Case Note: An Exploratory Analysis of Central Bank Digital Currencies — Some Considerations

• Author: Lawack, V.
• DOI: https://doi.org/10.47348/SAMLJ/v34/i1a5
• Published date: 24 October 2022
• Date: 24 October 2022
• Citation: (2022) 34 SA Merc LJ 118
• Pages: 118-134

Case Notes

AN EXPLORATORY ANALYSIS OF CENTRAL

BANK DIGITAL CURRENCIES — SOME

CONSIDERATIONS

VIVIENNE LAWACK

University of the Western Cape

IINTRODUCTION

The history of central banking began with payment services. Ever since

then, payment-related innovation has always been an integral part of

central banking (BIS Committee on Payments and Market Infrastruc-

tures and Markets Committee Report, ‘Central Bank Digital Currencies’

(2018) iii). Payments have evolved extensively over the years with the

emergence of various technologies, from the development of real-time

gross settlement (‘RTGS’) systems, to electronic money and mobile

money, to name a few. The arrival of f‌inancial technologies or ‘f‌intech’

has led to cryptocurrencies and now central bank digital currency

(‘CBDC’) (on cryptocurrencies, see Reddy & Lawack, ‘An overview of

the regulatory developments in South Africa regarding the use of

cryptocurrencies’ (2019) 31 SA Merc LJ 1–28; see also Deloitte, ‘Are

Central Bank Digital Currencies (CBDCs) the money of tomorrow?’,

available at https://www2.deloitte.com/ie/en/pages/f‌inancial-services/

articles/central-bank-digital-currencies-money-tomorrow.html,

accessed on 3 May 2021). A CBDC represents another potential

innovation in the area of an evolving branch of the law called ‘f‌intech

law’.

This exploratory analysis provides an overview of the meaning of

CBDC and the legal nature of money and CBDC. In addition, it provides

a broad overview of some legal implications, policy considerations and

regulatory issues. Challenges and risks are also highlighted.

II THE MEANING OF CENTRAL BANK DIGITAL

CURRENCIES (CBDC)

There is currently no universal def‌inition of CBDC, and the concept is

not well-def‌ined. However, this is envisioned as a new form of central

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(2022) 34 SA Merc LJ 118

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bank money (also called ‘f‌iat currency’). A CBDC can also be def‌ined as a

digital payment mechanism based on a cryptocurrency denominated in

f‌iat currency (ie central bank money). It is backed by a central bank

(such as the South African Reserve Bank (‘the SARB’)) to the same

extent as physical cash in the context of legal tender. ‘Central bank

money’ refers to a central bank liability, denominated in an existing unit

of account, which serves both as a medium of exchange and a store of

value (see Kumhof & Noone, ‘Central Bank Digital Currencies —

Design principles’ Bank of England Working Paper No 725 (2018); Bank

of England, ‘Central Bank Digital Currency: Opportunities, challenges

and design’, available at https://www.bankofengland.co.uk/paper/2020/

central-bank-digital-currency-opportunities-challenges-and-design-

discussion-paper, accessed on 1 May 2021; and Yao, ‘A systematic

framework to understand Central Bank Digital Currency’, Science China

Information Sciences (2018) 61, section 1).

The International Monetary Fund (‘IMF’) Working Paper (‘IMF

Working Paper’) on CBDC provides the following def‌inition that will be

used for the purpose of this analysis:

‘In essence, CBDC is thus a digital form of central bank money that is

different from balances in traditional reserves or settlement accounts of

monetary policy counterparties (cash account balances) ... CBDC is

central bank digital currency excluding digital central bank money

‘‘already available to monetary policy counterparties (mostly banks/

f‌inancial institutions and in some jurisdictions, some non-monetary

counterparties.’ (IMF Working Paper 20/254, ‘Legal aspects of Central

Bank Digital Currency: Central Bank and monetary law considerations’

(2020) 1)

Private digital tokens for general purposes include crypto assets and

cryptocurrencies. Cryptocurrency is a digital or virtual currency that

relies on secure cryptographic algorithms and technology for its creation

and transactional operations. Examples are Bitcoin, Litecoin and

Ethereum, to mention a few. Private digital tokens are not dealt with in

this analysis, as this analysis focuses on CBDC.

Central banks have studied CBDC in order to offer a formal/legal

substitute for the consumer that is trusted and protected (ie guaranteed)

by the central bank. The Central Bank of China was the f‌irst central bank

to issue CBDC. Some of the driving factors as to why central banks are

considering the feasibility of CBDC and the approaches taken by central

banks include that CBDC could be an alternative for declining cash, to

enhance f‌inancial stability, as a cross-border payment mechanism, for

security, etc. The adoption or otherwise of CBDCs depends on many

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