CBDC Regulatory Frameworks: How Central Banks Are Writing the Rules — TGB Regulatory & Policy Brief September 2024

Why the law comes first

A retail CBDC would be a new form of money issued by the central bank to the public, and few central bank statutes were written with that in mind. An IMF review of the laws of the 171 central banks in its membership found that 61% limit currency issuance to banknotes and coins, 23% allow directly for issuance in digital form and 16% are unclear. The same review found that 85% of central bank laws restrict the power to open current accounts to a limited category of institutions, with only 10 central banks, or 6% of the total, allowing accounts for a broader public. The IMF paper concluded that most central bank laws do not currently authorise the issuance of CBDC to the general public, and that it is not evident that a CBDC could be given "currency" status under monetary law.

Central banks have accepted the point in principle. In October 2020 the Bank of Canada, the ECB, the Bank of Japan, Sveriges Riksbank, the Swiss National Bank, the Bank of England, the Federal Reserve Board and the BIS listed a robust legal framework among the core features of any CBDC, stating that a central bank should have clear authority underpinning its issuance.

The BIS surveys show slow progress in closing the gap. The share of central banks reporting legal authority to issue a CBDC rose from 18% in the 2020 survey to 26% in the 2021 survey, and then to 27% in the 2022 survey. In the 2022 survey about 8% of jurisdictions were changing their laws to allow for or clarify that authority, a quarter of central banks lacked the legal foundation and about 40% were unsure. Technical work has moved much faster: in the 2023 survey, 94% of the 86 responding central banks were working on CBDCs at the end of 2023, 54% were running proofs of concept and 31% were running pilots.

That leaves a wide gap between experimentation and legal readiness. Testing can run under contract: the RBA's 2023 pilot CBDC, for example, was created as a contractual commitment of the RBA. Issuing to the public is different, because most central bank laws do not yet authorise it. Expectations of issuance have also slipped. Only 12% of central banks considered it likely they would issue a retail CBDC within three years, down from 18% a year earlier, and 16% within four to six years, down from 21%. The likelihood of a wholesale CBDC within six years now exceeds that of a retail one.

The euro area: legislating a currency into existence

The European Commission tabled its proposal for a regulation on the establishment of the digital euro, COM(2023) 369, on 28 June 2023, as part of a single currency package that also covers the legal tender of euro banknotes and coins.

Article 3 establishes the digital euro as the digital form of the single currency, and Article 4 gives the ECB the exclusive right to authorise its issue, as a direct liability of the ECB or the national central banks towards users. The recitals state that the ECB should be able to decide whether to issue the digital euro, at which times and in what amounts. The legislator would therefore create the instrument and its rules, while the decision to issue would stay with the central bank.

Article 7 gives the digital euro legal tender status, meaning mandatory acceptance at full face value with the power to discharge a payment obligation, and it prohibits surcharges. Article 9 allows payees to refuse the digital euro if they are enterprises employing fewer than 10 persons or with an annual turnover or balance sheet total of no more than EUR 2 million, unless they accept comparable digital means of payment. Individuals acting in a purely personal or household capacity are also exempt. The 2023 BIS survey shows the same tension elsewhere: some central banks reported possible exemptions for small merchants, while others said legal tender status does not imply mandatory acceptance in their jurisdiction.

Distribution is assigned to supervised payment service providers (PSPs). Users would contract only with PSPs and would have no contractual relationship with the ECB or the national central banks. Credit institutions that provide payment services would have to offer all basic digital euro services to clients on request, and Member States would designate authorities or post office giro institutions to provide basic services to people who do not hold, or do not wish to hold, an ordinary payment account. PSPs could not charge individuals for basic services. Merchant service charges and inter-PSP fees would be capped at the lower of PSPs' relevant costs plus a reasonable profit margin and the fees charged for comparable digital means of payment.

The core financial stability safeguard sits in Article 16. The ECB would develop instruments to limit use of the digital euro as a store of value and decide on their parameters, and the digital euro would not bear interest. Any holding limit would apply to offline and online holdings combined. So that limits do not block payments, PSPs would automatically sweep incoming funds above the limit into a linked ordinary account and let users pay amounts larger than their digital euro balance. The ECB's June 2024 progress report confirmed that individual holdings would be unremunerated and subject to limits, and said the limit would be set closer to any launch date, although calibration work had begun, including a data collection exercise with major banks.

The proposal writes privacy into law in layers. The digital euro would be available online and offline from its first issuance, and offline transaction data could not be retained by PSPs or by the central banks. Offline holding and transaction limits would be set by the Commission through implementing acts. For online payments, the ECB and the national central banks would have to segregate personal data so that they cannot directly identify individual users. Article 24 states that the digital euro shall not be programmable money. The text also builds in review: the Commission must report one year after first issuance and every three years thereafter.

The ECB has run its technical work in parallel. After an investigation phase launched in October 2021, the Governing Council decided on 18 October 2023 to begin a preparation phase from 1 November 2023, initially for two years. It stressed that this was not a decision to issue, and that such a decision would only be considered once the EU legislative process was complete.

Who sets the limit: the Council and the privacy debate

The legislative debate has turned on competence rather than on the principle of a digital euro. The Council's progress report of 17 June 2024 recorded that, under the Spanish Presidency, Member States generally supported the legal tender status of the digital euro, distribution through PSPs with mandatory distribution by credit institutions, the need for holding limits and a higher level of data protection than existing digital payment instruments. The Belgian Presidency then held five Working Party meetings in the first half of 2024.

The sharpest disagreement concerns Article 16. At the Working Party of 30 May 2024 many Member States argued for a larger role for the co-legislators in limiting the digital euro's store-of-value function, while others considered the ECB exclusively competent to set holding limits. The Commission and the ECB argued that the ECB should not be constrained by maximum, or possibly minimum, holding limits set by the co-legislators, because that would affect its monetary base.

Fees are less contested. Member States agreed that the ECB should not be competent under Article 17 to set caps on merchant service charges and inter-PSP fees. That is consistent with the ECB's own view that the formal responsibility to regulate fees lies with the legislators. On timing, the Presidency floated a gap, for example 18 months, between entry into force and application of the regulation. Some Member States want the ECB to authorise issuance only after the co-legislators have scrutinised the design, and at least one has sought a second legislative decision endorsing issuance.

Privacy is the second fault line. In their joint opinion of 17 October 2023, the European Data Protection Board and the European Data Protection Supervisor strongly recommended extending the offline regime to low-value online payments, with a threshold below which transactions would not be traced for anti-money laundering purposes. They also called for a binding obligation to pseudonymise all transaction data vis-à-vis the ECB and the national central banks, and for a clearer justification of the single access point for user identifiers. In the Council, one Member State proposed applying selective privacy to all low-value proximity payments, but the Commission maintained that the exception in Article 37 should remain limited to offline payments.

Member States generally support launching the online and offline versions at the same time. Other details remain open: the Commission's proposal set no limit on the number of digital euro accounts per user, although the Eurosystem had found a single-account model easier to implement. For euro area banks, the outcome on limits and fees will shape both deposit outflow risk and the economics of distribution.

The United Kingdom: Parliament first

The United Kingdom has made primary legislation the gateway. In their response of 25 January 2024 to the digital pound consultation, which drew over 50,000 responses, the Bank of England and HM Treasury confirmed the Government's commitment to introduce primary legislation, with a vote in both Houses of Parliament, before any launch. That legislation would enshrine commitments that neither the Government nor the Bank could access personal data through the core infrastructure, and that neither would pursue government- or central bank-initiated programmable digital pounds; it would be preceded by a further public consultation. On completion of the design phase around the middle of the decade, the Bank and the Government will decide whether to proceed to build.

On design, the authorities are minded to proceed with a holding limit of £10,000 to £20,000 per individual, at least during the introductory period, even though banks generally preferred £3,000 to £5,000 to limit deposit outflows. Corporate holdings would also be limited, though at a significantly higher level. A digital pound would not pay interest, and any change would follow public consultation. It would not be anonymous: personal data needed to fight financial crime would be held by private Payment Interface Providers and would not be visible to the Bank or the Government.

The UK and euro area frameworks share a structure: the central bank issues and settles, regulated intermediaries hold the customer relationship and the data, and holdings are capped and unremunerated. The difference is sequencing. The euro area is legislating before the ECB decides whether to issue, while in the UK a decision to build would come first, and a digital pound would be introduced only once both Houses of Parliament had passed the relevant legislation.

The United States: authorisation versus prohibition

The Federal Reserve's January 2022 discussion paper said that it does not intend to proceed with a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorising law. It noted that the Federal Reserve Act does not authorise direct Federal Reserve accounts for individuals, and that under an intermediated model the private sector would offer accounts or digital wallets.

Congress has since moved towards prohibition. On 23 May 2024 the House of Representatives passed H.R. 5403, the CBDC Anti-Surveillance State Act, by 216 votes to 192. The bill would bar Federal Reserve banks from issuing a CBDC directly to individuals or offering one indirectly through intermediaries, and would prohibit the use of a CBDC for monetary policy. It also provides that the Board may not, absent Congressional authorisation, design, build, develop, establish or issue a CBDC. It was received in the Senate on 3 June 2024 and referred to the Committee on Banking, Housing, and Urban Affairs.

Whether or not the bill becomes law, the Federal Reserve's own condition and the House vote together mean that a US retail CBDC would require an affirmative act of Congress.

Where legislation came first

In Jamaica and India, the statute was amended to accommodate the CBDC. All four retail CBDCs live at the time of the 2023 BIS survey were in emerging market and developing economies: The Bahamas, the Eastern Caribbean, Jamaica and Nigeria.

Jamaica amended the Bank of Jamaica Act, with the changes passed into law on 14 June 2022. The amendments made the Bank the sole authority to issue CBDC, made JAM-DEX legal tender and replaced references to "notes and coins" with "notes, coins and central bank digital currency". That drafting places the CBDC inside the existing currency framework rather than in a separate regime.

India followed a similar route. An RBI working group recommended in February 2021 that the RBI Act be amended to include the e-rupee in the definition of "bank note", and the Government notified the amendments by gazette notification dated 30 March 2022, enabling pilots and subsequent issuance. India's retail CBDC pilot was launched at the end of 2022. The RBI's concept note of 7 October 2022 defines CBDC as legal tender issued by a central bank in digital form, and under its model the RBI's sole right to issue bank notes now extends to currency in digital form, distributed through authorised intermediaries. The note argues that, because physical cash pays no interest, a CBDC should not either, and that reasonable anonymity for small-value transactions may be desirable.

Emerging economies lean more on transaction limits than advanced economies, which the BIS links to the difficulty of know-your-customer checks when users lack documentation. In Nigeria, an eNaira wallet can be opened without a bank account using basic information such as a photo and telephone number, but it carries relatively low daily transaction limits. Tiered access of this kind settles the trade-off between inclusion and financial integrity in the rulebook rather than in the statute.

Standing back: Australia, Sweden and Hong Kong

Other central banks are slowing the retail track while setting out what law would be needed. On 18 September 2024 the Reserve Bank of Australia and the Treasury concluded that a clear public interest case to issue a retail CBDC has yet to emerge in Australia, and set out a three-year roadmap. The RBA said it would prioritise wholesale digital money and infrastructure, including wholesale CBDC, and launch the public phase of Project Acacia the following month.

Their joint report is explicit about legal gaps. It states that the Government would ultimately decide whether to introduce a retail CBDC and might have to enact enabling legislation. Whether existing powers, including the Reserve Bank Act 1959 power to issue "Australian notes", extend to a CBDC is uncertain. The RBA's 2023 pilot CBDC was created as a contractual commitment, but the report judges that the soundest legal basis for any future CBDC would be statutory. Only physical cash is currently legal tender, so legal tender status for a retail CBDC would likely require law reform. The stated preference of the RBA and Treasury is to decide the desired functions first and then amend legislation, rather than design a CBDC to fit existing law.

Sweden's Riksbank ended its e-krona pilot in autumn 2023 and is now working on design and policy questions, including which laws would need to change. In its Payments Report of 14 March 2024 it said that legislative work needed to start now so that the lead time would not be too long if the Riksdag decided that the Riksbank may issue an e-krona. The Hong Kong Monetary Authority, which assessed 14 pilots by 16 firms in the first phase of its e-HKD programme, said on 30 October 2023 that it had not yet decided whether and when to introduce an e-HKD.

How selected jurisdictions are writing CBDC rules

Source: European Commission, Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro, COM(2023) 369 final (as transmitted in Council document 11605/23), 28 June 2023; Council of the European Union, Presidency progress report on the digital euro proposals (Council document 11028/1/24 REV 1, dated 17 June 2024), as published by the Dutch House of Representatives as an annex to Kamerstuk 21501-07 nr. 2053, 2 July 2024; European Central Bank, Press release: Eurosystem proceeds to next phase of digital euro project, 18 October 2023; Bank of England and HM Treasury, Response to the Bank of England and HM Treasury Consultation Paper - The digital pound: A new form of money for households and businesses?, 25 January 2024; Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, 20 January 2022; US Government Publishing Office, H.R. 5403 (118th Congress), CBDC Anti-Surveillance State Act, Referred in Senate, 3 June 2024; Office of the Clerk, US House of Representatives, Roll Call 230, H.R. 5403, On Passage: CBDC Anti-Surveillance State Act, 23 May 2024; Reserve Bank of India, Concept Note on Central Bank Digital Currency, 7 October 2022; Bank for International Settlements, Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto (BIS Papers No 147), 14 June 2024; Bank of Jamaica, JAM-DEX phased rollout progresses, 29 June 2022; Reserve Bank of Australia and the Department of the Treasury, Central Bank Digital Currency and the Future of Digital Money in Australia, 18 September 2024; Reserve Bank of Australia, Media Release 2024-17: RBA and Treasury Joint Paper on Central Bank Digital Currency and the Future of Digital Money in Australia, 18 September 2024; Sveriges Riksbank, Payments Report 2024, 14 March 2024.

Design rules are converging

Across jurisdictions, the design rules being written into law are converging. In the 2023 BIS survey, 68% of advanced-economy and 63% of emerging-economy respondents were considering a potential retail CBDC with holding limits, and similar or larger shares were considering offline payments and interoperability with domestic payment systems. More than one in two central banks does not intend to pay interest on a retail CBDC, although the Bank of Israel has said its potential CBDC may have the option of bearing interest. Half of advanced-economy respondents may require merchants to accept a retail CBDC, against 43% in emerging economies.

The level of holding limits still varies: studies cited by the BIS propose or assume a threshold of €3,000 for a digital euro, against the £10,000 to £20,000 range proposed in the United Kingdom.

Retail CBDC design features under consideration, % of respondents, 2023 BIS survey

Source: Bank for International Settlements, Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto (BIS Papers No 147), 14 June 2024.

What it means for banks

Three implications follow for banks. First, the binding constraint on retail CBDC is legislative, and it is moving slowly: in the 2022 BIS survey only 27% of central banks had legal authority, and among major advanced economies the euro area is still negotiating a statute while the US House has voted for one that would prohibit issuance. Second, in the euro area, British, US and Indian models alike, distribution runs through intermediaries, and the euro area proposal goes furthest by obliging credit institutions to offer basic services on request. Third, holding limits, the absence of interest and automatic sweeping to bank accounts are the main safeguards against deposit outflows, and their calibration remains open in both the euro area and the United Kingdom.

Fee rules will matter as much as limits. The euro area proposal would cap merchant charges at the lower of cost plus a reasonable margin and comparable payment fees, and Member States want that cap set by legislators rather than by the ECB. Banks distributing a digital euro would therefore be paid through a regulated merchant fee rather than through margin on holdings that pay no interest.

Primary sources: Reserve Bank of Australia, Media Release 2024-17: RBA and Treasury Joint Paper on Central Bank Digital Currency and the Future of Digital Money in Australia, 18 September 2024; Bank for International Settlements, Making headway - Results of the 2022 BIS survey on central bank digital currencies and crypto (BIS Papers No 136), 10 July 2023; European Commission, Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro, COM(2023) 369 final (as transmitted in Council document 11605/23), 28 June 2023; Bank of England and HM Treasury, Response to the Bank of England and HM Treasury Consultation Paper - The digital pound: A new form of money for households and businesses?, 25 January 2024; Office of the Clerk, US House of Representatives, Roll Call 230, H.R. 5403, On Passage: CBDC Anti-Surveillance State Act, 23 May 2024; US Government Publishing Office, H.R. 5403 (118th Congress), CBDC Anti-Surveillance State Act, Referred in Senate, 3 June 2024; Council of the European Union, Presidency progress report on the digital euro proposals (Council document 11028/1/24 REV 1, dated 17 June 2024), as published by the Dutch House of Representatives as an annex to Kamerstuk 21501-07 nr. 2053, 2 July 2024; International Monetary Fund, Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations (IMF Working Paper 2020/254), 20 November 2020; Bank for International Settlements and seven central banks, Central bank digital currencies: foundational principles and core features, 9 October 2020; Bank for International Settlements, Gaining momentum - Results of the 2021 BIS survey on central bank digital currencies (BIS Papers No 125), 6 May 2022; Bank for International Settlements, Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto (BIS Papers No 147), 14 June 2024; Reserve Bank of Australia and the Department of the Treasury, Central Bank Digital Currency and the Future of Digital Money in Australia, 18 September 2024; European Central Bank, Press release: ECB publishes first progress report on digital euro preparation phase, 24 June 2024; European Central Bank, Progress on the preparation phase of a digital euro - First progress report, 24 June 2024; European Central Bank, Press release: Eurosystem proceeds to next phase of digital euro project, 18 October 2023; European Data Protection Board and European Data Protection Supervisor, EDPB-EDPS Joint Opinion 02/2023 on the Proposal for a Regulation on the establishment of the digital euro, 17 October 2023; Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, 20 January 2022; Bank of Jamaica, JAM-DEX phased rollout progresses, 29 June 2022; Reserve Bank of India, Concept Note on Central Bank Digital Currency, 7 October 2022; Sveriges Riksbank, Payments Report 2024, 14 March 2024; Hong Kong Monetary Authority, Press release: HKMA publishes the e-HKD Pilot Programme Phase 1 Report, 30 October 2023.