E-CNY and jurisprudence renovation
A Beijing citizen gives a thumbs up for digital RMB’s convenience. Photo: CFP
China’s preparation for the development of digital renminbi started in 2014. In April, 2020, the Digital Currency Research Institute (DCRI) under the People’s Bank of China (PBOC) launched an internal closed pilot test of the central bank digital currency (CBDC, also known as DC/EP, or Digital Currency and Electronic Payment) in Shenzhen, Chengdu, Suzhou, Xiong’an, as well as Beijing and Chongli, the area where the 2022 Winter Olympics will be held. Since June 30, 2021, subway commuters in Beijing can pay their fares using CBDC, according to the Beijing Municipal Commission of Transport.
As digital RMB enters into our daily life and business life, legislators and users should start to adjust and renovate the existing legal system.
Legal definition
The system of digital RMB is built upon the concept of “one coin, two databases, and three centers.” “One coin” refers to the e-CNY unit of currency, which is an encrypted digital string representing a specific amount that is guaranteed and signed by the central bank for sale. “Two databases” refer to the central bank’s ledger that keeps track of all outstanding e-CNY and all the e-CNY ledgers maintained by the network’s lower tier either locally or on the same cloud used by the central bank. The e-CNY network’s “three centers” are three PBOC entities, including the certification center, which will keep a database that maps real identities against all digital wallet users; the registration center that tracks e-CNY ownership and transactions; and the big data analysis center, which the central bank will use to monitor payment flows for financial risks and detect illegal behavior such as money laundering.
Essentially, CBDC can be defined as a state-backed digital currency that is based on an encryption algorithm and loose coupling. It is a digital, legal tender whose nature is entirely different from the existing electronic payment tools.
E-CNY is different from private cryptocurrencies like bitcoin. The Notice on Guarding Against Bitcoin Risks issued by PBOC and four other departments and commissions promulgated in 2013 stated that: “Despite being called a ‘currency’, bitcoin is not a currency in any real sense given the fact that it is not issued by currency authorities and does not possess the legal status of being compulsorily used and accepted. Judged from its nature, bitcoin should be regarded as a specific virtual commodity: it does not possess the status of a legal currency, and cannot and should not be circulated in markets as a currency.” Therefore, the key difference between digital RMB and private cryptocurrencies is that the latter is merely a virtual currency not a legal tender.
Meanwhile, e-CNY is not an electronic currency. When a debtor pays off his/her debt by digital RMB—a legal tender—he/she directly ends the debtor-creditor relationship as this behavior serves the purpose of repaying debt. However, as is defined in Article Two of Directive 2009/110/EC of the European Parliament and of the Council, “electronic money” means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions, and which is accepted by a natural or legal person other than the electronic money issuer.
Therefore, a debtor has to ask for the permission of the creditor if he/she wants to pay by digital currency. In other words, digital currency cannot achieve the same legal effect as a legal tender.
Supervision & regulation
The issuance of digital RMB calls for adjustments in the rights to issue paper money, manage the system, and establish rules and regulations, including those related to supervision. PBOC’s right to issue paper money can be naturally extended to issuing digital RMB. Although some may argue that it is necessary to authorize PBOC with the legal right to issue digital RMB, it should be pointed out that as long as digital RMB is China’s legal currency, i.e. RMB in a digital form, its issuance right is exclusive to PBOC.
In practice, paper currency and digital currency are deemed as equal, and the issuance of digital currency is a natural extension of PBOC’s right.
Currently, digital RMB is still a limited legal tender. Article 16 of Chapter Three of the Law of the People’s Republic of China on the People’s Bank of China stipulates that the legal tender of the PBOC is RMB. RMB shall be used for repaying all public or private debts according to its face value within the territory of China, and no organization or individual shall refuse to accept. However, this article may not apply to digital RMB for some time to come, since many people are not equipped with the terminal device that is essential for circulating and receiving digital RMB.
Identifying e-CNY as a limited legal tender will also help ensure the basic interests of those less able to access the internet, such as some senior citizens and people with disabilities, by making sure that they can still use cash. This requires physical money always as an option for government departments and public service agencies, and they need to prepare enough change.
The supervision department has the obligation to protect digital RMB users’ privacy and personal data. The technical framework of digital RMB issuance and circulation has a registration center that stores the information about RMB’s circulation, as well as an authentication center in charge of authenticating users’ information identity. Both of them concern users’ privacy as they store users’ personal data.
Nevertheless, the current Law of the People’s Bank of China and its revision (draft solicitation) both reveal that legislators have yet to see the importance of these issues. It is necessary to roll out legal provisions to ensure that the supervision department safeguards users’ privacy and personal data. Legislators should specify who is able to read the information about transactions and users. Currently, a firewall has been established between the registration center and the authentication center to avoid information from either side being easily correlated. Still, we cannot eliminate the possibility that these two types of user information can be read simultaneously for legitimate reasons such as protecting national security, anti-terrorism, and anti-money laundering.
To balance the needs of digital RMB circulation, financial regulation, and user privacy, legislators need to stipulate the rights, conditions, and procedures for accessing the information. For instance, the central financial supervision department, public security organ, supervisory organ, and judiciary authorities must hold legitimate documents before they can read relevant information.
Civil and commercial law
As a legal tender, DC/EP combines three facilities: a measuring unit, a medium of exchange, and a store of value. When it joins into equal trade, as a new variate, digital currency will surely trigger a ripple effect in civil and commercial law.
First of all, digital RMB is users’ personal property. To determine digital RMB’s property attribute, we need to look close into the digital wallet, which was created by commercial banks as a supplement to the traditional bank account for the purpose of storing digital RMB. The relationship between a digital wallet and digital currency is like one between sealed property and content. Mainstream theory tends to divide the two by identifying sealed property as belonging to the bailee and content to the bailor. In this case, e-CNY users put their digital RMB into the custody of commercial banks by placing their digital currency into the “safe,” i.e. the digital wallet. The digital money is still directly possessed and owned by users.
Secondly, digital RMB is not included in commercial banks’ bankruptcy estate. When a depositor hands over his/her material money to a commercial bank, he/she only exchanges for creditor’s rights from the commercial bank. If the commercial bank is already bankrupt, the depositor has no priority right for the currency he/she has stored in the bank, and can only receive compensation, just like other creditors.
This is exactly the opposite case for digital RMB. By putting their digital money into the custody of commercial banks, users continue to enjoy their ownership of the money, which does not belong to the commercial bank, and therefore should not be included within the scope of bankruptcy estates. This means users can get their digital money back from the bankrupt commercial bank based on Article 38 of the Enterprise Bankruptcy Law. This regulation has greatly improved the edge of digital RMB, making it a means to avoid risk.
Third, Article 57 of the E-commerce Law can also apply to digital RMB. As technology advances, digital wallets can be accessed in more ways, such as the digital RMB wearable device being developed ahead of the Beijing 2022 Olympic and Paralympic Winter Games, which allows users to pay by scanning their ski gloves.
However, convenience also means the potential risk of unauthorized payment. When someone else uses your e-CNY for payment or transaction without your permission, who should assume the risk? The second clause of article 57 stipulates that “Losses caused by unauthorized transactions are to be borne by the electronic payment service providers; but electronic payment service providers do not bear responsibility where they can prove that the unauthorized payment was caused by the users’ fault.” Therefore, the risk of unauthorized payment should be undertaken first by the commercial bank. When the bank has fulfilled its responsibilities, compensation should then be claimed from the unauthorized user.
To sum up, the legal issues triggered by the circulation of e-CNY should be resolved by renovating the regulatory law and transaction approach. The law of the PBOC and the law of commercial banks should specify the legal status of digital RMB by adding regulations about privacy protection, personal data protection, and the liability of unauthorized payment. It is also necessary to adjust other laws based on the features of digital RMB, including the anti-money laundering law, law of administration of taxation collection, and the enterprise bankruptcy law.
Li Jianxing is a Chenhui scholar from East China Normal University.
Edited by WENG RONG
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