Analysis | 4 legal issues regarding the issuance of digital currency by my country’s central bank

|Original production of Compliance Alliance |

my country's DCEP (central bank digital currency) process started in 2014 and entered the application stage in the second half of 2019. On January 1, 2021, Shenzhen launched the third round of large-scale pilot of digital RMB, distributing 20 million yuan of digital RMB red envelopes to individuals in Shenzhen, and the lottery results were officially released on January 7. At the same time, the Agricultural Bank of China took the lead in launching the digital RMB deposit and withdrawal function of ATM machines in this event, guiding citizens to adapt to the digitization of cash.

The issuance of the central bank's digital currency DCEP is an opportunity for my country to break through the monopoly and blockade of European and American countries in the clearing system, and will help the RMB go further internationally. However, opportunities and challenges coexist. The issuance of DCEP in China will face many challenges, and issues in law, circulation, finance, and technology must be addressed one by one. This article aims to study the legal issues that may arise in the issuance of my country's central bank digital currency.

1. The concept of central bank digital currency

The Central Bank Digital Currency (DCEP) is a new currency backed by national credit and built using technologies such as blockchain and electronic encryption. It is a controllable and anonymous payment tool with value characteristics and legal tender issued by the People's Bank of China. It is presented in a digital form and has the same functions and attributes as paper currency.

Compared with traditional currency, the central bank’s digital currency is in the form of an encrypted digital string representing a specific amount of money, not a physical entity, and is mainly used for online investment, transactions and storage, representing digital information of a certain value. [1] Precisely because of these differences, my country’s current legal system, which regulates and protects traditional currency, cannot fully adapt to the requirements of the issuance and use of digital currency.

2. Problems faced by central bank digital currencies

There are two primary issues that the central bank needs to resolve when issuing legal digital currency: one is the legal basis for issuance and the status of legal tender; the other is the legal tender of the central bank’s digital currency.

1. Legal status of central bank digital currency

Article 8 of the Law of the People's Republic of China on the People's Bank of China (hereinafter referred to as the "People's Bank of China Law") stipulates that:

" The renminbi is printed and issued uniformly by the People's Bank of China. When the People's Bank of China issues a new version of the renminbi, it shall announce the time of issuance, denomination, pattern, style and specifications. "

Article 2 of the Regulations of the People's Republic of China on the Administration of Renminbi (hereinafter referred to as the "Regulations on the Administration of Renminbi") stipulates that:

“ Renminbi refers to the currency issued by the People’s Bank of China in accordance with the law, including banknotes and coins. ”

At present, China's definition of currency is still at the level of banknotes and coins, and the currency issuance system is only designed for the characteristics of banknotes and coins. DCEP does not belong to the category of RMB, and existing laws cannot provide a basis and guarantee for the issuance and legal entity status of DCEP.

Therefore, if we want to respond to the comprehensive promotion of DCEP, we should legislate first and revise the "People's Bank of China Law" and "RMB Management Regulations", or the State Council should issue relevant regulations to grant the People's Bank of China the right to issue digital currency, and make appropriate adjustments to the definition of RMB, clarifying that DCEP is a form of RMB and has the same legal status of national currency as the current accounting currency, banknotes, and coins.

2. The legal tender of central bank digital currency

Article 16 of the Law of the People's Republic of China on the Bank of China and Article 3 of the Regulations on the Administration of Renminbi both provide that:

" All public and private debts within the territory of the People's Republic of China may be paid in RMB, and no unit or individual may refuse to accept it. "

The above provisions clarify the legal tender of RMB, but the central bank's digital currency does not yet fall within the scope of RMB and cannot be protected by the above legal provisions. At the same time, due to the technical limitations of the circulation of digital currency, users must have terminal equipment to receive digital currency and rely on the support of network technology, which will affect the legal tender authority of digital currency in the future to a certain extent.

Therefore, for a long time to come, central bank digital currencies will coexist with traditional banknotes and coins. The law needs to respond to the coexistence of the two so that consumers and businesses know which currency they are obliged to accept as legal tender, companies need to know which currency units to choose in their income statements and balance sheets, and economic entities need to know what legal restrictions there are on specific forms of currency. [2] At the same time, it is necessary to add exceptions to clarify that if digital currencies cannot be accepted due to lack of objective conditions, actual needs should be taken into account and penalties can be exempted.

3. Ownership transfer of central bank digital currency

Compared with traditional banknotes and coins, the intangible nature of digital currency makes it more difficult to determine the transfer of its ownership. As the only institution that can provide central bank currency, the central bank should ensure that its ownership transfer system has legal finality, that is, the certainty, irrevocability and irreversibility of the transaction, regardless of the legal tender authority of the digital currency.

Civil Code of the People's Republic of China

Article 209

The establishment, change, transfer and extinction of real property rights shall take effect after registration in accordance with the law; they shall not take effect without registration, except as otherwise provided by law.

Article 224

The establishment and transfer of movable property rights take effect upon delivery, except as otherwise provided by law.

For the transfer of ownership, civil law generally requires that it must be publicized in a legal form, such as the possession and delivery of movable property, and the registration of immovable property and rights. The counterparty conducts transactions based on the publicized information. Even if the publicized rights status does not match the actual situation, the law recognizes the validity of the transaction. The public disclosure methods stipulated in the Civil Code are mainly possession and registration. Their commonality is that they can clearly reflect the owner's exclusive and exclusive control over a specific object. The determination of the transfer of digital currency ownership should also be confirmed in combination with the public disclosure method.

In practice, there are two main ways to transfer ownership of digital currency:

The first is “delivery transfer” , where the transferor delivers the digital currency and the corresponding private key directly to the transferee.

The second is "registration transfer", where the transferor sends an instruction to transfer currency to the central bank's digital agency registration agency. The registration agency verifies the transferor's identity as the owner, and then changes the identity code information in the digital currency to match the transferee's private key.

From this point of view, the ownership transfer system of DCEP does not seem to be a completely decentralized platform, but is more suitable for building a licensed distributed ledger technology platform , with the central agency responsible for transaction verification and ledger updates, and adopting a relatively simple consensus mechanism. This technical structure is designed to ensure the finality of digital currency transaction settlement, making it easier for central banks and regulators to verify and supervise transactions to ensure legal certainty.

(IV) Personal information protection issues of central bank digital currency

The central bank's digital currency needs to be issued in a purely digital form with the help of distributed ledger technology, and the ownership is determined by combining identity code information and private keys. The entire process is carried out in the form of information transmission, which inevitably faces severe personal information protection issues. Once personal information is leaked, it may cause individuals to lose control of digital currency and damage their property rights.

In addition to taking technical protection measures, a corresponding legal protection system should be established. First, the legal status and information protection responsibilities of the electronic certification service center should be clarified through legislation. Unless otherwise provided by law, no unit or individual may query the identity information and digital currency amount, secret key, transaction records and other information of the digital currency holder. Secondly, effective prohibition regulations should be made for the illegal collection of personal information that exists in practice. In addition, in view of the financial crimes such as money laundering, corruption and tax evasion that may be caused by the anonymity of digital currency, special query conditions and query procedures should be set. [3]

The DCEP currently promoted by China is a representative form of sovereign blockchain. On the one hand, it is conducive to enhancing the fairness and security of digital currency, but on the other hand, it also increases the difficulty of protecting personal information. Therefore, it is urgent to provide the most complete legislative guarantee for the issuance and circulation of central bank digital currency at the legal level to actively respond to future challenges.

References

[1] 刘向民.央行发行数字货币的法律问题[J].中国金融,2016(17):17-19.
[2] 于品显.中央银行数字货币法律问题探析[J].上海对外经贸大学学报,2020,27(02):88-102.
[3] 李南宇.央行发行主权数字货币（DCEP）的机遇及其法律问题——兼论全球监管合作构想[J].特区经济,2020(10):18-22.

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