The Future of Retail Central Bank Digital Currency in Australia
24th November 2020
“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr
An important speech by a senior Reserve Bank of Australia official last month has flown somewhat under the radar.
Tony Richards, Head of Payments Policy at the central bank, delivered a significant address on 14th Oct at the 3rd UWA Blockchain, Cryptocurrency and Fintech Conference (the University of Western Australia this year made it a virtual event, given the pandemic). The speech provided valuable insight into the RBA’s thinking on a possible central bank digital currency (CBDC) in Australia. Other than the implications for domestic monetary policy and Australia’s banking & finance sectors, Richards’ presentation was also relevant in the larger context of China’s ambitions in rolling out a CBDC, the plans of the likes of Facebook with its Libra digital currency, and the growing questions over the sustainability of the US dollar as the global reserve currency.
Richards focused on the CBDC from primarily a payments perspective, making only an early, tangential mention of potentials risks to the financial system at large.
The key takeaways are summarised below.
- Most money in Australia already exists in digital form, mostly in the form of deposits recorded in electronic ledgers at commercial banks. (‘Commercial bank money.’)
- RBA also issues digital money in the form of balances in Exchange Settlement Accounts (ESAs) that banks and some other entities can hold, with transactions made against the ESA balances.
- CBDC basically means a new form of digital money issued by the central bank that would be more widely accessible than ESA balances.
- There would be two types: retail CBDC, and wholesale CBDC.
Retail CBDC needs to be differentiated from three flavours of digital payments that are already in use:
- E-money (think prepaid cards, PayPal, Alipay, etc.). While not issued by central banks, there are similarities with CBDC.
- Cryptocurrencies or crypto-assets that use digital ledger technology (DLT) and cryptography. Again, DLT would probably also be used by CBDC – but cryptos, too, are not issued by a central bank.
- Stablecoins, a subset of cryptocurrency that uses assets as backing to maintain relative stability of their value. (e.g. Facebook’s Libra).
Rather than the RBA taking on all aspects of CBDC issuance, Richards flagged the greater likelihood of a two-tier system where the CBDC would be issued through private sector parties. Incentives for such private entities might include charging fees for transactions or account-keeping, and/or offering related financial services.
As opposed to a purely account-based CBDC, a token-based system would have the advantage of payments being made in an offline environment as well. However, Richards also noted the advantages of a hybrid system that allowed relevant authorities to have traceability over transactions. The ability to use the CBDC in offline mode would be attractive from accessibility and resilience perspectives – for example, for transactions in remote locations, or when networks are down.
The use of DLT would not be a certainty, as the centralised infrastructure currently in use, which is quite robust. DLT may also have some disadvantages in the areas of performance, privacy, and security. If DLT is used for a CBDC, the system would probably need to be permissioned, with limited access, and have a degree of centralisation built into it.
The central bank may be averse to have the CBDC match the levels of anonymity and privacy of physical cash. Key considerations here are the potential for creating a shadow, illegal economy. An account-based CBDC would require identity verification.
A further differentiator from physical cash would be the potential for CBDC to earn a rate of interest, although some overseas banks have expressed their opposition to an interest-bearing CBDC.
The major question around CBDC is “why”? Is there really a need for a central bank digital currency at this time? In Australia, some of the rationales used overseas do not hold – financial inclusion is not a significant issue in Australia, for example. Among others, China’s government is pushing aggressively for a two-tier CBDC, aiming to provide an alternative to private-sector e-money providers. The declining use of cash is also cited in arguments promoting CBDC, as is the greater resilience that such a payments system would ostensibly provide. Falling cash use may also result if less competition in the payment services market, and consequent high prices for these services may be mitigated by the introduction of a CBDC.
Other significant concerns driving the push for CBDC include the risks to national monetary security from the growing clout of cryptocurrencies and planned stablecoins. Concerns about user data that already afflict technology companies also taint their push into stablecoins. That said, advanced economies such as Australia, with strong regulatory mechanisms and robust financial and payments systems, may not be at any substantial risk in these areas.
Richards concluded that the RBA currently is not convinced that there is any ‘strong public policy case’ for the launch of a retail CBDC. However, the RBA is alert to the relevant trends, and the central bank’s Innovation Lab continues to do research into a potential wholesale CBDC.
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