Testing the case for central bank digital currencies

Central banks around the world are moving ahead ever more rapidly in testing the uses for digital assets, notably central bank digital currencies (CBDCs). For digital assets in general we see use cases emerging which demonstrate how the technology can transform business practices - cutting transaction times and improving productivity while lowering risk and cost.

Click image to zoom Tap image to zoom

More than 90 per cent of central banks are looking into Central Bank Digital Currencies and governments are already starting to regulate digital assets more broadly. This regulatory clarity is likely to be the catalyst for greater adoption.

"We believe the potential benefits of digital assets are numerous and more broadly applicable than just these particular use cases.”

At ANZ, our hypothesis is decentralised networks are an emerging form of financial-market infrastructure that deploy tokens as a new form factor for transacting value.  Moreover, World Economic Forum and Boston Consulting Group analysis suggests the tokenisation of global illiquid assets will be a $US16 trillion opportunity by 2030 - about 10 per cent of total global gross domestic product.

We’re working with clients at different stages of their digital asset assessment and adoption – some are already well progressed while others are still asking questions about how it works and why they need it.

And we’re particularly pleased to be working with the Reserve Bank of Australia and the Digital Finance Cooperative Research Centre (DFCRC) to explore potential use cases and economic benefits of a CBDC in Australia.

The RBA and DFCRC said they received more than 140 use case submissions from a range of industry participants for the project and ANZ is currently supporting the pilot.

The ANZ cases cover:

Improving efficiency and unlocking value in the superannuation sector

The Australian Federal Treasury recently announced Payday super, a reform that will benefit the retirement incomes of millions of Australians. But there’s still more value that can be unlocked in the system.

When employers make superannuation fund payments, contributions do not accrue value immediately but are allocated to a member account several days later. This is due to delays introduced because of the revocability of payments and limitations on the movement of individual contribution payments and related data requirements of intermediaries.

It has been estimated those delays in investing funds – and hence them not earning interest – accounts for up to $312m per day of delay that should have been working harder for members. 

Fraud is also a major and growing issue effecting the superannuation segment. Our traditional payment mechanisms have no payee identification for bank accounts. A centralised model using CBDC provides the opportunity to verify wallets aligned to each transaction.

Under the Superstream Payments use case, ANZ and industry partners tested a CBDC-based model to address these issues – demonstrating the potential for increased speed, reduced fraud and counterparty risks in the end-to-end process which could benefit around 17 million Australian superannuation accounts.

The key points in this use case are:

  1. CBDC as an irrevocable payment instrument is used to transfer contributions from employer to the super funds so money can be moved without risk of dishonour.
  2. Centrally held digital wallets and a validation service of the verified beneficiary wallet address are used to minimise fraud
  3. Simultaneous wallet and data settlement processes at an individual contribution level improve the matching, exception and allocation process.

This pilot use case demonstrated how digital wallets can ensure both data and payments are synchronised in real time mitigating counterparty risk and complex reconciliation while removing unnecessary delays.

Exploring technology, security and operational challenges for offline payments

According to a survey conducted by the BIS Innovation Hub, providing offline payments with a CBDC is an important requirement for many central banks. Financial inclusion and universal accessibility were mentioned as important reasons next to the payment system resilience.

Recognising the importance of these objectives, ANZ and our partners from technology and education sectors have proposed a solution to enable users to make instant payments on a peer-to-peer basis, in an offline environment.

This digital cash-like form of money could be used to provide immediate financial support through the disbursement of CBDC in emergency situations where people are unable to access funds online or via traditional banking services.

Offline CBDC capability – a reliable, efficient and secure means of payment - could enhance financial inclusion and accessibility to modernising digital services.

Removing friction and reducing settlement risk for the trading of nature-based assets

An area where we foresee significant opportunity for digital assets to deliver tangible benefits is in carbon markets. There is potential to improve information provenance, enable fractional ownership and atomic settlement, and facilitate asset-bundling with other nature-based assets.

In March we successfully completed our first pilot use-case, and the first live transaction in Australia to use a general purpose CBDC, aimed at helping customers achieve their sustainability objectives.

ANZ tokenised its first, non-currency based, real-world asset - Australian Carbon Credit Units (ACCUs) - that were purchased using A$DC on a decentralised network and subsequently retired by Grollo Carbon Ventures to voluntarily offset carbon emissions.

The transaction demonstrated ANZ’s capability to tokenise a real-world asset and develop smart contracts to facilitate easier access, reduce settlement time and mitigate settlement-related counterparty risk.

This work used a pattern-based approach and we are continuing to explore the application of this pattern to other nature-based assets with our customers in the pilot. Specifically, we are exploring the tokenisation of projects in the Reef Credit Scheme, a market-based solution to improve the quality of water entering the Great Barrier Reef and we look forward to sharing more on this soon.

Digital Assets

We believe the potential benefits of digital assets are numerous and more broadly applicable than just these particular use cases. In ‘traditional’ markets, the asset component of the transaction clears on a separate infrastructure from the payment. Multiple intermediaries facilitate this process, interacting with central clearing houses, commonly resulting in high costs, settlement delays and operational and counterparty risk.

Digital assets in tokenised form can be traded, cleared and settled securely in near real-time, 24x7. This creates significant efficiency and cost savings, especially with the feature often called ‘atomic settlement’ - the conditional and near-real time exchange of two assets where the transfer of one occurs only upon the transfer of the other.

This process of atomic settlement eliminates what’s known as “Delivery versus Payment” risk which today is managed by centralised clearing houses and largely exists because asset transactions occur on a different market infrastructure to the settlement or payment leg of the transaction.

Developing enterprise grade capabilities

At ANZ we have adopted a ‘test and learn’ approach to our work on digital assets and currencies. This is anchored on the execution of live transactions of real value with ANZ customers – with a strong focus on risk assessment, development of controls and proactive engagement with regulators.

Building on our work with A$DC last year, we are actively exploring the tokenisation of real-world assets by applying a secure, scalable, pattern-based model designed to be repeatable across multiple asset classes. This model uses a common control environment and technology stack to test a set of core services: a tokenised medium of exchange (A$DC), digital wallet infrastructure and asset tokenisation capabilities.

Several milestone transactions have been undertaken that contribute to a cumulative capability build and validation of control effectiveness critical for enterprise grade use. And this is perfectly complemented by the work we are doing with the RBA and DFCRC on digital currencies.

Nigel Dobson is Banking Services Lead at ANZ Institutional.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

03 Mar 2023

Australia moves forward on central bank digital currencies

Nigel Dobson | Banking Services Lead, ANZ

The Reserve Bank of Australia is beginning a pilot program to examine central bank digital currencies – with the potential to open a new world of opportunities.

04 May 2022

BEHIND THE NUMBERS: the stable in stablecoin

Nigel Dobson | Banking Services Lead, ANZ

Fintech was once touted as the great challenger to traditional finance, will DeFi – decentralised finance – be the next threat? Or will it create opportunity?