The worldwide financial setup is ready for a big change with the rise of Central Bank Digital Currencies (CBDCs)—official digital tools made and supported by central banks. These digital versions of regular currency, tied to the full power of the issuing country, suggest a mix of old-school money stability and new digital speed. As of March 24, 2025, over 130 places are working on designing, testing, or launching CBDCs, hinting at a possible upheaval of traditional money ideas.
But the current set of international money laws, based on physical coins and bank-managed transactions, isn’t well-prepared to handle these new tools. This article takes a close look at how the existing rules for regular currencies can be adjusted to fit CBDCs, covering rule gaps, effects outside borders, and real-life examples from early adopters. The goal is to create a strong legal base that balances new ideas with system strength, money control, and fair access.
Understanding CBDCs in Regular Money Terms
A CBDC is a digital form of a country’s regular currency, issued under the full powers of its central bank and different from loose crypto assets like Bitcoin or Ethereum. Split into retail CBDCs—available to people for everyday deals—and wholesale CBDCs, set aside for bank-to-bank settlements, these tools offer faster transactions, lower costs, and more financial inclusion while fighting back against private digital currencies taking over money control.
Examples include China’s e-CNY (Digital Yuan), the Bahamas’ Sand Dollar, and the new Digital Euro being considered by the European Central Bank (ECB).
The legal structure of international finance, locked in documents like the International Monetary Fund’s (IMF) Articles of Agreement, country laws, and the careful watching of the Bank for International Settlements (BIS), is set up for physical money and middleman-driven systems. CBDCs, on the other hand, create a direct link between users and central banks, reducing reliance on old financial middlemen. This direct approach calls for a legal shift to deal with enforcing money policies, data privacy, tax rules, and working across borders.
The Legal Base of Regular Currency Rules
Regular currency laws have built up over centuries, starting with countries issuing coins and paper money. The IMF’s Articles of Agreement set up a global system for stable exchange rates and money flow control, while local frameworks—like the U.S. Federal Reserve Act (12 U.S.C. § 221 et seq.) or the Treaty on the Functioning of the European Union (TFEU, Articles 127-133)—outline who can issue money, what counts as legal money, and careful oversight.
Extra laws, like the EU’s Second Payment Services Directive (Directive (EU) 2015/2366) and the U.S. Bank Secrecy Act (31 U.S.C. § 5311 et seq.), manage electronic money transfers through controlled middlemen. These setups assume a physical or middleman-based money base, making them unfit for the unique digital nature of CBDCs.
To make CBDCs work, five key legal areas need close examination: legal money status, money policy effectiveness, data protection and privacy, cross-border deal dynamics, and overall financial stability. Each area brings specific challenges needing custom law and rule changes.
Main Legal Challenges in Matching Regular Laws with CBDCs
Legal Money Status and Required Acceptance
Regular money rules demand that physical currency be accepted as legal money for all debts, public and private (e.g., 31 U.S.C. § 5103 in the U.S.). CBDCs complicate this idea: Should digital money be forced on everyone? Can private groups use contract freedom to refuse it? Differences between places—like required acceptance in China versus optional refusal in common law systems—make it harder. Legal changes must set CBDC status and reduce access gaps from lacking digital tools.
Money Policy Effectiveness and Programmable Tools
Central banks use tools like reserve needs and open market actions, written in laws like the Federal Reserve Act or ECB rules, to control money. CBDCs offer real-time deal visibility and programmable features—like time limits or conditional payouts—boosting money direction. Without law support, these tools lack legal backing, needing lawmakers to define their range, transparency duties, and protections against big economic upset, such as sudden capital moves or speed shocks.
Data Privacy and Anti-Money Laundering (AML) Compliance
Cash’s anonymity stands in sharp contrast to CBDCs’ digital tracking. Current data protection rules—like the EU’s General Data Protection Regulation (Regulation (EU) 2016/679) or U.S. Fourth Amendment ideas—offer partial shields, while AML/CTF requirements (e.g., 31 U.S.C. § 5318) demand watching. Balancing these needs a split legal setup: hidden small deals against ID-checked big exchanges, with clear rules on data handling and access.
Cross-Border Deals and Compatibility
CBDCs’ ability to skip traditional foreign exchange systems threatens IMF oversight (Articles IV and VIII) and local tax enforcement. Legal tricks—like using a Digital Euro outside Eurozone areas—could cause money splitting without compatible standards. Legal agreement must tackle exchange rate setting, tax sharing, and courts for cross-border fights.
System Stability and Careful Regulation
Direct CBDC accounts with central banks risk cutting out commercial bank middlemen, possibly causing liquidity crises or credit drops. Existing careful frameworks—like Basel III (BIS Capital Rules) or the U.S. Federal Deposit Insurance Act (12 U.S.C. § 1811 et seq.)—are incomplete for this situation. Law changes must adjust CBDC issuance to prevent system risk while keeping the banking sector healthy.
Law and Rule Suggestions for Adjustment
Redefining Legal Money in Digital Form
Law coding should make CBDCs legal money, with required acceptance softened by practical limits (e.g., a small exemption for tiny businesses). The IMF could change Article VIII to recognize CBDCs for international duties.
Allowing Programmable Money Tools
Law power must give central banks the right to use programmable CBDCs, subject to upfront lawmaker approval and later court check. A possible U.S. Digital Dollar Act might say that programmable conditions (e.g., negative rates) need the Federal Reserve Board’s okay and Congress’s watch.
Matching Privacy and AML/CTF Rules
A global framework, maybe led by the Financial Action Task Force (FATF), could set layered privacy rules—e.g., hidden deals under a €500 limit—in line with AML/CTF rules under Recommendation 16 (Travel Rule).
Enabling Cross-Border Compatibility
Two-sided or multi-sided deals should set up CBDC swap systems—maybe tied to IMF Special Drawing Rights (SDRs)—with related tax reporting and dispute mechanisms. BIS efforts like Project mBridge provide a model.
Strengthening System Resilience
Law caps on CBDC holdings (e.g., €3,000 per person), interest-bearing CBDC choices, and Basel III updates adding CBDC-specific risk weights could support financial stability.
Real-Life Case Studies: Legal Actions in Practice
China’s Digital Yuan (e-CNY)
Launch and Scale
Started in 2020, the e-CNY from the People’s Bank of China (PBOC), is a leading retail CBDC. By 2025, it has 260 million wallets and deals over 100 billion yuan ($14 billion USD), tied to tech giants like Alipay. Using a mixed blockchain, it aims to replace cash and boost money dominance.
Legal Setup
The PBOC Law (updated 2021) gives the e-CNY legal money status (Article 19), requiring equal acceptance with physical yuan. The Cybersecurity Law (2017) and Personal Information Protection Law (2021) handle data safety, though they put privacy below state watching. AML/CTF compliance uses real-name sign-up (Banking Supervision Law, Article 34).
Operations and Challenges
A two-part issue model works: PBOC creates it, commercial banks spread it. Soft wallets allow hidden deals up to 2,000 yuan; hard wallets (cards) work offline. Programmable payouts—like time-limited Olympic bonuses—show money direction. Privacy loss, due to PBOC’s full ledger access, and tests with Hong Kong highlight legal trick risks without matching global deals.
Lessons
China’s quick law changes show centralized power works, but privacy trade-offs push for looser CBDC designs in law-based places. Programmable use hints at budget innovation, but use outside borders needs IMF or BIS help.
The Bahamas’ Sand Dollar
Launch and Scope
Launched in 2020, the Sand Dollar, from the Central Bank of The Bahamas (CBOB), is the first full retail CBDC, targeting unbanked people across 700 islands. By 2025, it supports 30,000 wallets and $1.5 million BSD monthly, backed by a controlled blockchain.
Legal Setup
The Central Bank of The Bahamas Act (2020 update) makes the Sand Dollar legal money (Section 16), while the Payment Systems Act (2012, revised) controls digital wallets with ID checks. The Data Protection Act (2003) offers basic privacy shields, limited by enforcement ability.
Operations and Challenges
A two-part structure manages issue; small deals (under $500 BSD) have relaxed ID, while offline cards fix connection gaps. Use is only at 10%, as merchants cite setup costs. Cross-border lag within CARICOM shows compatibility shortfalls.
Lessons
The Sand Dollar’s inclusion focus needs matching infrastructure support and legal clarity beyond money status. Its small scale suggests success for island economies, depending on regional law alignment.
European Union’s Digital Euro
Development
By 2025, the ECB’s Digital Euro is still in early testing, with pilots since 2023 checking retail and wholesale forms across 20 Eurozone states. Seen as a cash add-on, it uses digital ledger tech and links to TARGET2, aiming for strength and money unity.
Legal Setup
The TFEU (Article 128) allows ECB issue, but a new Rule (proposed 2023) would set legal money status and required acceptance. GDPR demands hidden small deals; AMLD6 (Directive (EU) 2021/1678) sets tracking limits. Getting all countries on board is a huge task.
Operations and Challenges
A mixed model—ECB issues, banks distribute—limits holdings at €3,000 to avoid cutting out middlemen. Privacy levels balance GDPR with AML needs. Inside-EU compatibility is strong, but outside deals (e.g., with e-CNY) wait for legal support. Love for cash in Germany and tech differences slow progress.
Lessons
The EU’s careful agreement prioritizes privacy and stability, offering a multi-place model. The delay in the law highlights the complexity of group consensus, contrasting with China’s speed.
The Legal Future: A Team Effort
CBDC integration needs a joint effort of local changes, global teamwork, and tech fit. The IMF and BIS should suggest model laws and compatibility protocols, while country lawmakers adjust these to local needs. Public input on privacy and fairness is a must. Digital ledger tech and smart contracts, as legally recognized tools, must support implementation.
Conclusion
CBDCs promise a rebirth of regular currency, but fitting them in depends on legal creativity. China’s control, the Bahamas’ inclusion, and the EU’s caution provide varied lessons. By redefining money, enabling programmability, balancing privacy with safety, ensuring compatibility, and strengthening careful oversight, international money law can guide this digital shift—unless it falls into system chaos.
References
- International Monetary Fund. Behind the Scenes of Central Bank Digital Currency: Emerging Trends, Insights, and Policy Lessons. IMF Fintech Notes. Published February 8, 2022. Accessed March 24, 2025.
https://www.imf.org/en/Publications/fintech-notes/Issues/2022/02/08/Behind-the-Scenes-of-Central-Bank-Digital-Currency-512713 - International Monetary Fund. Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations. IMF Working Papers. Published November 20, 2020. Accessed March 24, 2025.
https://www.imf.org/en/Publications/WP/Issues/2020/11/20/Legal-Aspects-of-Central-Bank-Digital-Currency-Central-Bank-and-Monetary-Law-Considerations-498 - International Monetary Fund. IMF Website. Accessed March 24, 2025.
https://www.imf.org - Bank for International Settlements. BIS Website. Accessed March 24, 2025.
https://www.bis.org - European Central Bank. ECB Website. Accessed March 24, 2025.
https://www.ecb.europa.eu - Financial Action Task Force. FATF Website. Accessed March 24, 2025.
https://www.fatf-gafi.org - United States Code. Title 12: Banks and Banking, Chapter 3: Federal Reserve System, Section 221 et seq. Legal Information Institute. Accessed March 24, 2025.
https://www.law.cornell.edu/uscode/text/12/221 - United States Code. Title 31: Money and Finance, Subtitle IV: Money, Chapter 51: Coins and Currency, Section 5103. Legal Information Institute. Accessed March 24, 2025.
https://www.law.cornell.edu/uscode/text/31/5103 - United States Code. Title 31: Money and Finance, Subtitle IV: Money, Chapter 53: Monetary Transactions, Section 5311 et seq. Legal Information Institute. Accessed March 24, 2025.
https://www.law.cornell.edu/uscode/text/31/5311 - European Union. Treaty on the Functioning of the European Union (Consolidated Version). Official Journal of the European Union. Published 2012. Accessed March 24, 2025.
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12012E/TXT
About Author
Avaneesh Reddy Golamari, a student at National Public School Whitefield, is currently studying in the commerce field pursuing a career in international business law. Avaneesh’s interest in CBDCs represents a transformative innovation in global finance, blending legal, technological, and economic dimensions.
The aim is to explore how CBDCs can reshape monetary systems, address legal uncertainties, and enhance financial inclusion while balancing privacy and security concerns. By analyzing their design and regulatory frameworks, he seeks to contribute to the discourse on creating robust legal foundations for CBDCs, ensuring their legitimacy and trustworthiness in diverse jurisdictions.
