Tuesday, May 18, 2021

"Who Will Regulate Central Bank Digital Currencies?"

 Good question.

From Columbia Law School's CLS Blue Sky blog. May 12:

Though a bit provocative, this headline raises a liminal question on the various projects of Central Bank Digital Currencies (CBDBs): Which  governance will apply to them? Or as Juvenal, the poet in ancient Rome, famously asked, “Who will guard the guards themselves?”[1] 

What Is a Central Bank Digital Currency?
A CBDC is the digital form of a country’s fiat currency and, like traditional currency, represents a claim on that country’s government. Instead of printing money, the central bank issues electronic coins backed by the full faith and credit of the government.[2] As a result, for the first time, central banks will accept claims directly from the public.

When Facebook announced its Libra project of creating a “universal digital currency” in June 2019, the company faced forceful pushback from central banks, governments, and regulators. Those entities raised serious concerns over what they saw as the privatization of the sovereign right to issue national currencies. These concerns helped accelerate the central banks’ own efforts, which had already begun to various degrees, to look into issuing their own digital currencies.

Central banks are now issuing regular reports on their progress and, in October 2020, the Bank for International Settlements (BIS) published a report jointly with the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, and the Board of Governors of the Federal Reserve, suggesting a growning consensus among leading central banks over how CBDCs would work and be regulated. [3] 

The Chinese CBDC Is Purely Domestic
In China, the People’s Bank of China issued its own report on Global Rules for CBDC Monitoring, Data Sharing[4]. Since the Yuan is not fully convertible and the CBDC has only been introduced domestically, it is unlikely to serve as a model and seems designed to give more power to central banks and add finance to the government’s methods of controlling its citizens. Zhou Xiaochuan, a former governor of the Peoples Bank of China, has said that the China CBDC would be utilized locally instead of globally immediately after it goes public.[5]

As Hung Tran at the Atlantic Council has said, this will significantly strengthen the Chinese government’s social credit scoring system, which is used to control Chinese citizens by rewarding or punishing their behaviors. Basically, the more citizens that use the Digital Currency Electronic Payment (DCEP) instead of physical cash, the more the government can monitor and control their lives. This is an important issue for other central banks contemplating digital currencies. These banks must demonstrate their ability to put in place very robust institutional safeguards against potential abuse of digital currency-transactions data. [6]

Mu Changchun, the head of the Chinese central bank’s Digital Currency Research Institute, has said that so-called “controllable anonymity” is at the core of China’s digital yuan design. A completely anonymous CBDC is not an option.[7]


Is It Really About Digital Technology?
There is a fundamental ambiguity in the term, “digital currency.” Let me first address the word digital.

When Libra was launched, Facebook insisted that Libra’s mission was to enable a simple global currency and financial infrastructure that empowers billions of people.[9] Yet the unbanked population of the world is not impaired by the availability of a good mobile application  for payments. They are, instead, confronted by infrastructure problems: lack of electricity, telecommunications or internet access.

What’s more, the digitalization of money is not exactly new. The payments between central banks and the banking sector or the capital markets are already digitalized. Are those payments unsafe? Do they need blockchain? In conversations with teams of several central banks, I have heard them question how innovative the blockchain actually is. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.[10]

Central banks are quite familiar with digital payments. Yet a CBDC could provide a complementary central bank currency to the public, supporting a more resilient and diverse domestic payment system. It might also offer opportunities not possible with cash while supporting innovation.[11]

If more safety is needed – and it is a constant challenge – the improvement of digital systems is a key maintenance and innovation matter that does not require a digital revolution, but evolution. ConsenSys, a blockchain technology company owned by Joseph Lubin, who is  a co-founder of Ethereum, has already designed a proposed architecture for a successful implementation on Ethereum. [12] 

Is It Really About Currency?
While central banks consider CBDCs as just another way to issue their own currency, there is a structural change involved. A bank note is the beginning and the end of the currency. A digital currency is a connection with a counterpart, which can be a bank, but in the case of a CBDC, is the central bank. In the case of a banknote, the holder is immaterial. In the case of a digital currency, though, central banks are in a relationship with the holder, as is the case with a bank deposit.

The  ultimate liability  of a currency lies squarely with the government, and is a sovereign liability. A CBDC expressed in the country’s currency is also a sovereign liability. However, it is the central bank that is entrusted to issue that currency. A bank deposit, is the liability of a bank. In the case of a CBDC, it is a direct liability of the central bank. To acquire a unit of CBDC, an individual or a company will need to use its existing holdings of the currency. It will receive a direct claim on the central bank, not on a commercial bank. A CBDC  is backed by a government’s central bank, which holds the liability.[13] There is a novation.