Hi Crypto Insiders, This is the fourth of five weekly newsletters I have been publishing each Saturday for our Inside Cryptocurrency audience. This series analyzes the laws and regulations around different applications of Blockchain technology. At the end of these five weeks, I will join our "Inside Cryptocurrency: Law and the Blockchain" event, where I will discuss these issues directly with you and answer whatever questions you may have. For those who missed my first few posts, I’d like to introduce myself. My name is Liam. I’ve been writing the morning edition of Inside Business for the past 18 months and am the former Managing Editor at Inside.com. I’ve long had an interest in the blockchain space and have been an advisor, consultant, and investor in the industry since 2016. I also hold a Law Degree and Master of Laws and currently work at Zargar Lawyers in Vancouver, advising tech startups and small businesses including blockchain companies. Today we will be covering Central Bank Digital Currencies, or CBDCs. To provide a thorough analysis of the regulatory environment, we'll look at the following: - Central Bank Digital Currencies: What are they and who is working on them?
- Central Bank Group Report: What did a group of the top central banks conclude in their research on CBDCs?
- CBDC Leaders: Which countries are currently leading in the development and deployment of CBDCs?
- US Positions: What is the position of the United States regarding CBDCs?
- CBDC Challenges: What are the potential issues?
- Stablecoins: Are they an alternative?
This series is not intended to provide legal advice; its purpose is to share knowledge and information gained through the study and practice of law and participation in the industry. This is a quickly evolving industry so please ensure that you stay up to date with any changes and consult a lawyer who is familiar with your personal situation before participating in the industry in any capacity. Please feel free to reach out on Twitter or LinkedIn if you have any questions, comments, or suggestions. |
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What are CBDCs and who has them? Last week we finished our newsletter by raising the unique regulatory and legal issues around CBDCs and Stablecoins. Today we are going to be looking at both in-depth. For those needing a refresher, Central Bank Digital Currencies are cryptocurrencies backed and issued by national governments. CBDCs would allow the US Federal Reserve, for example, to issue cryptocurrencies with each token equal to 1 US Dollar instead of continuing to print money each time a new dollar needed to be minted. This would allow for a cryptocurrency whose value comes from the same confidence and promises as existing fiat currencies. On the flip side, it would allow for a fiat currency to have all the benefits we've previously discussed such as near-instantaneous transactions or accessibility — which are hallmarks of blockchain technology. Currently, all but 7 of the global economies tracked by the Atlantic Council are working or have worked on establishing a Central Bank Digital Currency. - 9 countries have officially launched a CBDC including:
- The Bahamas
- Nigeria
- Grenada
- Saint Lucia
- 15 countries with CBDCs in the pilot or testing phase include:
- Saudi Arabia
- South Africa
- Sweden
- Ukraine
- Russia
- China
- Singapore
- South Korea
- 15 countries currently with a CBDC in development include:
- Canada
- Brazil
- Australia
- India
- Switzerland
- 40 countries currently researching the potential of CBDCs include:
- The United States
- Mexico
- Spain
- Germany
- The UK
- Italy
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Central Bank Report on CBDCs In 2020, a group of central banks including the Bank of Canada, Bank of England, Bank of Japan, Swiss National Bank, European Central Bank, together with the Bank for International Settlements, created a research group to investigate how CBDCs could be used, how they would function and how they would operate in relation to cross border payments. The group released a report in October 2020 that highlighted key principles and features that these Central Banks would apply when developing their own projects. Key Principles
One of the worries about CBDCs is how they will actually harm or benefit citizens in comparison to cash. Here are three principles that were established that if followed, would allow benefits to be maximized and harms to be limited: - Ensure that there is coexistence with cash and other types of money in a flexible and innovative financial and payments system.
- Ensure that any new CBDC, when introduced, is launched within the larger framework of real policy objectives and care is taken to ensure that there is no harm done to the government's ability to enact monetary policy or to the stability and functioning of the financial system.
- Novel features of a CBDC should be explicitly chosen to create a currency that can promote and encourage continued innovation and efficiency.
Core Features
Here are four of the core features of any CBDC that these central banks believed were essential for creating a currency that helps promote the interest of their countries: - Any system must be resilient and secure above all to protect the integrity of the country's financial system and currency.
- It must be convenient, easy to use and available at very low cost or no cost to the average person.
- It should be supported by the same standards and legal framework as the current monetary system.
- It should have an appropriate role for the private sector to operate and allow for innovation and competition.
To this day, this framework continues to set the standard for the development of cryptocurrencies for many countries, specifically those involved in the research and their allies.
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CBDC Leaders As seen in President Biden's recent executive order regarding cryptocurrencies and blockchain technology, there is a clear recognition that the development of a CBDC could be important for continued influence on the financial system and for the national security of countries. There are four countries that, while not necessarily the most technically advanced, have been leaders in this field for specific reasons: - China
- China led the world by developing its own CBDC as early as 2014, long before the technology was on the radar of many developed nations. While their CBDC is still technically in a pilot phase, there are already billions of dollars in transactions occurring using their CBDC in Shenzhen, Suzhou and other test cities. The country also recently announced that the trials would be extended to Bejing and Hong Kong as the government continues to advance on the most sophisticated CBDCs.
- Venezuela
- The country was one of the first to fully launch a CBDC with Petro in February 2018. The launch did not work and like the country's actual currency, suffered from volatility. Experts also found numerous technical, design and infrastructure flaws. The country has since launched two more CBDCs, with the Digital Bolivar in October 2021 being the most recent. None of these have worked, however, and the country has been unable to design a functional CBDC. Nonetheless, it continues to develop new iterations and provide important real-life testing for countries considering or building a CBDC.
- Canada
- In February 2020, Canada took a unique approach and announced that the Bank of Canada had no plans to release a CBDC but would be fully developing one so that it can instantly launch it if it deems it to be in the interest of the country. The two scenarios for when it would launch a CBDC are:
- The use of physical bills decreases by such an amount where Canadian citizens could no longer use them for a wide range of transactions
- Other digital currencies from other countries or the private sector became so widely popular that they could feasibly replace the Canadian Dollar as a method of payment, store of value or unit of account.
- UK
- Unlike other countries on this list, the UK has not actually begun developing a CBDC but it has conducted some of the most detailed investigations into the effect of CBDCs on their economy. The country has been undergoing a study since April 2021 that includes interviews and discussions with normal people, companies, politicians, economists and others to truly understand how a CBDC could be used alongside cash and bank deposits.
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A US Digital Dollar In 2021, the Federal Reserve underwent an extensive study of CBDCs and their potential effects on the US economy. This report, however, did not provide any conclusion as to the future of a Digital Dollar. Since then, President Biden's executive order issued just three weeks ago has given the Federal Reserve six months to provide a recommendation. Despite this, there have been numerous instances of legislation in some way referencing the concept in anticipation of its future deployment. These include: - Take Responsibility for Workers and Families Act, which required member banks to establish a pass-through Digital Dollar Wallet that would allow the US Government to directly send stimulus checks from the Federal Reserve to citizens' own cryptocurrency wallets. The Act also provided a definition of Digital Dollar for the first time.
- Banking for All Act included requirements for a digital dollar wallet to be used to help increase the speed at which Covid-related relief could be distributed if a digital dollar was established.
- Automatic Boost to Communities Act also mentioned the use of FedAccounts, which was a Digital Dollar Wallet developed by the Federal Reserve, and would allow the government to instantaneously mint and issue money to those needing support.
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CBDC Challenges While it may seem obvious that countries need to adopt a CBDC in the future, especially to continue having a national currency that's efficient and used by a generation more reliant on technologies, there are still some major issues: - Privacy is the most concerning issue from a consumer perspective. If individuals were to have their identities tied to a wallet that was developed by the Federal Reserve or another Central Bank, the government would always know exactly how much money each person has and could track all money in and out of accounts. While this can be done in the current system with court orders and cooperation between private and public bodies, the ability for the government to know all financial transactions conducted in the country with no oversight is a serious privacy concern.
- Competition is another issue. While we currently have many fiat currencies, the US Dollar remains a more trusted currency than almost any other fiat currency. The reason that the US Dollar is not universally used is that there are still barriers in foreign countries to converting and using the currency. In a digital future, these barriers would disappear and there is a serious consideration that only one CBDC would survive. This creates a scenario where one national government could control the currency used for all or substantially all international trade.
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Stablecoins Underpinning the discussion on CBDCs is the concept of stablecoins. These coins, which are backed by the US Dollar or other commodities or fiat currencies, can potentially alter an alternative to CBDCs. Many that already exist are operated by private companies outside of the level of regulation that a CBDC would face. Stablecoins, however, come with their own set of concerns: - Securities Laws - Facebook's Libra (later Diem) stablecoin was the subject of securities laws investigations and there was debate around whether users might expect to profit in some way from using the stablecoin. If such profits were expected, then there would be an element of securities law invoked.
- Currency Laws - The US government seriously had to consider how Libra could affect the sovereignty of the country and the constitutional right of the government to control currency.
- Banking Laws - Libra was also investigated for potentially engaging in shadow banking by setting up a parallel banking system aside from the established financial system.
- Privacy Laws - Libra was subject to investigations as to the privacy of the coin and the information that the Libra blockchain would hold about its users.
Other issues that were considered include Anti-Money Laundering, Know-Your Customers, and Custody.
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| Would you trust a US Digital Dollar given the privacy concerns? | | | | |
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 |  | Liam Gill is a founder, lawyer and investor.
He previously founded Fumarii Technologies, which became a top 20 ranked cloud computing service (Yahoo Finance! 2019) valued at over $30M. He holds an LLB Laws (UK), MSc Management and Master of Laws and currently practices law at Zargar Lawyers + Business Strategists in Vancouver, Canada.
|   | | Editor | Beth is a writer and analyst at Inside.com covering artificial intelligence and daily tech news. Since starting work at Inside, she has covered various topics including virtual reality, drones, and e-commerce. Prior to that she was a public policy and investigative reporter for The Arizona Republic, where she won a Pulitzer Prize nomination and First Amendment Award for reporting on the rising costs of pensions. Reach her at Beth.Duckett@inside.com. | |
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