The International Monetary Fund has said close to 80 per cent of the world’s central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear.
A recent survey conducted by the organisation reviewing the central bank laws of 174 IMF members found that most central banks could issue only physical cash, with only about 40 countries being legally allowed to issue digital currencies.
The research report said, “Law does not limit issuance to bank notes and coins for 40 central banks, 23 per cent. Law is not clear for 27 central banks, 16 per cent and law only authorises issuance of bank notes and coins for 104 central banks, which is 61 per cent.”
The financial body noted that although countries were suggested to be moving fast toward creating digital currencies, majority of such countries did not have legal structures supporting the establishment of cryptocurrencies, or in some cases, permitting their development.
The fund explained that this was not just a legal technicality. It said any money issuance was a form of debt for the central bank, so it had to have a solid basis to avoid legal, financial and reputational risks for the institutions.
The IMF said, “Ultimately, it is about ensuring that a significant and potentially contentious innovation is in line with a central bank’s mandate. Otherwise, the door is opened to potential political and legal challenges.
“To legally qualify as currency, a means of payment must be considered as such by the country’s laws and be denominated in its official monetary unit.
“A currency typically enjoys legal tender status, meaning debtors can pay their obligations by transferring it to creditors.
“Therefore, legal tender status is usually only given to means of payment that can be easily received and used by the majority of the population. That is why banknotes and coins are the most common form of currency.”
It added that to use digital currencies, digital infrastructure such as laptops, smartphones and connectivity must first be in place.
It noted, however, that governments could not impose on their citizens to have it, so granting legal tender status to a central bank digital instrument might be challenging.
The global financial body said, “Without the legal tender designation, achieving full currency status could be equally challenging. Still, many means of payments widely used in advanced economies are neither legal tender nor currency, such as commercial book money.
“The overlapping of these and other design features can create very complex legal challenges and could well influence the decisions made by each monetary authority.”
The IMF concluded that the creation of central bank digital currencies would also raise legal issues in many other areas, including tax, property, contracts, and insolvency laws; payments systems; privacy and data protection; most fundamentally, preventing money laundering and terrorism financing.
According to the organisation, if they were to be ‘the next milestone in the evolution of money’, central bank digital currencies needed robust legal foundations that ensured smooth integration to the financial system, credibility and broad acceptance by countries’ citizens and economic agents.