authors of the report, however, that it can be defined as a digital ‘central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value’.[5] Commonly cited motivations for creating a CBDC include: the provision of a real-time digital alternative to slower contemporary payment systems; promoting financial inclusion by reaching out to unbanked populations; decreasing the high physical costs associated with cash handling;[6] and, potentially, assisting the efficacy of monetary policy.[7] Which reason is prioritised is largely idiosyncratic between jurisdictions.[8]

Additionally, there are very limited examples of CBDCs in practice as central banks have elected to instead adopt a ‘wait and see’ approach. In a 2018 survey of sixty-three central banks, it was found by the BIS that the majority considered a move to issue a CBDC in the short or medium-term as ‘somewhat or very unlikely’.[9] Currently, completed pilot projects in Ecuador, Uruguay, Senegal and Tunisia are leading the way for enterprises across the globe including Sweden, Canada, Thailand, the Philippines and China.[10] China has been identified to likely be the first major central bank to issue a CBDC in the form of a ‘digital yuan’.[11]

Consequently, the ‘global political economy’ for CBDCs remains immature. The theory of political economy founded by eminent jurist Jeremy Bentham asserts that desirable government action stems from a combination of power, knowledge or intelligence, and inclination.[12] Each factor is relevant to the development of CBDCs. States and their central banks currently have the technical power to achieve CBDCs and stand to gain much greater power in the conduct of their respective communities. They also have the knowledge and intelligence driven by collective information-gathering and examples in the private sector to identify what works and what does not work in this context.

Yet there remains a decided lack of inclination from many key decision-makers to act. Many do not consider that the benefits will outweigh the costs,[13] and more concerningly, do not see private sector digital currencies as an immediate concern worth challenging. Understanding the legal and financial challenges of CBDCs, and how similar challenges have been addressed in the past, may go a long way in breaking the logjam over their development and implementation.

B Compulsory Features

The BIS report differentiates between two features of CBDCs: first, the compulsory, primary features which characterise all CBDCs; and the secondary design features which can be implemented at the issuer’s discretion. The compulsory features are further differentiated in two key aspects: accessibility (wide or restricted); and technology (token-based or account-based).[14]

CBDCs may be defined by varying degrees of accessibility, including whether restrictions are placed on agent or jurisdiction. For instance, the Bank of Canada has experimented recreating payment systems for wholesale, large-scale entities using digital currency technology.[15] Additionally, the Bank of Canada has partnered with the central banks in the UK and Singapore to evaluate wholesale CBDCs that can be held and exchanged beyond their home jurisdiction.[16] In contrast, the Bank of Uruguay’s ‘e-peso’ was open to general purpose use for individuals. However, it was functionally restricted in jurisdictional scope because it only issued the CBDC to users connected with a local telecom provider.[17] As the most well-known private sector digital currencies are available for general purpose use, it follows that most of the applicable lessons that can be taken from those examples will primarily assist general purpose CBDCs.

Technology is another important consideration for CBDC issuers. Token-based payment systems are decentralised, relying on peer-to-peer functionality and the recipient’s ability to verify that the payment object is not counterfeit. One significant feature of private sector token-based digital currency like Bitcoin has been the use of cryptography to validate transactions. This has been achieved by using distributed ledger technology (‘DLT’) to maintain and secure a record of all tokens issued across multiple sites, preventing tampering, double-spending and falsification.[18]

On the other hand, account-based payment systems are centralised by a master ledger and instead rely on the ability to verify the identity of the account holder. Sweden’s Riksbank has proposed two versions of the account-based CBDC: the first is where the CBDC user is registered in a database and the central bank has active responsibility for the user; and the second is similar, albeit the central bank would only offer basic functions and give external payment providers responsibility for the direct relationship with the user.[19]

C Design Features

Once the main parameters of the CBDC has been set through defining its accessibility and technological framework, further design choices may be made. These most notably include anonymity; limits on ownership; availability; means of transfer and interest-bearing characteristics.[20]

1 Anonymity

Anonymity from the central bank is likely to only be associated with token-based CBDCs. In contrast to currency accounts which require verification of the account holder’s identity, the peer-to-peer nature of token-based digital currencies has allowed transactions between users under pseudonyms.[21] This is because developments in DLT like ‘blockchain’, which is a time-stamped series of immutable transaction records, make the need for a trusted intermediary to verify the parties’ identities and funds unnecessary.[22]

Yet token-based digital currency may not be anonymous in all respects. For example, Bitcoin maintains a public ledger where all the relevant transaction data of a user under a pseudonym can be observed and potentially linked back to the user’s identity.[23] The degree of anonymity in a CBDC will therefore depend on multiple factors. This includes whether the digital wallets used to store the currency are registered, whether transaction information is recorded and, if so, who can see that transaction information.[24] This may extend to counterparty anonymity which conceals the identity of the sender from the recipient and third-party anonymity which conceals information from other users.[25]

2 Limits on Ownership

Quantitative limits or other restrictions on the use or holdings of CBDCs could be imposed. This may incentivise certain behaviours or further refine the focus of the CBDC to a target group. For example, a lower cap may make the CBDC less useful for wholesale rather than retail payments.[26]

3 Availability

This feature concerns the timeframe and duration of CBDC access. With respect to timeframe, they may be available at all times or only during specified periods.[27] They could also be available permanently or only temporarily. For example, they may be created, issued and redeemed on an intraday basis.[28]

4 Means of transfer

CBDCs could be issued on a decentralised, peer-to-peer basis between the payer and the payee. Alternatively, they could function a lot more like existing bank deposits and be transferred through an intermediary like the central bank or another third-party provider.[29]

5 Interest-bearing characteristics

In a similar fashion to other electronic forms of central bank money, both positive and negative interest could be payable on a token-based or account-based CBDC.[30] For example, usage of CBDCs could be encouraged or discouraged by the setting of an interest rate different to the general policy rate.[31]

D Assigning the Features

Every available feature is on the table when it comes to designing CBDCs. However, there are likely to be a series of significant trade-offs between different choices. Fundamental decisions about its main characteristics are likely to inform the applicability of secondary design features.

For example, there is an important trade-off between anonymity and transparency. If a CBDC is account-based, then it is likely to forego privacy for increased visibility of user information. Likewise, if a CBDC is made widely accessible, then this may but not necessarily conflict with design choices aimed at limiting its availability or placing other limits on ownership.

Ultimately, decisions about what features will apply will be informed by the key stakeholders. Domestic and international norms will elucidate expectations about currency and the role that central banks and nation states play. Each stakeholder will have a different perspective on the relative benefits or costs of a given CBDC design.

III WHO ARE THE KEY STAKEHOLDERS AFFECTED BY CBDCS AND THEIR REGULATION?

The implementation of CBDCs is likely to affect a wide variety of domestic and international stakeholders. These include central banks, international organisations, financial regulators and the commercial banking and payment services industry. However, the stakeholders likely to be the most important in this process are the general public. This is because, under the general purpose CBDC model, they are the main consumer base. They are therefore an important target for competition with private sector digital currencies.

A Central Banks

Central banks, which are primarily responsible for monetary policy and issuing money in their respective jurisdictions, [32] would be to a great extent involved in managing the risks by being responsible for CBDC issuance and design.

Significantly, as the CBDC is a central bank liability, responsibility for monitoring digital transaction activity may increasingly shift to central banks. For instance, if a CBDC were widely available and had interest-bearing characteristics, it may be more attractive to retail depositors and result in a larger central bank balance sheet to the detriment of existing commercial banks.[33]

However, a degree of national government intervention in the design of CBDCs is inevitable. Many central banks likely require the legal authority of their national governments to issue CBDCs as a new form of legal tender.[34] Additionally, as eminent academics Ernest Gnan and Donato Masciandaro assert, certain design choices do not exclusively belong to central banks alone but also to the political sphere.[35] The anonymity of CBDCs, for instance, is a question that ‘affects the heart of personal freedom and modern liberal democracy’.[36]

B International Organisations

Further, international organisations may become to a great extent responsible for shaping regulatory approaches to CBDCs, both at an agenda-setting and standard-setting level.[37]

Currently, there has been limited activity by either the G20 or Financial Stability Board (‘FSB’), the entities nominally responsible for coordinating international approaches to financial regulation, towards setting the agenda for CBDCs. However, standard-setting organisations like the CPMI, International Monetary Fund (‘IMF’), and Basel Committee on Banking Supervision (‘BCBS’) have been influencing CBDC discussion through research and consensus-building. The IMF, whose objectives are to foster global monetary cooperation and financial stability, has made its support for CBDCs known through the publication of reports[38] and conference appearances.[39] In contrast, the CPMI has advocated for caution and further legal research on cross-border payment implications.[40]

If clearer agendas regarding CBDCs develop, then the frontline standard-setting level will inevitably become more active. For example, the Financial Action Task Force’s (‘FATF’) mandate is to establish guidelines regarding the implementation of legal, regulatory and operational measures to combat money laundering and terrorism financing.[41] Since it operates on a consensual basis, its main enforcement mechanisms are mutual reviews and the placement of jurisdictions with strategic anti-money laundering and counter-terrorism financing (‘AML/CTF) deficiencies on a public list.[42] CBDCs, much like their private sector counterparts, will present significant AML/CTF challenges to be addressed by bodies like the FATF with clear standards and guidelines.

C Financial Regulators

At a domestic level, financial regulators will have a significant role in administering and enforcing the laws and regulations surrounding CBDCs. As CBDCs are issued under the authority of the national government and would likely be considered legal tender, transactions in CBDCs are likely to be at an intersection between regulations concerning digital currency, banking and remittance.[43]

Additionally, the exercise by regulators of governmental or public powers to actively create laws and regulations in some jurisdictions may affect the direction that CBDCs take. It follows that there will likely be a greater need to ensure that financial regulators are kept accountable.[44] This is because political pressure on financial regulators to take or refrain from taking certain actions regarding CBDCs may create perceptions of regulatory capture.[45]

D Banking and Payment Services Industry

Industries in banking and payment services are likely to be adversely affected by CBDCs. Notably, the introduction of CBDCs in the retail sector may result in competition for commercial banks if retail depositors find CBDCs more attractive.[46] As a result, commercial banking as an industry may decline significantly as they may not be able to raise lending rates to preserve profits.[47] Accordingly, these industries are likely to be among the most vocal advocates for proper regulation for CBDCs.

Conversely, CBDCs may benefit the industry by easing liquidity pressures, particularly improving on past crisis situations where central banks have had to transport physical cash to commercial banks across long distances.[48] Central banks could also work in conjunction with commercial banks. Commercial banks could offer wallets to hold and make transactions in CBDCs, shifting the responsibility for transaction monitoring back to the banking industry which has greater experience with retail depositors.[49] However, this would present a conflict where disintermediation is an intended impact of a CBDC. For instance, the intention of introducing a CBDC may include increasing the role of the central bank so monetary policy can be more efficient or the central bank can otherwise regulate currency more closely.

E The Public and Other Stakeholders

Lastly, the public and other stakeholders like private firms are likely to be the most important sources of motivation for CBDCs. They are also amongst the most deeply affected by their implementation.[50] Any significant disruptions to the contemporary monetary system may generate public resentment towards the other stakeholders outlined above, particularly if risks are improperly managed.[51]

CBDCs are very unlikely to be successful if they cannot offer a viable alternative to what else is on offer to individuals and firms. If a CBDC is too restrictive or otherwise lacks value, then these stakeholders are likely to seek private sector alternatives. The ‘Imagine 2030’ report released by the Deutsche Bank in December 2019 indicated that, on current consumer trends, demand for private sector digital currencies could exceed fiat currencies by 2030.[52] Speed, lower transaction costs and perceptions of greater anonymity are key factors driving this push.[53] If nation states are not able to present another attractive option, then private sector digital currencies could become a new store of value regardless of public sector input through mass consumer uptake.

IV WHAT ARE THE CHALLENGES OF CBDC REGULATION?

A Maintaining Financial Integrity

On one hand, a significant challenge posed by CBDCs for regulators is that they can be abused for money laundering, terrorism financing or other financial crimes. Certain design choices could increase the anonymity of CBDC holders. Accordingly, these choices may make it easier for financial crimes to escape the notice of authorities or at least complicate their investigation.

There is one consistent thread across the IMF, BIS and academic literature: whether CBDCs should be like cash. Cash is a physical token-based payment available for general purpose use that by its nature ensures both counterparty anonymity and third-party anonymity.[54] In a similar fashion, a CBDC that does not require identification and verification of participants or generate historical transaction records could provide anonymity impossible with existing non-cash payment methods like credit cards.[55]

Consequently, a risk of CBDC anonymity is increased financial crime.[56] A stable and trusted high-anonymity CBDC could conceal illegal activity but, unlike cash, be transferred at a faster rate and in greater denominations through digital technology. Limits on payments in and holdings of CBDCs would reduce but not entirely address this issue, particularly without monitoring of structured payments.[57]

This regulatory concern is reflected in the current approach of central banks. For instance, the Central Bank of Uruguay designed its CBDC users’ wallets to be anonymous yet traceable with transactional data that could be decrypted if required by a competent authority.[58] This sentiment has been mirrored by the Vice President of People’s Bank of China, who supported a CBDC that could achieve ‘controllable anonymity’ to mitigate AML/CTF risks.[59]

Additionally, a potential weakness of CBDCs would be their reliance on a digital infrastructure. The example of the 2016 Bangladesh central bank hack where approximately eighty million USD was diverted from its accounts is instructive that central banks naturally make attractive targets for cyber-attacks.[60] Instability and reputational risks stemming from breaches could cause significant disruption to the functioning of the payment system. In Sweden, it has been suggested that their proposed CBDC could mitigate the effects of a catastrophe by implementing situational offline capabilities.[61]

B Protecting Data Privacy

On the other hand, regulators are faced with valid concerns as to how data obtained from CBDC users should be sheltered from abuse. Wholesale institutions naturally expect confidentiality in their payment systems, as without it their transaction data could be abused by competitors and other interested parties. Additionally, the phenomenon of data profiling made possible by personal information flows can enable the prediction and manipulation of peoples’ characteristics and behaviours.[62] While access to this information is helpful for regulators in addressing financial crime, there is a countervailing public interest concern that data could be used in discriminative ways or for private gain. Any unreasonable abrogation of a population’s right to privacy may also contravene international law: the International Covenant of Civil and Political Rights expressly provides for legal protection from arbitrary or unlawful interference with an individual’s privacy.[63]

Much attention has been given to the potential of ‘smart contracts’ in this context. The emergence of complex digital ledgers has also allowed the creation of self-executing, autonomous computer protocols that can facilitate commercial agreements between parties. These protocols form the essence of smart contracts which could be used to create ‘programmable money’.[64] In Australia, smart contracts have been proposed as a means of controlling how recipients of social welfare payments spend or transfer their funds.[65]

General purpose CBDCs that are traceable with complex smart contract characteristics could pose a systematic threat to privacy: nation states could gain data on how their citizens spend money and dictate how they do so. This is exacerbated by CBDCs being framed as a means of access for those who do not currently hold commercial bank accounts.[66] In practice, these are typically vulnerable populations who have low income and financial literacy[67] and are thus particularly vulnerable to government control. CBDC users’ data could also be sold to interested third parties or become exposed through data breaches.

These issues are compounded by existing difficulties in making even the most fundamental legal principles work with complex digital algorithms. In 2019, academic Christopher Clack and lawyer Ciaran McGonagle examined the challenges of adapting smart derivative contracts to standardised legal agreements provided by the International Swaps and Derivatives Association. They found many instances of complex terminology and conflicting definitions across legal, financial and computer science areas relevant to the contracts.[68] Ultimately, they concluded that a thoroughly inter-disciplinary approach was the bare minimum required to avoid unexpected or undesirable legal or contractual issues.[69]

It follows that, since smart contracts in a CBDC context are likely to operate on a much larger scale than the contracts examined by Clack and McGonagle, the complexity and quantity of contracts will be even greater. If implementing a discretionary right to privacy into the code of CBDCs is only partially effective, then it is likely more justifiable under international law to ensure the right is protected either by supplemental legal protections or by eliminating the discretion.

CBDCs that emphasise anonymity may even help reduce crime. This is because, in a similar fashion to prohibiting high denomination banknotes, prohibiting anonymous CBDCs may encourage the creation of an underground IOU payment mechanism.[70] Any increase in these socially disruptive alternatives would likely offset the advantages of stripping CBDCs of their anonymity, particularly in a scenario where CBDCs completely replaced banknotes.

It is also important to place concerns over how CBDCs may be abused by governments in the context of limited central bank accountability.[71] Global reactionary trends currently threaten to worsen the situation by supporting political control over central banks for short-term gain.[72] For example, the most recent nomination for the Federal Reserve Board in the United States has challenged the notion that their central bank should operate free of political influence.[73]

C Ensuring Financial Stability

Lastly, it is important to recognise that these two competing regulatory challenges are subject to an overarching objective of minimising systemic risk and negative repercussions on the economy. As legal academics John Armour et. al. assert, financial stability deserves first order priority as a regulatory goal because it is a public good which the private sector cannot adequately maintain.[74]

As highlighted above in Part III.D, there is a valid concern that CBDCs could upset financial stability by creating competition between central bank money and commercial bank money and thereby impose hardships on the existing banking system. This is of particular concern in circumstances of wider financial instability: namely, if a CBDC’s value was guaranteed by the central bank and was considered as more secure relative to a claim on a private bank, it may prompt a ‘bank run’.[75] This would likely result in a great upheaval in the role of central banks, as it may fall to them to extend credit to the economy.[76] Alternatively, commercial banks may be propped up at great expense to the public. These are possible outcomes that need to be appropriately planned for in the pre-implementation stage of a CBDC.

V WHAT LESSONS CAN BE LEARNED FROM DIGITAL CURRENCY LAW OVER THE LAST DECADE?

In this pattern of pursuing innovation and technological development, opportunities brought by CBDCs can also mean challenges. How can central banks and regulators best balance the objectives of financial integrity and privacy, all while maintaining stability in the face of considerable disruption? Fortunately, the political economy surrounding regulatory action on private sector digital currencies has had a lot more time to develop.[77] This means that there is likely to be significant lessons that can be taken in formulating regulatory approaches to CBDCs.

Private sector digital currencies share many broad features with CBDCs. Their mutual underlying technology offers great potential for security, speed, minimal transaction fees, ease of storage and relevance in the digital era compared to the status quo.[78] How the functions of private sector digital currencies have been regulated will therefore have bearing on best practice in regulating CBDCs.

However, private sector digital currencies also act as a useful contrast to CBDCs. Private sector digital currencies are distinct from CBDCs in terms of their purpose and effect. Many like Bitcoin and Ethereum operate as open source projects where the purpose is that there is no one individual owner. In practice, however, private sector digital currency exchanges have stepped in as intermediaries and aim to maximise profit by holding large amounts and charging fees for purchases, withdrawals or trades.[79]

In a similar fashion, issuers like Facebook propose that their digital currency’s purpose is reaching out to unbanked and underbanked populations, increasing community participation in the financial ecosystem.[80] At the same time, Facebook’s motives are not completely altruistic: they also seek to generate engagement with their digital currency so they can increase advertisement revenue on their main platform.[81]

CBDCs therefore provide an effective foil to private sector digital currencies. They highlight a different approach where the aim is nominally providing a public service rather than making a profit. Conversely, examining the lessons learned over the last decade in digital currency law may also elucidate how private sector digital currencies can be better regulated to strike a better balance between private sector and public sector in this area of interest.

A There Needs To Be A Balance Between Privacy And Disclosure

1 What Is the Cultural Value Of Privacy In Private Sector Digital Currencies?

In a similar fashion to how privacy is the central point of contention between advocates and adversaries of CBDCs, the development of private sector token-based digital currency also involved a perceived need for stronger user anonymity.[82] For example, blockchain has been touted for restricting unwelcome third-party access.[83] This is primarily associated with ‘permissioned’ blockchains which only allow actions by certain identifiable participants as opposed to ‘permissionless’ blockchains which provide equal and open rights to participate in any capacity.[84]

Accordingly, the first lesson is that the cultural significance of private sector digital currencies should not be ignored in the calculation of appropriate CBDC design and regulation. The 2008 financial crisis had severe consequences for public trust in the banking system and drove innovation partly as a means of finding different financial sources to accommodate new enterprises.[85] If central banks were to issue a CBDC that undermined privacy then it may further injure that trust. This would be a missed opportunity: funds may be increasingly directed to channels of private sector digital currencies, where central banks and regulators will have less agency to get ahead of the AML/CTF risks.

2 What Are The Current Regulatory Approaches?

At the same time, the position that CBDCs should be made completely anonymous to prevent the prevalence of underground payment mechanisms would likely not have regulatory support. This can be identified from the responses of most national regulatory authorities to the AML/CTF and other financial crime risks of private sector digital currencies. These strategies can be broadly identified on a spectrum from low-level or lack of regulation to prohibition. Each approach will be outlined below with an emphasis on the underlying reasons and trends.

(a) Unregulated or Low-level Regulation

There are jurisdictions who have judged based on their power, knowledge or intelligence that only limited action is desirable. This includes jurisdictions like Belgium[86] and the UK[87] who regulate private sector digital currencies to a very limited degree. The most commonly cited reason is that private sector digital currencies do not present significant risks to price stability, to the financial system in general, or to its individual users in that jurisdiction.[88] Instead, digital currencies have been targeted for their more everyday consumer risks, including perceptions about their volatility or use in fraudulent schemes.[89]

They may also be regulated within the bounds of existing laws affecting financial services providers. For example, products that link to digital currencies or derive their value from them might be regulated as securities or derivatives.[90] However, with their increasing prevalence, a lack of digital currency-specific regulation is unlikely to be a long-term global trend: with respect to Belgium and the UK, both have signaled their interest in regulation, with the UK scheduled to design and implement a new AML/CTF regime aimed at private sector digital currencies in early 2020.[91]

(b) Regulated

Japan[92], Australia[93] and Canada[94] are notable examples of jurisdictions where entities carrying on a digital currency exchange business will be required to comply with specific requirements. Significantly, these requirements incentivise the creation of account-like relationships with both regulators and customers that prioritise disclosure of key user information and ongoing monitoring. For instance, Japan and Australia’s regimes are very similar: both require that digital currency exchange businesses must register with an authority; that identification and verification of customers be undertaken; that they maintain certain transaction records; and that suspicious transactions are reported.[95] Canada’s legislation, although not yet in force, goes further by restricting banks from opening and maintaining accounts with unregistered companies dealing in private sector digital currencies.[96]

Justifications for this kind of regulation stem from both a concern about the risks of private sector digital currencies and a willingness to enhance their potential economic benefits. In a similar fashion to CBDCs, much concern has been directed by authorities to the potential anonymity and limited transparency of private sector digital currency transactions relative to other traditional non-cash payment methods. As argued in the explanatory memorandum to Australia’s Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (Cth), which introduced registration-based AML/CTF regulation for digital currency exchange providers, the ‘modest’ intrusion to privacy is justified. This is because it is in accordance with guidelines issued by international AML/CTF standard-setting body FATF and it will likely provide actionable intelligence on financial crimes.[97]

Yet, on the other hand, the explanatory memorandum also referred to regulation of private sector digital currencies as a legitimising mechanism to ease market concerns and enable their growth.[98] This sentiment has been particularly prevalent in France, which has been identified as taking a ‘soft touch’ to digital currency regulation.[99] For example, under French law, financial institutions must establish objective, non-discriminatory and proportionate rules governing access to bank accounts for private sector digital currency token issuers who have satisfied registration requirements.[100] France’s embrace of digital currency regulation as a way to legitimise the industry can ultimately be traced to national competition: the Minister of the Economy, Bruno Le Maire, has publicly advocated for France to become a global hub of ‘initial coin offerings’ or ‘ICOs’.[101]

Reasonable minds may differ as to whether the intrusions of regulation in each instance are indeed modest. However, the laws have had some success in meeting their stated objectives of regulation in hand with market growth. In the Australian context, over 200 exchanges have been successfully registered, indicating widespread engagement with the regulations.[102] Additionally, the market for private sector digital currencies in Australia has continued to rapidly expand, with the total value of digital currency trading in 2017 estimated to be approximately $5.9 billion AUD.[103]

(c) Prohibited

Lastly, there are several jurisdictions who have imposed extensive restrictions on investments in private sector digital currencies. Some, like Algeria, Pakistan and Vietnam, have banned any and all activities involving private sector digital currencies.[104] Alternatively, others have barred domestic financial institutions from facilitating transactions that involve private sector digital currencies. These include China, Thailand, Iran and Lithuania, amongst others.[105] These bans have primarily been justified because of consumer protection. For example, the State Bank of Pakistan released a statement cautioning the general public in 2017, asserting that private sector digital currencies were not authorised or recognised as legal tender.[106]

However, upon further examination, they appear to fulfil strategic goals. For Pakistan, who are in the process of introducing digital currency regulation and even their own CBDC by 2025,[107] restricting the growth of private sector digital currencies may have given them more agency to introduce digital currencies on their own terms. This is almost certainly the case for China. Notably, in the context of the incoming digital yuan, officials have publicly stated that currency is a matter of sovereignty as much as it is economics.[108] For other states, like Iran, the ban has also been described as a temporary measure to comply with FATF-identified deficiencies in its AML/CTF regime.[109]

Ultimately, there are very few, if any, cases where the ban is applied without a public objective ancillary to protecting consumers. Once these temporary objectives have been achieved, it appears that jurisdictions have expressed interest in private sector digital currencies, CBDCs or a combination of both.

3 How Might These Approaches Be Applied to CBDCs?

Having considered these trends, there are three main takeaways: firstly, that the AML/CTF risks of private sector digital currencies are comparable to general purpose CBDCs; secondly, that there is a global trend towards more specific regulation for private sector digital currencies instead of not choosing to regulate or prohibiting them; and thirdly that this regulation has typically involved designing account characteristics that requires balance between privacy and safeguards commensurate to the risks involved. These safeguards are primarily limited to the provision of key user information along with ongoing issuer disclosure requirements where necessary.

One method of achieving this in the CBDC context would be developing an account-based model, which would benefit from the greatest level of legitimacy. However, the account-based model likely raises social welfare concerns and imposes a potentially unreasonable burden on central banks through demand for customer support and infrastructure. Instead, regulators could impose account-like compliance requirements. This could be achieved by regulating issuers of token-based CBDCs like digital currency exchange businesses. In a similar fashion to Uruguay’s e-peso, this model would have the added benefit of retaining demand for centralised service providers like commercial banks who have existing infrastructure. Additionally, central banks could feasibly create an anonymous yet traceable CBDC by design. However, this would require close coordination between financial, legal and computer science professionals to be viable for both purposes.

Ultimately, there is force to the argument that an appropriately coordinated hybrid system is the most appropriate mechanism to maintain the balance between financial integrity and data privacy. This is supported by the proposal of Sweden’s Riksbank to incentivise account-based CBDCs but also create a token-based CBDC which stores its value locally on a smartphone application or a card.[110] For example, account-based CBDCs could be designed so that they have a higher cap than token-based CBDCs. This could lower the utility of anonymous token-based CBDCs for financial crime while keeping CBDCs accessible for groups unwilling or unable to make accounts with a public authority.[111] Full CBDC anonymity is worth analysis and debate, but best practice informed by international expertise and regulatory movements advocates for balance.

However, any appropriation of information from CBDC users must be carefully moderated by clear and effective data protection laws. This assertion reflects both the potential scale of users and vulnerability of digital infrastructure associated with CBDCs. Without obligations imposed on CBDC data recipients to secure information or remedy breaches, the risk of harm caused either by identity theft or by lack of trust in the financial system increases.

To address uncertainty, the best way forward is likely to develop the CBDC to be compatible with data protection laws by design. For instance, importing a ‘consensus by authority’ where the central bank has control over storing copies of the ledger and adding new entries may limit confusion over data responsibility in a blockchain context.[112]

B There Needs to be Domestic and International Clarity on Their Legality

1 What Are the Implications of a New Digital Legal Tender?

Further, the disparity in how the financial crime risks of digital currencies have been regulated highlights that there are also great differences across jurisdictions regarding their legal treatment. This includes differences concerning whether private sector digital currencies satisfy the status of ‘legal tender’ and how they will be taxed. In a similar fashion, the effective implementation of CBDCs requires that nation states consider the adequacy of their existing legal frameworks to fit their intended use. CBDCs may also generate tensions in international law that need to be clarified. This is because digital currencies provide an alternative to large-scale international payment networks and may frustrate the ability of nation states to hold each other to account through economic measures.

First, almost no jurisdiction currently considers private sector digital currency as legal tender capable of being accepted for payment of financial obligations. One notable exception is the Republic of the Marshall Islands which has recognised a third-party private sector digital currency as a second legal tender. This has attracted a large amount of criticism from the IMF.[113] This is because, in contrast to fiat currency and most models of CBDCs, existing private sector digital currencies are not backed by clear governance, standards, mandates or other assets.[114]

Consequently, existing laws can only provide very limited guidance on the domestic stability implications of legal tender with digital currency characteristics like a CBDC. For example, both private sector digital currencies and CBDCs have received attention for their potential to disintermediate the financial system. However, the gravity of disintermediation has been greatly differentiated in practice. Disintermediation caused by current private sector digital currency raises issues primarily as to whether peer-to-peer systems escape regulatory oversight by avoiding disclosure obligations imposed on intermediaries.[115] While it is a growth industry, it has not been adopted as a regular means of payment for most people due primarily to legal, accessibility, reputational or even energy barriers.[116]

In contrast, general purpose CBDCs that are legal tender would feasibly capture a much larger share of the contemporary payment system. As mentioned above in Part IV.C, CBDCs with interest-bearing characteristics could incentivise ‘bank runs’ by retail customers in crises. Accordingly, legal challenges stem not only from whether the central bank has the authority to issue CBDCs, but whether it would interfere with their mandate as public authorities. As legal academic Hossein Nabilou asserts with respect to the European System of Central Banks:

‘Such a consequence would be inimical to the [central bank’s] statutory mandate of contributing to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system’.[117]

Accordingly, central banks considering CBDCs will need to carefully examine whether their conduct could fall outside the scope of their enumerated powers and be considered ultra vires and unconstitutional.[118] If so, further consideration must be given to altering the design of CBDCs to fit the laws or substantial legal reform.

It is also essential for CBDC issuers and regulators to consider the implications of digital algorithms interacting with legal principles, including but not limited to the concept of legal tender. As established in Part IV.B, it is difficult to ensure that the code used in complex financial instruments complies with the spirit of legal principles. Even where experts from multiple disciplines are convened, it may be difficult if not impossible to account for every contingency where the algorithm and the law conflict. This is exacerbated by the speed and potential uptake of CBDCs, which may see one legal error replicated in thousands of transactions.

As eminent legal author Professor Richard Susskind asserts, trusting binding legal decisions to digital algorithms therefore raises important ethical and social questions.[119] There are indications that developments in technology may help machines improve at incorporating abstract legal ideas beyond their current limitations.[120] However, regulators should remain vigilant in order to prevent the rule of law becoming substituted with the rule of code.

It is also important to reflect on where liability may fall for contestable machine decisions in this context. In B2C2 Ltd v Quoine Pte Ltd,[121] the Singapore International Commercial Court considered how the intention of parties in a matter concerning private sector digital currencies with smart contract features was to be ascertained. It found that the knowledge and intention of the programmer when they wrote the code was relevant and distinguished this from the translation of that intention in the automated digital algorithm.[122]

Although this decision sets a helpful precedent, it remains to be seen whether it is suitable for CBDCs. If they become widely used as legal tender, then it is likely that there will be increased demand for consumer protection from instances of digital algorithm error. This may include increasing the amount of legal risk that central banks take as the designers of digital currencies. Accordingly, nation states will likely have to create new laws that reflect community expectations about where responsibility lies for digital algorithm errors while still limiting the potential indeterminacy of claims.

2 What Are the Implications for Taxation Law?

The high levels of variation in how taxation laws have dealt with existing digital currencies indicates that the taxation status of CBDCs will need to be carefully tailored. Since most jurisdictions have been clear that private sector digital currencies are not legal tender, this has allowed them to be more flexible in their approach to determining the applicable tax bracket. This is demonstrated by the wide international variety regarding the categorisation of private sector digital currencies for tax purposes.[123] In Israel, private sector digital currencies are taxed as assets; in Switzerland, they are taxed as foreign currency; and in the UK, what type of tax is imposed depends on whether the taxpayer is an individual, unincorporated business or corporation.[124]

Nation states will likely have to generate new taxation laws to fit CBDCs. In contrast to designing taxation approaches to private sector digital currencies, this is a matter of both adapting existing taxation systems and fulfilling the policy objectives of CBDC design. Since general purpose CBDCs would be made legal tender, they will reach a wider number of users. They may also be used like current fiat currency to pay income and other entitlements. As a result, the designation of these CBDCs as assets or foreign currency for tax purposes is unlikely to be appropriate. Also, taxation systems necessarily involve the collection of information about taxpayers. Consideration would therefore have to be given as to the breadth of information that CBDCs provide to taxation authorities relative to the intended anonymity in their design. For example, in Canada the central bank would be required to provide information about the recipient of interest-bearing CBDC income to the Canada Revenue Agency.[125]

3 What Are the Implications For Public International Law?

On a wider scale, the association of CBDCs with their national governments may have adverse consequences for public international law. This is an area that existing digital currency laws would clearly be inadequate to address. As an illustration, Venezuela’s government recently issued an official digital currency called ‘Petro’. The Petro was backed by Venezuela’s oil reserves and was designed to evade financial sanctions imposed against it by the United States and other countries.[126] This was achieved by using the digital currency to avoid the standard interbank SWIFT payment network, conceal the user’s location and mix funds on different international exchanges.[127]

These are issues which will likely require public international law solutions. This may necessitate less reliance on direct economic sanctions in favour of other enforcement measures. For example, the United States is currently restricting its citizens from purchasing the Petro.[128] It is feasible that a CBDC with smart contract features could achieve similar aims by further enforcing restrictions on purchases of another currency or asset.

C There Needs to Be a Collaborative International Response to Private Sector Digital Currencies

1 What Has Been the Response of International Agenda-setting Institutions to Private Sector Digital Currencies?

In a similar fashion to CBDCs, and even considering the trend of registration-based regulation across jurisdictions, international agenda-setting with respect to private sector digital currencies has remained at a conceptual level. The G20 and the FSB have demonstrated a keen interest in the subject that has not materialised into direct action or policy. Their attention is evidenced by the FSB’s provision of a report on private sector digital currencies to the G20 in July 2018[129] and a comparative directory of financial regulatory approaches in April 2019.[130] Inertia on making any kind of policy declaration has been explained by a finding that private sector digital currencies do not currently pose a substantial risk to international financial stability.[131]

International standard-setting organisations, however, have been more prolific in their approach. For instance, the FATF has released guidelines on approaches to virtual assets including private sector digital currencies.[132] This discrepancy is to a fair extent understandable. While the agenda-setting entities are concerned with wider financial stability, the standard-setting bodies are involved with the more granular details of their focus areas.

2 What Are the Implications for CBDCs and Financial Integrity?

The lack of international agenda-setting with respect to private sector digital currencies is a serious inadequacy. One reason for this is because they pose important cross-border regulatory challenges. In particular, the nature of AML/CTF risk is that ‘global safeguards to combat money laundering and terrorist financing ... are only as strong as the jurisdiction with the weakest measures’.[133] Research on Bitcoin in the private compliance sector highlighted that, of all the transactions on the top twenty global exchanges, 97 percent of direct payments from identifiable criminal sources were received by unregulated exchanges.[134]

The level of indirect payments from criminal sources, or payments that move through one or more separate wallets before being deposited into an exchange to be converted into another digital currency or fiat currency, could be substantially higher. Above all, this highlights that the strong AML/CTF and digital currency laws of one country may be completely undermined by the weak ones of another; private sector digital currencies can simply be mixed and ‘cleaned’ in unregulated jurisdictions and moved back undetected into the global financial system.

Without adequate international coordination, CBDCs may also be subject to abuse for illicit gain. In a similar fashion to correspondent banking, which is defined by the practice of a bank in one country being authorised by another bank to provide services in a foreign country, CBDCs may become a ‘gateway for money laundering’.[135]

CBDCs may pass from one jurisdiction into another for illicit purposes, and inconsistent foreign AML/CTF regimes and bank secrecy laws may inhibit the ability of parties to fulfill due diligence requirements.[136] Even if a CBDC were designed to be limited to its jurisdiction of issue, this does not mean that they could not be digitally breached by an overseas actor in some way if thought advantageous to do so.

3 What Are the Implications for CBDCs and Financial Sovereignty?

Under a wider political lens, a lack of an effective international public response to private sector digital currencies may enable large-scale corporate entities to assert greater control over currency compared to CBDCs. This would likely result in several adverse outcomes for the global community.

As was mentioned in the beginning of this paper, concern has been particularly directed to the announcement of a digital currency by social media giant Facebook. This digital currency called ‘Libra’ has several advantages over existing private sector digital currencies. This includes its established market reach through the Facebook social media platform. However, an equally important distinction between Libra and other private sector digital currencies like Bitcoin is that Libra will be fully backed by safe assets denominated in reputable fiat currencies.[137] Coupled with its potential to operate outside of slower commercial and central bank settlement and money-transfer systems, it may have a competitive advantage over the banking and payment services industry as well.[138]

If Libra were to become relied upon as a store of value by even half of its current social media user base, which is only just shy of the most populated country on Earth,[139] then massive shocks to the global economy will inevitably occur. This could happen in several ways. First, monetary policy set by central banks may be less effective in controlling inflation due to the influence of another currency. Also, investment decisions made by the issuers of Libra could have significant impacts on asset prices and fiat currencies. Lastly, if Libra incorporated lending into its business model, then it could almost completely substitute the role of commercial banks. This would concentrate international financial risk in what is practically a ‘one world’ currency, creating a single point of failure for the global financial system.

There is also apprehension about how a large, profit-driven corporation will adequately manage the public policy elements of a digital currency that can be used as legal tender. Facebook has been criticised for failing to transparently demonstrate how it will address the regulatory risks of creating a digital currency.[140] This perspective also emerges within a wider context of Facebook and other technology giants being found to act consistently below their legal obligations in protecting users’ privacy.[141] If Facebook cannot provide transparency at this formative stage prior to implementation, then it remains to be seen how it might adequately prevent or even disclose instances of abuse throughout Libra’s execution.

Of greater concern is the implications of an unaccountable private entity gaining control over the currency of nation states. This could validly be construed as a threat to state sovereignty. The ability for a government and central bank to carry out their public mandate is in direct proportion to their capacity to make decisions about flows of money. In a similar fashion, commentators have put China’s digital yuan in a larger context as a means of the government reasserting its control over private sector e-commerce entities. Although digital currencies as technical stores of value have been prohibited, China has not prevented third-party services operating with financial institutions to provide mobile and online payment platforms.

Consequently, the private sector has introduced digital currencies into China in all but name. Ant Financial’s Alipay and Tencent Holding Ltd’s WeChat Pay currently preside over the payments industry in China that is worth approximately $27 trillion USD.[142] Their main service is facilitating smartphone-based electronic payments that process claims on a bank account like debit cards or credit cards.[143] The relative ease of this cashless system has attracted a significant number of users: there are now more users of Alipay and WeChat Pay then there are of the domestic commercial banks.[144] Together, these factors point to a payments industry that is now ‘too big to fail’ without presenting a systemic risk to the financial system. This means that policy decisions may increasingly have to protect this status quo to prevent financial instability. As a result, this detracts from the nation state’s autonomy in regulating its own financial affairs.

The introduction of the digital yuan, which would function as both an alternative to the Alipay or WeChat payment platforms and as a store of value, may help reduce some of this risk by offering a competitive alternative. However, time will tell how quickly China’s circumstances can be reversed. Currently, the People’s Bank of China is aiming for at least one third of market share with the digital yuan to regain payment system control.[145] The stakes are high and if adoption of the digital yuan is weak then the central bank’s reputation may be jeopardised.[146] Accordingly, although CBDCs are still open to abuse by states, it follows that they play an important role in addressing the anticipated increase in private sector payment systems and digital currencies. They can prevent private sector monopolisation over finance and are likely more accountable to public policy. This is because issuing institutions like central banks have monetary authority granted to them by law, which are ideally decided by more consensual decisions over how society should be organised.

4 What Action Should Be Taken?

The lack of genuine international public collaboration in existing digital currency laws is concerning. This is because it highlights a critical gap in ensuring global financial integrity and sovereignty. Cross-border risks of digital currencies including CBDCs are best managed by all relevant jurisdictions rather than dealt with alone. Additionally, while the risks posed by private sector digital currencies may seem inconsequential at this moment, Libra is the first wave of an incredibly disruptive movement. Evidence of private sector control over payments in China has provided a window into potentially global systemic risks if this movement continued unabated. Consequently, urgent efforts should be taken to harmonise international legal approaches to private sector digital currencies and CBDCs.

Significantly, giving up some autonomy to collaborate in the short-term is the key for nation states to retain sovereignty over financial control in the long-term. The influence of large multinational corporations through private sector digital currencies or other payment systems may creep unopposed through fragmented jurisdictions. By the time that it was identified as a systemic risk, it may be too late to manage on favourable terms. Indeed, if China were to collaborate with other jurisdictions in formulating appropriate regulations for private sector digital currencies, it may enliven competition rather than concentration in its domestic payments market. Strong, consensus-driven public approaches now will therefore enable nation states to better manage technical change while maintaining financial control.

From my perspective, an informal, collaborative approach is a pivotal step. However, it lacks the truly global reach that an effective solution to the regulatory challenges of private sector digital currencies and CBDCs requires. For example, memorandums of understanding (‘MOUs’) between financial intelligence agencies can be an effective tool in a regulator’s arsenal to facilitate bilateral or multilateral consensus on AML/CTF and other financial crime prevention approaches.[147] This can help clarify the responsibilities of correspondent financial institutions in their home and host jurisdictions, facilitating compliance. MOUs can also be more detailed and individualised than international standards and, if mutually desired, incorporate binding provisions. Yet they are ultimately constrained in effectiveness by their limited scope.

Nor is it necessarily the appropriate regulatory response to unilaterally impose laws on other jurisdictions to address cross-border issues. The usage of extraterritoriality in data protection law has raised questions as to whether it is fair or even effective.[148] Notably, the lack of consent is likely to exacerbate political frictions between jurisdictions and does not adequately consider the potential inability of developing economies to support increased monitoring requirements. This holds true for data protection law as it does for any other kind of regulation.

Rather, the transition in international law-making from ‘thin state consent’ driven by formal treaties to ‘thick stakeholder consent’ that prioritises the organic development of norms supports the argument that success requires broad collaboration.[149] When the G20 met in June 2019[150], it is certain that private sector digital currencies and CBDCs were discussed. However, there remains a disappointing lack of policy declarations. The regulatory challenges and future risks are clear but whether there exists the political will to set an international agenda for the future of digital currencies is uncertain. This task may be ambitious at this early stage, but it is preferable to waiting until private sector digital currencies become a material risk to international financial sovereignty and stability.

VI CONCLUSION

The Deputy Governor of the Bank of Italy has asserted that CBDCs have ‘nothing to do’ with private sector digital currencies.[151] This paper has demonstrated that upon closer inspection the opposite is reasonably true: CBDCs have many things, if not everything, to do with private sector digital currency. They have many similar features but are strongly differentiated in their overall purpose and effect. As technology has enabled capital to flow more freely and in greater volumes across nation states, the international financial and monetary system has become increasingly linked.

Private sector digital currencies are the next big step in this process, promising access to instantaneous finance for billions of people. Yet, if allowed to do so unchecked, they may create more issues for financial integrity and stability than they solve. If nation states and international agenda-setting organisations want to get ahead of private sector dominance in this area, then they need to collaborate and give serious thought to implementing viable alternatives like CBDCs.

Ultimately, there are several lessons that nation states can learn from the last decade to better regulate private sector digital currencies and CBDCs. First, there is an identifiable need to balance privacy and traceability in designing CBDCs. Regulatory trends indicate that an approach commensurate to the risks involves at least low-level disclosure and ongoing transaction monitoring. The public policy nature of CBDCs will likely necessitate a greater inclination towards anonymity, but this could be tempered by a hybrid system incorporating accounts and traceable tokens.

Second, there is a need to clarify the domestic and international legality of CBDCs. Creating CBDCs that function effectively in their respective jurisdictions requires understanding whether obstacles exist to their classification as legal tender, where liability falls when errors occur, how they will be taxed and how they may affect inter-jurisdictional matters. It is likely that significant legal reform will be necessary to adapt domestic and international laws to the presence of CBDCs.

Lastly, there is a need for a collaborative international response to private sector digital currencies. Fragmented responses likely increase cross-border AML/CTF risks and allow private sector digital payment alternatives to undercut the financial and monetary authority of nation states. A ‘one world’ currency that poses immense systemic risk and is administered by private entities apathetic to public policy concerns may emerge. Nation states should embrace harmonisation in their approaches to digital currencies: without it, there can be no long-term success.


[1] BA (Distinction), LLB. I would like to thank Australian barrister Christopher Dobbs for his assistance and encouragement. All errors are my own.

[2] Kari Paul, ‘Libra: Facebook launches cryptocurrency in bid to shake up global finance’, The Guardian (online, 18 June 2019) <https://www.theguardian.com/technology/2019/jun/18/libra-facebook-cryptocurrency-new-digital-money-transactions>.

[3] Committee on Payments and Market Infrastructure (‘CPMI’) and Market Committee (‘MC’), ‘Central Bank Digital Currencies’ (CPMI Paper No 174, Bank for International Settlements, 12 March 2018) 1 (‘Central Bank Digital Currencies’).

[4] Ibid 3.

[5] Ibid.

[6] Ernest Gnan and Donato Masciandaro, ‘Do we need central bank digital currencies? Economics, technology and institutions’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 8, 9.

[7] ‘Central Bank Digital Currencies’ (n 3) 10.

[8] Christian Barontini and Henry Holden, ‘Proceeding with caution – a survey on central bank digital currency’ (BIS Paper No 101, Monetary and Economic Department, 8 January 2019) 12.

[9] Ibid 11.

[10] Gnan and Masciandaro (n 6) 18.

[11] Lulu Yilun Chen and Zheping Huang, ‘Alipay, Tencent Beware: China’s Digital Yuan is Closing In’, Bloomberg (online, 24 October 2019) <https://www.bloomberg.com/news/articles/2019-10-24/alipay-tencent-beware-china-s-digital-yuan-is-closing-in>.

[12] Emilios Avgouleas and David C. Donald, ‘Introduction’ in Emilios Avgouleas and David C. Donald (eds), The Political Economy of Financial Regulation (Cambridge University Press, 2019) 2.

[13] Barontini and Holden (n 8) 12.

[14] ‘Central Bank Digital Currencies’ (n 3) 4.

[15] Scott Hendry et al, ‘Jasper Phase III: Securities Settlement using Distributed Ledger Technology’ (White Paper, Bank of Canada, 22 October 2018) 1.

[16] Bank of Canada, Bank of England and Monetary Authority of Singapore, Cross-border interbank payments and settlements (Report, 15 November 2018) 1.

[17] Gnan and Masciandaro (n 6) 9.

[18] Timothy Lane, ‘Decrypting “Crypto”’ (Speech, Hayskane School of Business, 1 October 2018) <https://www.bankofcanada.ca/2018/10/decrypting-crypto/>.

[19] Sveriges Riksbank, The Riksbank’s e-krona project – Report 1 (Report, 1 September 2017) 19-21 (‘Riksbank’s e-krona project’).

[20] ‘Central Bank Digital Currencies’ (n 3) 5-7.

[21] Merve Can Kus Khalilov and Albert Levi, ‘A Survey on Anonymity and Privacy in Bitcoin-Like Digital Cash Systems’ (2018) 20(3) IEEE Communications Surveys & Tutorials 2543, 2543.

[22] Ibid 2544.

[23] Ibid 2549.

[24] Tommaso Mancini-Griffoli et al, ‘Casting Light on Central Bank Digital Currency’ (Staff Discussion Note, International Monetary Fund, November 2018) 8.

[25] ‘Central Bank Digital Currencies’ (n 3) 6.

[26] Ibid.

[27] Ibid 5.

[28] Ibid.

[29] Morten Bech and Rodney Garratt, ‘Central bank cryptocurrencies’ (2017) BIS Quarterly Review 55, 56.

[30] Ibid 63.

[31] ‘Central Bank Digital Currencies’ (n 3) 6.

[32] Dimitris N. Chorafas, The Changing Role of Central Banks (Palgrave Macmillan, 2013) 129.

[33] ‘Central Bank Digital Currencies’ (n 3) 15.

[34] Gnan and Masciandaro (n 6) 10.

[35] Ibid.

[36] Ibid.

[37] Martin A. Weiss, Introduction to Financial Services: International Supervision (Congressional Research Service, 2015) 1.

[38] Mancini-Griffoli et al (n 24) 30.

[39] Christine Lagarde, ‘Winds of Change: The Case for New Digital Currency’, (Speech, Singapore Fintech Festival, 14 November 2018) <https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency>.

[40] Financial Stability Board (‘FSB’), Crypto-assets: Report to the G20 on work by the FSB and standard-setting bodies (Report, 16 July 2018) 5 <https://www.fsb.org/wp-content/uploads/P160718-1.pdf> (‘Report to the G20’).

[41] Financial Action Task Force (‘FATF’), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation - The FATF Recommendations 2012, 15 February 2012, 6.

[42] ‘High-risk and other monitored jurisdictions’, FATF (Web Page, 2019) <https://www.fatf-gafi.org/countries/#high-risk>.

[43] Economics References Committee, Digital currency – game changer or bit player (Report, 10 August 2015) 12.

[44] Joanna Bird, ‘Regulating the Regulators: Accountability of Australian Regulators’ [2011] MelbULawRw 27; (2011) 35(3) Melbourne University Law Review 739, 741-742.

[45] Michael R. Potter, Amanda M. Olejarski and Stefanie M. Pfister, ‘Capture Theory and the Public Interest: Balancing Competing Values to Ensure Regulatory Effectiveness’ (2014) 37 International Journal of Public Administration 638, 638.

[46] Mancini-Griffoli et al (n 24) 23.

[47] Ibid.

[48] Ibid 25.

[49] Ibid.

[50] Rohan Grey, Regulatory Challenges and Risks for Central Bank Digital Currency (Focus Group Technical Report, June 2019) 23.

[51] Ibid.

[52] Deutsche Bank, ‘Imagine 2030’ (Research Paper, Konzept, 6 December 2019) 12 (‘Imagine 2030’).

[53] Ibid 58.

[54] Bech and Garratt (n 29) 65.

[55] FATF, Virtual Currencies – Key Definitions and Potential AML/CFT Risks (Report, June 2014) 9 <https://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf>.

[56] Itai Agur, ‘Central Bank Digital Currencies: an overview of pros and cons’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 113, 115.

[57] Mancini-Griffoli et al (n 24) 4.

[58] Gnan and Masciandaro (n 6) 18.

[59] Josiah Wilmoth, ‘China’s State Digital Currency must have “Controllable Anonymity”, Says Central Bank Official’, CCN (online, 26 January 2018) <https://www.ccn.com/chinas-digital-currency-must-have-controllable-anonymity-says-central-bank-official>.

[60] Fabio Panetta, ‘21st century cash: central banking, technological innovation and digital currencies’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 23, 30.

[61] Cecilia Skingsley, ‘Considerations for a cashless future’ (Speech, SNS Finance Panel, 22 November 2018) 7 < https://www.riksbank.se/en-gb/press-and-published/speeches-and-presentations/2018/skingsley-considerations-for-a-cashless-future/>.

[62] Bart Custers, ‘Data Dilemmas in the Information Society: Introduction and Overview’ in Bart Custers, Toon Calders, Bart Schermer and Tal Zarsky (eds), Discrimination and Privacy in the Information Society: Data Mining and Profiling in Large Databases (Berlin: Springer-Verlag, 2013) 3, 4.

[63] International Covenant on Civil and Political Rights, opened for signature 16 December 1966, 999 UNTS 171 (entered into force 23 March 1976) art 17.

[64] James Eyers, ‘Programmable money will be the trigger for governments to adopt blockchain’, Australian Financial Review (online, 8 October 2018) <https://www.afr.com/technology/programmable-money-will-be-the-trigger-for-governments-to-adopt-blockchain-20181005-h169hx>.

[65] Ibid.

[66] Mancini-Griffoli et al (n 24) 28.

[67] Panetta (n 60) 25.

[68] Christopher D. Clack and Ciaran McGonagle, ‘Smart Derivatives Contracts: the ISDA Master Agreement and the automation of payments and deliveries’ (Research Paper, Centre for Blockchain Technologies and International Swaps and Derivatives Association, 1 April 2019) 9.

[69] Ibid 32–3.

[70] JP Koning, Approaches to a Central Bank Digital Currency in Brazil (Research Paper, R3 Research, 15 October 2018) 5.

[71] Santiago Fernandez de Lis, ‘Central bank digital currencies: features, options, pros and cons’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 46, 51.

[72] Donato Masciandaro and Francesco Passarelli, ‘Populism, Financial Inequality and Central Bank Independence (Working Paper No. 74, Bocconi, 2018) 15.

[73] Saleha Mohsin, ‘Trump’s Fed Pick Judy Shelton Cast Doubt on Central Bank Independence’, Bloomberg (online, 22 November 2019) <https://www.bloomberg.com/news/articles/2019-11-21/trump-fed-pick-shelton-cast-doubt-on-central-bank-independence>.

[74] John Armour et. al, Principles of Financial Regulation (Oxford Scholarship Online, 2016) 70.

[75] Vitas Vasiliauskas, ‘Central bank digital currencies’ (Speech, Reinventing Bretton Woods Committee Conference, 12 April 2019) 3.

[76] Ibid.

[77] Hossein Nabilou, ‘Central Bank Digital Currencies: Preliminary Legal Observations’ (2019) Journal of Banking Regulation 1, 2.

[78] ‘Imagine 2030’ (n 52) 58.

[79] Cameron Dark et al, ‘Cryptocurrency: Ten Years On’, Reserve Bank of Australia - Bulletin (online, 20 June 2019) <https://www.rba.gov.au/publications/bulletin/2019/jun/cryptocurrency-ten-years-on.html>.

[80] Lauren Feiner, ‘Facebook crypto chief says company does not expect ‘to make money at the outset’ with Libra currency’, CNBC (online, 15 July 2019) <https://www.cnbc.com/2019/07/15/facebook-does-not-expect-to-make-money-at-the-outset-with-libra.html>.

[81] Ibid.

[82] Gnan and Masciandaro (n 6) 10.

[83] Bech and Garratt (n 29) 2.

[84] Khalilov and Levi (n 21) 2550.

[85] Douglas W. Arner, Jànos Barberis and Ross P. Buckley, ‘FinTech, RegTech, and the Reconceptualization of Financial Regulation’ (2017) 37(3) Northwestern Journal of International Law and Business 373, 385.

[86] Law Library of Congress, Regulation of Cryptocurrency Around the World (Report, 16 August 2018) 31 (‘Regulation of Cryptocurrency’).

[87] ‘Cryptoassets’, Financial Conduct Authority (‘FCA’) (Web Page, 7 March 2019) <https://www.fca.org.uk/consumers/cryptoassets> (‘Cryptoassets’).

[88] Regulation of Cryptocurrency (n 86) 32.

[89] Ibid.

[90] FCA, ‘CP19/22: Restricting the sale to retail clients of investment products that reference cryptoassets’ (Consultation Paper, FCA, July 2019).

[91] ‘Cryptoassets’ (n 87).

[92] Payment Services Act (Japan) Act No 59 of 2009, arts 62-2, 63-3 <http://www.japaneselawtranslation.go.jp/law/detail/?id=3078 & vm=02 & re=02> .

[93] Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) pt 6A.

[94] Parliament of Canada, ‘Bill C-31’, Parliament of Canada (Web Page, 19 June 2014) <http://www.parl.ca/DocumentViewer/en/41-2/bill/C-31/royal-assent> .

[95] Regulation of Cryptocurrency (n 86) 111.

[96] Parliament of Canada (n 94).

[97] Explanatory Memorandum, Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (Cth) 7-8.

[98] Ibid.

[99] Christophe Perchet, Juliette Loget and Stephane Daniel, ‘Blockchain & Cryptocurrency Regulation 2020 | France’ Global Legal Insights (Web Page, 23 October 2019) <https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/france#chaptercontent5>.

[100] Ibid.

[101] Hannah Murphy and David Keohane, ‘France plans rules to lure cryptocurrency business’, Financial Times (online, 22 March 2018) <https://www.ft.com/content/2e7b2778-2d22-11e8-9b4b-bc4b9f08f381>.

[102] Ariel Bogle, ‘Cryptocurrency looks for respectability as more than 200 exchanges registered’, ABC News (online, 1 February 2019) <https://www.abc.net.au/news/science/2019-02-01/digital-currency-exchanges-bitcoin-austrac-industry-reputation/10764316>.

[103] Accenture and Australian Digital Commerce Association, ‘How Big is Australia’s Digital Currencies Market?’ (Research Summary, Accenture, 2018) 3 <https://www.accenture.com/_acnmedia/pdf-74/accenture-adca-digital-currency-exchange-research-summary-2018.pdf>.

[104] Regulation of Cryptocurrency (n 86) 2.

[105] Ibid.

[106] State Bank of Pakistan, ‘Caution Regarding Risks of Virtual Currencies’ (Media Release ERD/M&PRD/PR/01/2018-31, 6 April 2018).

[107] P. H. Madore, ‘Pakistan Will Issue Its Own Digital Currency By 2025’, CCN (online, 2 April 2019) <https://www.ccn.com/pakistan-will-issue-its-own-digital-currency-by-2025/>.

[108] Yinan Zhao and Heng Xie, ‘Why China’s rushing to mint its own digital currency’, Bloomberg (online, 11 September 2019) <https://www.bloomberg.com/news/articles/2019-09-10/why-china-s-rushing-to-mint-its-own-digital-currency-quicktake>.

[109] Regulation of Cryptocurrency (n 86) 83.

[110] Riksbank’s e-krona project (n 19) 5.

[111] Ibid.

[112] Christopher Kuner et al, ‘Blockchain versus data protection’ (2018) 8(2) International Data Privacy Law 103, 103.

[113] International Monetary Fund (‘IMF’), Republic of the Marshall Islands (IMF Country Report No. 18/270, 10 September 2018) 6.

[114] Ibid.

[115] Tobias Adrian and Tommaso Mancini-Griffoli, ‘The Rise of Digital Money’ (Research Note, IMF, July 2019) 9.

[116] Paul Pichler and Martin Summer, ‘Digital money, cryptocurrencies and central banks’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 91, 94-95.

[117] Nabilou (n 77) 15.

[118] Ibid 10.

[119] Richard Susskind, ‘Why We Need Online Courts’, Law.com (online, 22 November 2019) <https://www.law.com/legal-week/2019/11/22/why-we-need-online-courts/>.

[120] Law Society of New South Wales, The Future of Law and Innovation in the Profession (Report, March 2017) 36.

[121] [2019] SGHC(I) 03 (Singapore International Commercial Court).

[122] Ibid 42 (Thorley IJ).

[123] Regulation of Cryptocurrency (n 86) 2.

[124] Ibid 3.

[125] Walter Engert and Ben Fung, ‘Motivations and implications of a CBDC’ in Ernest Gnan and Donato Masciandaro (eds), Do We Need Central Bank Digital Currency? Economics. Technology and Institutions (SUERF/BAFFI CAREFIN Centre Conference, 2018) 56, 66.

[126] Enwar Prasad, ‘Central Banking in a Digital Age: Stock-Taking and Preliminary Thoughts’ (Research Paper, Hutchins Center on Fiscal & Monetary Policy, 16 April 2018) 12.

[127] Ibid.

[128] Kate Rooney, ‘Trump issues action blocking Venezuela cryptocurrencies within US’, CNBC (online, 19 March 2018) < https://www.cnbc.com/2018/03/19/trump-issues-action-blocking-us-citizens-from-trading-or-financing-venezuela-cryptocurrency.html>.

[129] FSB, Report to the G20 (n 40) 1.

[130] FSB, Crypto-assets regulatory directory (Report, 5 April 2019) <https://www.fsb.org/wp-content/uploads/P050419.pdf>.

[131] FSB, Report to the G20 (n 40) 1.

[132] FATF, Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Providers, 21 June 2019, 4–5 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets.html>.

[133] FATF, ‘More on High-Risk and Non-Cooperative Jurisdictions’, FATF (Web Page, 2019) <https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/more/more-on-high-risk-and-non-cooperative-jurisdictions.html?hf=10&b=0&s=desc(fatf_releasedate)>.

[134] Ciphertrace, 2018 Q3 Cryptocurrency Anti-Money Laundering Report, (Report, 2018) 2 <https://ciphertrace.com/resources-cryptocurrency-anti-money-laundering-report-2018-q3-html/>.

[135] United States Senate Committee on Governmental Affairs, Correspondent Banking: A Gateway for Money Laundering (Report, 5 February 2001) 41.

[136] Ibid.

[137] Michael Collins, ‘Facebook’s Libra could one day warrant ‘reserve’ status’ (2019) 33(10) Equity 13, 13.

[138] Ibid.

[139] ‘Number of monthly active Facebook users worldwide as of 3rd quarter 2019 (in millions)’, Statista (Web Page, 2019) <https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/>.

[140] Lydia Beyoud and Joe Light, ‘Senators Caution Mastercard, Visa, Stripe on Libra Membership’, Bloomberg (online, 9 October 2019) <https://www.bloomberg.com/news/articles/2019-10-09/senators-caution-mastercard-visa-stripe-on-libra-membership>.

[141] ‘Facebook to pay record $5n to settle privacy concerns’, BBC News (online, 24 July 2019) <https://www.bbc.com/news/business-49099364>.

[142] Chen and Huang (n 11).

[143] Ibid.

[144] Zhang Yuzhe and Lin Jinbing, ‘In Depth: Alipay and WeChat May Have Grown Too Big to Fail’, Caixin Global (online, 23 November 2018) <https://www.caixinglobal.com/2018-11-23/alipay-and-wechat-may-have-grown-too-big-to-fail-101351370.html>.

[145] Chen and Huang (n 11).

[146] Ibid.

[147] Australian Transaction Reports and Analysis Centre (‘AUSTRAC’), ‘AUSTRAC continues to strengthen international partnerships with latest MOU signing with Qatar’ (Media Release, 12 November 2019).

[148] Christopher Kuner et al, ‘The extraterritoriality of data privacy laws – an explosive issue yet to detonate’ (2013) 3(3) International Data Privacy Law 147, 147.

[149] Joost Pauwelyn, Ramses A. Wessel and Jan Wouters, ‘When Structures Become Shackles: Stagnation and Dynamics in International Lawmaking’ (2014) 25(3) European Journal of International Law 733, 734.

[150] ‘G20 Japan 2019’, Government of Japan (Web Page, 2019) <https://www.japan.go.jp/g20japan/fukuoka.html>.

[151] Gnan and Masciandaro (n 6) 9.


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