Legally Speaking, is Digital Money Really Money?

IMF Blog, January 14, 2021

Source details

Countries are moving fast toward creating digital currencies, but close to 80 percent 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.
IMF staff reviewed the central bank laws of 174 IMF members and found that only about 40 are legally allowed to issue digital currencies.
Issuance of money is a form of debt for the central bank and requires a solid legal basis to avoid legal, financial and reputational risks.

Reviewed universe: 174 IMF members.
Legally allowed to issue digital currencies: only about 40.
Legal uncertainty or prohibition: close to 80 percent of central banks.
Scope limits in existing laws: 61 percent of central banks are limited to only banknotes and coins.
Retail access limitation: Only 10 central banks in the sample would currently be allowed to open accounts for private citizens (retail access).

Qualification as currency:
- 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.
- Legal tender status typically allows debtors to pay obligations by transferring it to creditors, and is usually given to means of payment that can be easily received and used by the majority of the population.
Infrastructure and usability constraints:
- Digital currencies require digital infrastructure—laptops, smartphones, connectivity—which governments cannot impose on citizens, complicating legal tender designation.
- Without legal tender designation, achieving full currency status could be equally challenging.
Forms of digital currency considered:
- Account-based: digitalizing balances currently held on accounts in a central bank’s books; historically well-grounded in public and private law (originating with the Exchange Bank of Amsterdam).
- Token-based: designing a new digital token not connected to existing central bank accounts; has a very short history and unclear legal status.
Wholesale vs retail:
- Wholesale model: for financial institutions (commercial banks are traditional central bank clients).
- Retail model: accessible to the general public; would constitute a tectonic shift in central bank organization and require significant legal changes.

Core concerns:
- Ensuring consistency with a central bank’s mandate to avoid political and legal challenges.
- Money issuance as central bank debt demands a clear legal basis to prevent legal, financial and reputational risks.
Cross-cutting legal areas affected:
- Tax law, property law, contracts, insolvency law.
- Payment systems, privacy and data protection.
- Preventing money laundering and terrorism financing.
Design-feature interactions:
- Overlapping design features (account-based vs token-based, wholesale vs retail) can create complex legal challenges and influence monetary authorities’ decisions.

Digital central bank instruments need robust legal foundations to:
- Ensure smooth integration into the financial system.
- Preserve credibility.
- Achieve broad acceptance by citizens and economic agents.
Legal reform considerations:
- Assessments of central bank mandate, powers, and limits should precede issuance.
- Consider whether existing law permits issuance of digital forms or requires amendments to authorize account-based or token-based instruments and retail access.

Legally Speaking, is Digital Money Really Money? — Catalina Margulis, Arthur Rossi, January 14, 2021