Although central bank digital currencies (CBDCs) open opportunities to utilize new technologies, they also raise significant human rights concerns for many global users.
In today’s world, technology and innovation expand without limitations wherever they find room, reshaping old structures from the ground up and establishing new foundations with transformative tools. Money and its transaction infrastructure are no exception, having evolved remarkably over time, and today, they are undergoing further transformation with blockchain technology.
Following the emergence of cryptocurrencies and global awareness of this new technology, countries are now working to maximize their gains by developing their own CBDCs and joining this race.
This article examines the legal perspective on CBDCs and seeks answers to numerous questions. It is useful to review the meanings of frequently used terms to better understand them.
In general, CBDC stands for Central Bank Digital Currency. CBDCs aim to create a new type of digital currency that leverages new technologies to revolutionize payment systems.
They carry the value of their nation’s fiat currency and are managed by an organization, government, or regulatory body, granting access to user accounts.
To outline the perspective of legal science, it is important to note that the term “rights” linguistically refers to the plural of “right”. Technically, it denotes a set of rules established to regulate relationships among people and maintain social order. Additionally, the law grants individuals certain privileges and powers in relation to others, which are collectively referred to as “rights”.
With this introduction, we examine Central Bank Digital Currencies (CBDCs) from the lens of legal science. As mentioned, CBDCs are issued by central banks and utilized by individuals. Naturally, wherever interactions and exchanges between individuals occur within a society, rules and regulations must be in place to organize these interactions. Without such measures, chaos and disorder are inevitable.
Legal rules and regulations play a crucial role in all societies, such as establishing order and protecting individuals. Consequently, societies always strive to enact new laws and regulations to further respect and safeguard individuals’ rights.
Human Rights Concerns Regarding CBDCs
Human rights are a primary concern in human societies. They play a crucial role in international relations, including the adoption of new technologies. CBDCs originate from central banks, so they are no exception and may even exacerbate such concerns. Human rights organizations and activists have raised objections, arguing that CBDCs could violate human rights norms.
Human rights advocates claim that CBDCs could violate specific rights such as freedom of association, privacy, equality before the law, and private property rights.
“The only beneficiaries of Central Bank Digital Currencies are lobbyists, tech companies, and central banks. CBDCs not only offer no significant advantages to American users but also eliminate whatever remains of financial privacy.” –Norbert Michel & Nicholas Anthony,
Directors at the Cato Institute
1. Right to Freedom of Association and Political Parties
This includes the right to form and join trade unions, syndicates, political parties, or any civil society organization, a fundamental aspect of human rights that CBDCs could easily undermine.
Critics argue that CBDCs enable central banks to monitor and control the financial activities of these groups or potentially restrict or sanction them for political or ideological reasons. A central bank could freeze or confiscate a CBDC account of a government-opposing group or impose fees or restrictions on its transactions. This level of control could impact the independence and diversity of civil society and weaken democratic processes.
2. Privacy of Individuals
The protection of personal data and communications against arbitrary or illegal interference is another human rights aspect. CBDCs could expose users to surveillance and data breaches because central banks or related entities might have complete access to financial transactions, identities, and other user data, enabling tracking and analysis. For instance, a central bank could use CBDC data to monitor spending habits, preferences, locations, health status, religion, ethnicity, or political views, potentially violating privacy and exposing individuals to discrimination or harassment.
Given that CBDCs are inherently programmable, central banks could connect spending habits with other datasets, thus limiting or conditioning welfare benefits based on personal criteria. For example, purchases of sweets, chocolates, or fast food could be restricted for individuals suffering from obesity.
CBDCs grant the government the power to spy on citizens. -Ted Cruz, U.S. Senator
3. Protection Against Discrimination and Equality Under the Law
The right to non-discrimination includes equal treatment and protection under the law without regard to specific characteristics. Human rights organizations and critics argue that CBDCs could foster or exacerbate inequality and exclusion, as central banks or other entities could discriminate against users based on accessibility, eligibility, affordability, or usability of CBDCs. For example, a central bank could exclude or disadvantage users lacking digital or internet literacy. Moreover, a central bank might seek to control, coerce, or harm marginalized, exiled, or vulnerable individuals. Examples include societies that grade citizens based on religion, race, skin color, or social class, like untouchability in India or discrimination against migrants. This could significantly limit users’ opportunities and negatively impact their social and economic rights.
4. The Right to Private Ownership
Another aspect of human rights is the right to private ownership, which includes the right to own, use, and control material and intellectual assets. Critics argue that central bank digital currencies (CBDCs) could weaken users’ security and ownership of their money, as central banks or other influential entities might manipulate, confiscate, or devalue these digital currencies.
For example, a central bank could impose negative interest rates, inflation, taxes, or collateral requirements on CBDCs or even seize them without the owner’s intervention in cases of debt, sanctions, or emergencies. This contrasts with the legal requirement for strict and complex processes before property confiscation and depriving individuals of their assets.
Looking at the international human rights system, this issue proves significant, as Article 17 of the Universal Declaration of Human Rights addresses it, stating: “Everyone has the right to own property alone as well as in association with others, and no one shall be arbitrarily deprived of their property.”
Article 15 of the Islamic Declaration on Human Rights also asserts that “Every human being has the right to acquire property through lawful means and enjoy it, provided it does not harm oneself, others, or society. Property cannot be taken away except out of necessity to protect the public interest, and any expropriation must be accompanied by prompt and fair compensation.”
Throughout history, human rights have strived to protect all people’s legitimate rights and freedoms. Regardless of its successes and failures, it is essential to acknowledge that societies deserve a life free from violence and wrongdoing under the protection of the law, which can only be achieved through precise regulatory frameworks governing societal relations.
Central bank digital currencies introduce risks to global financial stability and open a Pandora’s box of financial privacy issues and cybersecurity concerns. -John Reed Stark, Former Head of the SEC’s Office of Internet Enforcement
Advantages and Disadvantages of Central Bank Digital Currencies
Like any emerging technology, the use of CBDCs has various advantages and disadvantages. We will explore some of the benefits and drawbacks of this innovation, especially within the context of the Iranian legal system.
Advantages of Central Bank Digital Currencies
One potential advantage of CBDCs is their capacity to improve anti-money laundering (AML) processes, reduce tax evasion, and curb financial corruption and illegal activities. In this section, we will discuss two key crimes: money laundering and tax evasion.
1. Combating Money Laundering
The Anti-Money Laundering Law was enacted on 11/02/2007 and amended on 15/10/2018. Money laundering is a global, organized crime. It is a secondary crime that follows primary offenses that yield financial and material gains for criminals. This crime involves concealing the illegal and illegitimate nature of assets gained from such crimes, giving them a lawful appearance.
The term “money laundering” refers to hiding the original source of criminal proceeds and converting them into “clean” assets, making it nearly impossible or very difficult to trace the assets back to their criminal origins.
Money laundering is the process of converting illicit profits from activities such as drug trafficking, arms and human trafficking, bribery, and theft into legitimate and legal money. Importantly, this crime may be committed by either the original criminals or others. This crime needs to be independently criminalized, separate from the original offense.
To define money laundering, it is crucial to note that the acts involved, such as converting, transferring, and concealing the proceeds of crime, must be done with the intent to hide the criminal origins.
Given the significance of this issue for the country’s judicial and financial systems, all relevant authorities are working to ensure the effective implementation of this law and using modern monitoring tools to enforce it more accurately. Thus, CBDCs, as a modern technological tool, could significantly help reduce money laundering and improve operational frameworks for combatting it.
CBDCs could require holders to provide accurate information about themselves and their transactions to the central bank, reducing money laundering risks.
CBDCs facilitate smoother banking processes, allowing people to transfer funds from commercial banks to the central bank more quickly. As both digital bank reserves and digital cash for minor transactions, CBDCs could become the core of the future financial system. -Agustin Carstens, General Manager of the Bank for International Settlements (BIS)
2. Combatting Tax Evasion-Related Crimes
Tax evasion is any legal or illegal effort to avoid paying full or partial taxes. People evade taxes for various reasons, sometimes because they find the tax amount on their income unrealistic, unfair, inaccurate, or simply because they do not want to pay. Some individuals are also unaware that they are committing the crime of tax evasion.
For example, if someone reports lower income to the government than they earn, they pay less tax, which motivates tax evasion. The Direct Tax Law’s Articles 199 and 200 states:
“Any individual or entity that, according to this law, is required to withhold and remit another taxpayer’s taxes and fails to do so will be subject to a fine equal to 20% of the unpaid tax, in addition to joint liability with the taxpayer in paying the tax.”
Furthermore, Article 199, Note 1, specifies:
“When ministries, companies, or government institutions are required to withhold taxes, responsible personnel will be penalized as stipulated in the Law on Administrative Violations.”
As mentioned, taxes are levied on various groups according to the Direct Tax Law and indirect taxes (such as value-added tax). These laws specify tax rates and outline provisions for tax evasion, exemptions, and penalties.
These strict laws are intended to prevent individuals from easily bypassing regulations, thus protecting the rights of both the government and society.
Based on judicial records, high-income individuals often commit tax evasion. Such individuals typically try to evade tax laws by creating fake records, filing fictitious contracts, or presenting incorrect information to understate their actual income. These methods allow them to reduce or avoid taxes or benefit from tax exemptions.
Providing incorrect information or manipulating data in records, invoices, or unregistered cash transactions are simple ways to commit tax evasion that people often use.
Tax evasion is undoubtedly a crime under the law, as it not only infringes on government rights but also harms the public’s interests by depriving society of tax revenues. This crime disrupts the country’s economic and investment system, potentially leading to recession and inflation.
To address this, there is a need for a new, powerful tool that could reduce the incidence of such crimes and facilitate better monitoring of individuals’ financial transactions.
Here, CBDCs could play a significant role. Thus, it can be concluded that one advantage of developing CBDCs is enhanced monitoring, control, and infrastructure for tax collection.
If central banks fail to advance CBDCs amid the rise of digital currencies, they risk losing control over money and payments. -Christine Lagarde, President of the European Central Bank
Disadvantages of Central Bank Digital Currencies (CBDCs):
After examining several advantages of CBDCs, it is crucial to also be aware of their drawbacks and potential unknown risks. These disadvantages may lead to significant legal and social challenges. Two main concerns include the expansion of Cybercrime: Unlike physical cash, the use of CBDCs could potentially lead to a rise in novel and widespread cybercrimes, which are challenging to detect and counteract. Privacy Violations: In Iran, privacy holds considerable legal and societal importance. CBDCs could pose risks to personal privacy, leading to significant implications.
1. Expansion of Cybercrime
Cybercrime, or computer-related crime, was globally defined by the OECD (Organization for Economic Co-operation and Development) in 1983 as illegal or unauthorized actions involving computers, data processing, or data transfer.
Recent studies provide new insights into data-related crimes.
Cybercrime is broadly defined as any criminal act in which a computer is used as a tool or target.
In Iranian law, any illegal act conducted via computer or the Internet, whether directly or indirectly, is considered cybercrime.
Criminal deviant behaviors related to computers are referred to by various terms, such as computer crime, computer offenses, cybercrime, and virtual crime, which are often assumed to be synonymous. However, in reality, these terms have distinct natures.
Cybercrimes are offenses in which computers, phones, household devices, and other technological tools are used for unlawful purposes, such as fraud, theft, electronic sabotage, infringement of rights, hacking into computer systems, and breaching networks.
Although lawmakers have tried to ensure cybersecurity through strict monitoring and neutralizing criminal activities in recent legislation, the rise of financial and monetary technologies like Central Bank Digital Currencies (CBDCs) could provide a fertile ground for committing cybercrimes. Considering the numerous unknown risks and challenges CBDCs may pose, this issue can be considered one of their potential disadvantages. Nevertheless, with proper study and anticipation of these risks, precise legislation and oversight of CBDCs can significantly mitigate potential dangers.
When reviewing the history of legislation in Iran concerning emerging technologies, lawmakers have tried enacting laws suited to these new topics. While they have sometimes succeeded and other times failed, legislators inevitably must establish laws to facilitate the appropriate use of new technologies.
CBDCs create a hazardous mix of financial, economic, and human rights risks. Nevertheless, given blockchain’s high security and the deeply segmented nature of transactions, the use of CBDCs is improving. –Alessandro Civati, Blockchain, AI, and Cybersecurity Specialist
2. Privacy Violations
Privacy can be categorized into informational privacy, communication privacy, bodily privacy, territorial privacy, and personality privacy. Respecting this right is relevant in individual, societal relationships, family dynamics, and interactions between governments and citizens. Contrary to some beliefs, privacy in Islamic jurisprudence is addressed distinctly from life and property. Defending privacy is considered as crucial as defending life and property.
Informational privacy pertains to data in any form—audio, video, text, symbols, maps, numbers, or their combinations—stored in documents, software, or other recording devices. Personal information includes identity details, personal circumstances, addresses, email accounts, bank account numbers, passwords, workplaces, and personal details related to trade, profession, education, or finances (Article 1 of the Executive Regulation on Access to Information). The laws governing the processing of personal data are referred to as “informational privacy.”
Data protection principles dictate that personal information, including financial or governmental data, must be processed under strict rules. Violations of these rules are considered breaches of informational privacy.
The Electronic Commerce Law of Iran (2005) does not explicitly define privacy but introduces data protection measures, such as safeguarding sensitive data (Article 58) and ensuring consent-based storage and processing (Article 59).
Similarly, the Access to Information Law (2009) defines personal information, including names, addresses, family life, personal habits, and bank account details, as part of privacy. In the Islamic Penal Code (2013), violations of personal information are criminalized, with severe penalties for breaches.
Informational privacy is critical, and any intrusion or dissemination of personal secrets is strongly condemned. For example, some Islamic scholars consider exposing a believer’s secrets as an act that undermines justice. Hence, any factor threatening personal information privacy, such as inadequate security for Central Bank Digital Currencies (CBDCs), must be addressed. CBDCs could be susceptible to theft, posing significant risks without robust infrastructure.
Entering uncharted territories often invokes fear, yet without exploration, we cannot comprehend their challenges or rewards. New technologies inevitably raise questions and concerns but eventually envelop us, necessitating peaceful coexistence. CBDCs and cryptocurrencies are no exception. Sooner or later, we will create solutions to meet these new demands, just as humanity has innovated to survive challenges throughout history.
CBDCs won’t inherently lead to dystopia; they could help prevent it, provided personal freedom remains central to their design and implementation. –Richard G. Brown, Chief Technology Officer
Law has always evolved alongside new developments, establishing regulations to organize societal relationships. Sometimes these frameworks are beneficial, while at other times, they impose limitations. The ultimate goal remains harmonious coexistence without infringing on others’ rights.
Modern technologies, despite their many advantages, can disrupt order and challenge societal laws. However, just as a small flame can ignite a forest fire, it can also provide warmth and light.
Legal systems strive to recognize opportunities and threats, ensuring a safe framework for the former while mitigating risks from the latter. Law violators are dealt with strictly, protecting victims and seeking justice.
Law is an indispensable element of modern societies and a never-ending pursuit.
Law never ends…
Sources:
Introduction to Legal Studies by Dr. Nasser Katouzian
Policy Report Title: Central Bank Digital Currency (CBDC): Theoretical Foundations and Experiences, MBRI-PR-9932, p. 10
Draft Document on Rial, p. 45
Computer, Cyber, and Virtual Crimes by Mohammad Sadegh Gholami-Nia
