27 September 2023

BIS' Carstens:Legitimacy, Privacy, Integrity, Choice: Towards a legal framework for central bank digital currencie

Importance of CBDC

Before addressing the legal issues, I would like to talk about CBDCs more fundamentally. 

A key role, perhaps the key role, of central banks is to provide money for society. Currently, they do this primarily through the provision of cash and central bank reserves. In practice, these account for only a small share of the money used by the public. The bulk of it consists of commercial bank money, in the form of bank deposits. Even so, central banks play a pivotal role in ensuring the public's trust in money. It is this trust that makes commercial bank money useful as a means of payment in our societies.

Central banks create trust in several ways. They regulate and supervise the payments system. They control the economy's unit of account. They provide for settlement finality. And the central bank also underpins the solvency of the banking system as a whole. As lender of last resort, the central bank provides emergency liquidity to the system and mitigates against potential bank runs.

Taken together, these actions uphold confidence in the safety and value of money. They ensure that a dollar is a dollar, a euro is a euro and, here in Basel, that a franc is a franc, whether that dollar, euro or franc is a banknote or a deposit.

This apparently simple concept – the "singleness of money" – is extremely important. If singleness were ever to be in doubt, people would run for cash. Individual banks – and ultimately the whole system – would be under threat. And relatedly, central banks guarantee the finality of settlements in central bank money, providing assurance that transactions are final and irrevocable, even if parties to the transaction go bankrupt or fail.

As the defender of the value of money, central banks have a responsibility to ensure that money is available in forms that meet society's needs and expectations.

The current monetary system, based on cash and commercial bank money, continues to serve society well. 

But it needs to evolve. Cash use is declining.¹ Users are increasingly demanding new forms of money. Advances in digital services are highlighting shortcomings in existing systems, while raising expectations about what money should do. People want their money to be digital and programmable. They want to be able to transfer it across borders quickly, cheaply and safely.

The private sector has sought to meet these demands by issuing new forms of private money. Examples include unbacked cryptocurrencies and stablecoins. While they have achieved some popularity as speculative investments, these financial instruments are not money. They do not offer the backing and protection of the central bank; a reliable regulatory and supervisory framework; access to the central bank as lender of resort; or guaranteed finality of payments. Even stablecoins do not assure a stable value. They do not and cannot meet the standards the public expects of money.

Central banks have a responsibility to meet the public's demands and drive innovation in money and the financial system more broadly. But they cannot do this alone. They must work closely with other stakeholders, including the private sector.

Increasingly, central banks around the world are examining how CBDCs could address these demands. According to a CPMI survey, in 2022 93% of central banks were engaged in some form of CBDC work. Of these, more than half were running concrete experiments or working on pilots.

Some central banks are focusing on wholesale CBDCs, intended for the settlement of interbank transfers and related wholesale transactions. Wholesale CBDCs have vast potential in the areas of automation and risk mitigation. They could in effect make central bank money programmable, for example by providing that settlement will occur if and only if certain conditions are met.

Wholesale CBDCs would also facilitate the development of more sophisticated financial products for retail purposes, such as tokenised deposits. The resulting system would likely resemble today's two-tier banking system, with central banks providing the foundational layer and private entities providing the customer-facing services. A "unified ledger", as proposed in our recent Annual Economic Report, would help to seamlessly integrate the various layers of the digital monetary system. In time, it could even be extended to allow for simultaneous and instantaneous settlement in central bank money across asset classes.

Other central banks are exploring retail CBDCs and this is the focus of the conference today. A retail CBDC has a lot of potential to respond to the public's evolving needs. It could exist alongside cash, offering the public a digital alternative to banknotes and coins. It could deepen financial inclusion, as several experiences with digitalisation in emerging and developing countries have shown.², ³ And it has huge potential to make payments faster, cheaper and easier, particularly across borders.⁴

Importance of legitimacy for any CBDC implementation

Much of the discussion around CBDCs focuses on technology. But, as this audience knows, this is only part of the challenge. Legal frameworks must also advance if we want CBDC to deliver on its potential. 

Money is a social construct. People trust in it today because they know others will trust in it tomorrow. The legal framework is a key underpinning for the legitimacy of money, and the trust that people place in money. Without the law, money cannot function. 

This applies as much to CBDCs as it does to other forms of money. At the same time, CBDCs raise new questions and will involve new use cases. The legal framework must keep up....

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