Introduction
The significance of this is in the introduction. The idea of virtual currency is not a mere novelty. Central banks are creating their own digital currencies (CBDCs), while cryptocurrencies are transforming how people understand andmakes payments. These instruments offer ease and innovation, but also pose significant legal problems. This post provides concrete illustrations of these issues.’
What is the fundamental distinction in legal concepts?
Privately held assets include Bitcoin and other digital currencies, which operate without any legal status. What does this mean? These types of currency are not considered legal tender under traditional bank regulations and rely on voluntary use by other parties. CBDCs are a digital version of fiat money that is issued by a central bank and is backed by the government. Laws governing the central bank, monetary authority and payment systems provide the legal foundation for CBDCs as opposed to privately developed arrangements between issuers and users. Why? Many jurisdictions have made it their policy to incorporate CBDCs into existing legal Systems regarding issues like legal tender, central bank responsibility, and payment systems.
Key legal themes
1. Legal status and classification
Without a legal framework, any country must establish what a tool is in law asa commodity, security, payment instrument, or something else. Then it becomes necessary to determine this. Why? Taxes, consumer rights, and the regulatory bodies that regulate them are all influenced by this classification. Legal definitions must be clearly defined to avoid any gaps or overlaps in the law, as central banks and lawmakers need them. Before implementing retail CBDCs, jurisdictions must address these fundamental classification questions, as stated by the BIS.
2. Legal tender, liability, and guarantees
If the central bank issues a CBDC as a statutory tender, it establishes legal commitments for companies that must subscribe to it (if required by legal regulations) and later assumes the final guarantee in that case, the central bank holds the ultimate liability and guarantee for the currency’s value. According to the Reserve Bank of India, a CBDC is like a liability of the central bank, which is equivalent to physical banknotes, and is associated with electronic payment.
3. Consumer protection and market integrity
The crypto markets have encountered attacks, e-manipulation, and abrupt Collapses. Investor protection, disclosure regulations, and operational standards for exchanges and wallet providers are the primary concerns of regulators. The EU’s MICA initiative aims to establish transparent regulations on disclosure, monitoring, and authorisation for various Crypto-assets and service providers. The EU’s MiCA initiative exemplifies this approach, which aims to provide stronger consumer rights and reduce market risks.
4. Privacy vs. Anti-money-laundering (AML) rules
While private digital wallets are feasible, it’s incumbent upon regulators to prevent money Laundering, terrorism financing, and other criminal activities. While users have the right to privacy, CBDCs can also enable traceability, which is good for crime prevention,n but privacy is limited. According to international standards, such as the FATF, countries must follow AML/CFT Guidelines for virtual assets and service providers; more stringent updates emphasise stricter Implementation and clearer travel-rule requirements for cross-border transactions. This creates a persistent legal conflict between safeguarding privacy and enforcing AML/CFT compliance.
5. Cross-border and interoperability issues
Although money changes across borders, legal frameworks remain largely national in scope. The use of cross-border CBDC (or crypto transfers) raises concerns about data sharing, currency controls, and the jurisdictional framework of each country in disputes. Why is this? CBDCs must adhere to common technical standards and cooperate across countries for efficient operation. Significant challenges remain in creating effective cross-border legal and technical arrangements, as noted by the IMF.
6. Taxation and enforcement
Certain Nations tax capital gains on virtual digital assets through withholding or transaction fees. Tax Laws are being made more rigorous as tax authorities increasingly target crypto trades and Exchanges to stifle illegal funds. Recent reports indicate that tax investigations and Enforcement actions are active in major markets.
Practical examples
MiCA is a standard approach that serves the needs of both issuers and service providers in the EU, emphasising consumer protection and market stability. India regulates crypto through compulsory disclosure. Additionally, they tax crypto gains. FATF and BIS workstreams facilitate regulatory consensus among crypto-CBDC jurisdictions by promoting shared AML/technical practices.
Which topics are important for politicians and consumers to consider?
We are transitioning into a multifaceted world, with private digital currency, regulated exchanges, and state-backed digital currencies being the norm. The key roles of the policymakers and regulators are to clarify definitions, ensure users’ privacy within AML boundaries, and enforce cross-border regulations. Users must remain aware of the legal status of their tokens, whether they are valid or not, their tax obligations, and privacy safeguards, and they should choose regulated platforms to ensure their compliance and security.
Call to action
Stay updated with the national central banks, Financial regulators, and global bodies like the BIS. New Users should exercise caution and require proper guidance in transactions, understand legal restrictions and their risks.
References
- Reserve Bank of India Act, 1934, § 22 (India).
- The Reserve Bank of India, Concept Note on Central Bank Digital Currency (Oct. 7, 2022), https://www.rbi.org.in.
- Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on Markets in Crypto-Assets (MiCA), 2023 O.J. (L 150) 40.
- Financial Action Task Force (FATF), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (updated 2023), https://www.fatf-gafi.org.
- Bank for International Settlements (BIS), Central Bank Digital Currencies: Foundational Principles and Core Features (Oct. 2020), https://www.bis.org.
- Internet & Mobile Ass’n of India v. Reserve Bank of India, (2020) 10 S.C.C. 274.
- Income-tax Act, 1961, § 115BBH (India).
- International Monetary Fund (IMF), Digital Money Across Borders: Macro-Financial Implications (2023), https://www.imf.org.
- Nishith Desai Associates, India and Cryptocurrencies: Legal, Tax and Regulatory Analysis (2023), https://www.nishithdesai.com.
- European Central Bank, Digital Euro: Legal and Policy Considerations (2022), https://www.ecb.europa.eu.
Author Name: Anand Kumar Bose is a student of Ideal Institute of Management and Technology and School of Law under Guru Gobind Singh Indraprastha, 4th Year (B.A.LL.B(Hons).
