The new report points to a problem with CBDC

China will introduce the digital yuan very soon and other countries are also eager to complete white papers and even the CBDC pilot project.

CBDC problems

Meanwhile, the International Securities Services Association has published a report entitled “Blue Print for CBDC in Post-Trade-Settlement”, which outlines the financial and regulatory risks that could pose a global threat to an interoperable multi-CBDC system.

The problem involved fragmented liquidity. Regarding the regulatory issue, they concern the implementation of cross-border settlement, differences in technological standards and the application of laws in a particular jurisdiction.

“The costs and risks of lack of interoperability between tokenized and non-tokenized systems also require careful consideration, especially when transactions take place through input and output patterns, such as between Fiat and CBDC.”

ISSA outlines a high-level set of legal and regulatory considerations that a CBDC might generally face:

1. Central bank authority/mandate
The legal authority of central banks to issue a CBDC remains unclear in many jurisdictions. The BIS survey of central
banks identified that 26% of central banks do not have the authority to issue a CBDC and about 48% remain unsure.
Similarly, the IMF noted that among the 171 central banks of the IMF membership, only 23% of central bank laws
allowed directly for the issuance of currency in a digital format, with 16% of central bank laws unclear as to whether
they authorize the issuance of a digital version of central bank currencies. Without a clear and explicit mandate to issue a CBDC, questions and concerns may arise as to the legitimacy of such a currency, which could affect the claim
on the central bank represented by a CBDC. 

2. Governance of system
The establishment of a new CBDC and its supporting infrastructure and ecosystem raises the question of governance,
and whether a cross-industry or cross-jurisdiction governance framework will be required. Roles and responsibilities
within the system will need to be clearly delineated, with corresponding legal mandates and sufficient oversight.

3. Interoperability
▪ Technical and operational standards and expectations may need to be set out in law or regulation, to ensure
minimum standards of robustness, security, resilience and interoperability (with legacy systems, other forms
of CBDC, or other forms of both public and private money).
▪ Interoperability considerations may extend to cross-border legal and regulatory compatibility, for instance,
where jurisdictions might also have to consider how domestic laws and regulations view and treat foreign
CBDC. The BIS recognizes that different legal and regulatory frameworks are significant obstacles to crossborder payments and expects international policy coordination on CBDC to intensify over the coming years.

4. Other areas of law

▪ AML / CFT / KYC requirements: digital ID is a rising issue in certain jurisdictions such as the UK and will aid in
meeting AML / CFT / KYC requirements. Digital ID may also be central to the design and controls of a CBDC,
e.g., in providing national access or restricting foreign access to a CBDC.
▪ Prudential requirements: should a CBDC’s infrastructure be considered national or systemically important
infrastructure, prudential measures may be applied to participants, e.g., maintenance of capital adequacy and
liquidity assets.
▪ Intermediaries’ distribution / access: a level playing field will need to be created and enforced across new
and existing entrants within the CBDC structure, for instance, between financial institutions and non-bank
payment providers.
▪ Privacy and data protection: a balance will need to be struck between privacy and AML/CFT requirements.
Furthermore, the emphasis or value placed on privacy and data protection will probably be a jurisdictionspecific choice, and variations may impact the international interoperability of national CBDC.
▪ Several other potential legal areas of interest regarding CBDC, including: currency controls, tax law,
property law, contract law, payment systems and settlement finality law, insolvency law, private international
law and criminal law.

And these are not the only risks potential CBDC users should fear. Privacy advocate Edward Snowden, for example, called the CBDC extremely dangerous. He believes that the state can use them for total control over the population and arbitrary government.