While the Reserve Bank of Australia (RBA) has indicated its general scepticism toward the merits of a retail-focused central bank digital currency (CBDC), or e-AUD, the RBA's recent submissions to the Senate Select Committee on Fintech and Regtech have confirmed that the RBA is actively experimenting with wholesale alternatives on a private Ethereum network. The Australian Financial Review (AFR) recently praised these experiments and endorsed the ongoing journey towards an Australian digital dollar.
The RBA's Australian Senate FinTech & RegTech Inquiry submission confirmed that the RBA's internal Innovation Lab, established in late 2018, has been considering the merits of CBDC's in the context of the RBA’s responsibilities for issuing Australian dollars and overseeing the payments system.
One specific example identified was the development of a wholesale settlement system running on a private, permissioned instance of the Ethereum network, which was used to simulate the issuance of RBA-backed tokens, as well as the exchange and redemption of those tokens. The RBA went on to confirm that it intends to extend its research into the above, potentially with external partners (watch out Consensys, IBM and R3).
While the RBA noted that the case for the use of a CBDC in these types of systems has yet to be determined, it identified the key potential benefits of a centrally issues digital currency as:
Speed, cost and robustness of payments. A CBDC fully integrated into a blockchain platform could enable payments to be made between participants in real-time and 24/7 without relying on external payment systems.
Atomic transactions. A CBDC integrated within a blockchain platform could more easily allow for ‘atomic’ transactions. An atomic transaction is ‘all or nothing’, meaning that either all parts of the transaction are executed or none at all. When applied to delivery-versus-payment, this can reduce settlement risk as a payment and corresponding asset can be exchanged simultaneously.
Programmable money. A CBDC in combination with smart contracts on a blockchain may enable new kinds of ‘programmable money’. This refers to the ability to attach conditions to how money can be spent or transferred, which could be automatically executed, without the need for a trusted third party.
Despite this, the RBA is unlikely to go all-in on development of a retail CBDC, with RBA payments policy department head Tony Richards commenting to the AFR that there are still too many unresolved issues in CBDC's which could have a destablising effect on the financial system, including:
in times of uncertainty, people might decide that they want to switch their savings from bank deposits to holding the central bank's digital currency. So that could have the effect of making bank runs easier.
Or alternatively:
people decide that they would much prefer to hold the central bank's digital currency rather than keeping their money on deposit in commercial banks... [raising] the question as to who is going to fund mortgages and business loans.
The counter-point to this is to note that there are many digital options available for people to move funds out of banks in the event of a bank-run now, such as shifting funds to Paypal, or a Gold ETF or a myriad of other digital products.
It's unclear why the RBA considers a CBDC to be such a threat to banks other than the very trust created in a CBDC by being issued by the bank being a downside.
Concerns around how mortgages and deposits would be handled in a retail CBDC world need serious consideration as a shift to the very long-standing arrangements for mortgages and deposits would be a significant change to the Australian financial system.
As rumours continue to swirl that the US Federal Reserve is quietly considering digitizing the US Dollar, and China's proposed digital currency continues to advance, it may well be only a matter of time until the RBA is required to move more swiftly to ensure Australia's prior lead in the digital currency space is reclaimed.