The digital money trail


Legal issues of BSP’s ‘digital banknote’ initiative

MB file

After the Bangko Sentral ng Pilipinas (BSP) created a Technical Working Group (TWG) in June 2020 as initial research on a possible central bank digital currency (CBDC), it released a more comprehensive study in March this year on what should be done before it could launch a CBDC in a future that could come sooner than later.

Based on a paper (“Central Bank Digital Currency for the BSP,” completed on October 2020), the central bank’s two key considerations on CBDC issuance is one, if the BSP has the legal mandate and regulation to set it up and two, implications on the country’s fight against “dirty money” or money laundering.

The BSP is also keen on further assessing a CBDC’s potential impact on its central bank functions such as monetary policy transmission, and in ensuring financial stability as well as an efficient and safe payment and settlement system.

More important, the BSP is assessing a CBDC’s legal implications and if the National Payment Systems Act (NPSA), which granted BSP an expanded authority to own and operate a payment system, is enough in terms of legal framework.

“The complexity and novelty of the introduction of CBDC in the Philippines carry with them certain legal considerations since most financial laws were formulated under a backdrop of a fiat or physical currency regime. It is, therefore, of paramount importance to revisit existing laws, rules, and regulations to ensure the legal feasibility of the issuance of CBDC in the Philippines and guarantee its general acceptability as legal tender Philippine currency,” said the BSP in the study.

The NPSA could be enough as it is if the BSP plans to issue CBDCs in wholesale form.

Unfortunately, the issuance of a “widely accessible retail CBDC cannot be accommodated under existing legal framework of the BSP,” the BSP said in the study.

The BSP has already said that it prefers a retail CBDC.

BSP’s legal team led by senior assistant governor and general counsel, Elmore O. Capule, in the CBDC paper said that the primary characteristic of retail CBDC “is that it is akin to a fiat currency or liability issued by central banks in a digitized form, which the general public can own and use for payment and settlement of obligations.”

As such, the issuance of retail CBDC will have several legal considerations such as deposit accounts opening, which will require revisiting existing laws if this could be allowed. “AML (anti-money laundering) and combating financial terrorism (CFT) laws and regulations may need to be revisited (as well) to cover CBDC transactions,” BSP’s lawyers said.

“It is significant to note that in formulating AML/CFT laws/regulations to cover CBDC, several issues may be considered depending on the type of CBDC that will be issued by the BSP. For instance, in the case of token-based retail CBDC, the (Anti Money Laundering Council) and law enforcement agencies may encounter challenges in determining the owners or monitoring transactions using said digital currency since this type of retail CBDC may be used and transacted without the need for identity verification,” said the BSP. “Such anonymity, however, would make it easier for users to avoid AML regulations, which may lead to an increase in illegal transactions or tax evasion.”

On the other hand, the BSP said that a wholesale CBDC under the NPSA is possible if the BSP will agree to a contract with banks or financial institutions.

But there are possible legal implications on a wholesale CBDC issuance under the NPSA since CBDCs are not yet recognized by any laws in the Philippines. It will be considered instead as a “mere representation of fiat money,” which would make it acceptable to participate in the PhilPaSS, BSP’s real time gross settlement system.

Other legal implications such as data privacy will apply as well AML and counter-terrorism financing rules and regulations.

“The use of wholesale CBDC for purposes of operating the BSP’s payment system is covered by measures to ensure compliance with laws and regulations related to AML,” said the BSP.

The BSP is also looking into concerns about cybersecurity, data privacy, and electronic counterfeiting, it added.

Further research on a BSP CBDC is ongoing. The BSP said it will continue in-depth research, especially how other countries apply it on payments systems and to have a deeper understanding of privately issued digital currencies.

BSP Governor Benjamin E. Diokno said earlier that the Philippines is not likely to have a CBDC within his term, which ends in mid-2023. “Most central banks say they will not issue CBDCs within the next five years. So, not within my term,” he said in October 2020, about the same time the BSP CBDC paper was completed.