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Editor’s Note: In the 15th installment of our series, the moneylaundering.com legal team examines central banks and their growing interest in cryptocurrencies and other digital currencies.

In January, the Bank for International Settlements, or BIS, announced the formation of a group of six central banks, including the Bank of Canada, Bank of England and European Central Bank, to consider the possibility of developing their own digital currencies.

A month prior, during a lecture at Princeton University, BIS General Manager Agustin Carstens discussed some of the challenges posed by central bank digital currencies, or CBDCs, including where responsibility for know-your-customer and anti-money laundering oversight would fall.

His comments came two months after the Monetary Authority of Singapore found in a report that CBDCs could help address the exploitation of privately issued cryptocurrencies and other digital currencies by money launderers, tax evaders and other criminals by ensuring that all such transactions are recorded as changes to individual accounts.

In February, at a symposium on the future of payments in Stanford, California, Lael Brainard, a member of the U.S. Federal Reserve’s Board of Governors, discussed the challenges arising from the digitalization of payments and currency, and whether CBDCs would improve retail and other payment systems and reduce operational vulnerabilities in the U.S. financial system.

A day after Brainard’s speech, the U.S. Treasury Department released its 2020 National Illicit Finance Strategy, drawing attention to the vulnerabilities presented by digital assets, specifically CBDCs, and how they could be used in furtherance of sanctions evasion and other financial crimes if developed without anti-money laundering and counterterrorist financing controls.

AML and CTF compliance was also a central theme of remarks delivered in February by the Bank of Japan’s deputy governor, Masayoshi Amamiya, who emphasized that controls against illicit finance must be discussed before jurisdictions begin developing their own CBDCs.

The People’s Bank of China has identified AML and CTF as a key facet of its plan to issue its own digital fiat currency, Amamiya told the Future of Payments Forum in Tokyo.

In March, the Bank of England published a report on the possibility of developing a CBDC, emphasizing the need to ensure CBDC transactions are compliant with all regulations, including AML requirements and protections for the privacy of users.

The BoE found that CBDCs could help consumers make faster and more reliable payments, while avoiding the risks associated with stablecoins and other privately issued cryptocurrencies.

With proper AML systems in place, CDBCs could also foster competition, innovation and efficiency in domestic and cross-border payments, according to the BoE, which envisions a “central bank core ledger” with which private-sector payment providers would interface.

Several jurisdictions have gone beyond reviewing possible models, including the Central Bank of Thailand, which included the development of a CBDC and related policies and regulatory framework in its strategic plan for 2020-2022.

Similarly, in April, the Central Bank of Malaysia noted its plan to explore the potential merits and feasibility of a CBDC.

Also in April, the central bank of the Netherlands, De Nederlandsche Bank, examined the value of CBDCs from the lens of the public interest in a report that also noted the migration of consumers away from physical currency.

In the report, DNB noted that CBDCs would promote the smooth function of the payment system in times of financial crises, such as that seen during the ongoing COVID-19 pandemic, and found that any risks posed by them could be mitigated through technologies previously developed for cryptocurrencies.

Interest in CBDCs has separately spurred interjurisdictional cooperation.

In April, the Hong Kong Monetary Authority disclosed that it embarked on a joint research project with the Bank of Thailand to study the application of CBDCs, particularly in the context of cross-border payments between banks in Hong Kong and Thailand.

Brainard noted in her February speech that the U.S. Federal Reserve has joined with other central banks to increase their mutual understanding of CBDCs.

On June 4, the European Parliament published a preliminary report that welcomed the European Commission’s commitment to developing an action plan on financial technology, or fintech, to create a more competitive and innovative European financial sector by the second half of this year, including with respect to proposals for CBDCs.

Prior to the report, a member of the Executive Board of the European Central Bank, Yves Mersch, discussed the EU’s growing interest in CBDCs and remarked on the potential of a cashless economy.

During his remarks, Mersch noted that a retail CBDC, which would be accessible to all consumers as opposed to a wholesale CBDC—which would be accessible to only certain financial counterparties—could rely on digital tokens that would circulate in a decentralized manner, or, alternatively, be based on depository accounts.

Depository accounts would offer stronger protections against money laundering and other financial crimes by enabling the European Central Bank to log transfers between individual users, said Mersch, but they may also result in a disproportionate concentration of power and a potentially unworkable regulatory burden.