Central banks tangle with the digital currency conundrum

Depending on who you talk to, central bank digital currencies (CBDCs) will either be the solution to our payment problems in the digital era or an unnecessary social tool, reducing availability of credit and disintermediating traditional banks.

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The Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) have been running a pilot program to look at various use cases for CBDCs and examining how they might be used in certain circumstances.

“Participants in the RBA pilot sought to demonstrate how a CBDC could be used to provide innovative and value-adding payment and settlement services to Australian households and businesses.” 

And it’s not just the RBA, central banks around the world are moving ahead rapidly in testing the uses for all sort of digital assets, including CBDCs. The point of this testing is to demonstrate how the technology might transform business practices, cut transaction times and improve productivity at the same time as lowering risk and cost.

While some Caribbean and African countries have already introduced CBDCs, the RBA and the DFCRC wanted to explore the potential use cases and economic benefits for such instruments in Australia.

CBDCs are more accurately defined as a new digital form of money, denominated in a national currency, that would be issued as a direct liability of the central bank.

They could be used by households and firms for everyday payments – something akin to a digital version of a banknote. They could also be designed for use by a more limited range of market participants in specialised payment and settlement systems.

Participants in the RBA pilot sought to demonstrate how a CBDC could be used to provide innovative and value-adding payment and settlement services to Australian households and businesses.

After accepting submissions from across the financial services industry, the pilot program focused on four key themes: enabling smarter payments, supporting innovation in financial and other asset markets, promoting private digital money innovation and enhancing resilience and inclusion in the digital economy.

CBDC features and capabilities

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Source: Australian CBDC Pilot for Digital Finance Innovation

This involved improving efficiency in the superannuation sector, removing friction and reducing settlement risk for the trading of nature-based assets and examining the viability of using CBDCs for offline payments.

ANZ was involved in several of these use cases, including how to use CBDCs for offline payments when the payment systems were down. The aim was to demonstrate how an organisation, such as a university, could step in during an emergency to provide immediate financial support through the distribution of CBDC if access to payment systems were down and access to cash was limited.

Despite the success of these pilot programs, the RBA sounded a cautious tone in latest update.

“The project raised a number of legal, regulatory, technical and operational issues associated with a CBDC that warrant further consideration in future research,” is said in the report.

While the project yielded valuable insights into how a CBDC could unlock benefits for the Australian financial system, the report appeared to kick the can down the road.

“The key findings from the project will help to shape the next phase of the RBA’s research program into the future of money in Australia. Alongside our ongoing work on cross border payments, this will include deepening our understanding of the role that tokenised asset markets and programmable payments could have in the Australian economy,” Brad Jones, Assistant Governor (Financial System) at the RBA said.

It may be CBDCs are better suited to countries where the digital payments networks are less advanced than in countries like Australia. The RBA would have to be convinced there was a compelling public policy rationale to introduce a CBDC into the market.

Public vs private sector

The report said: “there is a significant body of existing research into the potential design and technical feasibility of CBDC, a question that has received less attention to date, particularly in countries like Australia that already have a modern and well-functioning electronic payments system, is the broader public policy rationale for a CBDC.”

Further it found: “It is possible that many of the benefits linked to the pilot CBDC in use case submissions could be achieved in other ways, including through privately issued forms of digital money such as tokenised bank deposits or asset-backed stablecoins. In other words, in a number of use case submissions, it was not clear that CBDC was exclusively required to achieve the desired economic outcomes.”

“Some combination of other forms of private digital money, wider access to RBA settlement account balances and enhancements to existing payments infrastructure, may have also yielded improvements over current practices. There is considerable scope for further research in this regard.”

So while that further research is undertaken, the private sector can get on with the fledgling use of stablecoins and other digital assets. Several players, including banks, are doing just that – using digital currencies to complete transactions for clients.

Earlier this year ANZ completed the first live transaction in Australia to use a general purpose CBDC. The bank tokenised its first, non-currency based, real-world asset - Australian Carbon Credit Units (ACCUs) - purchased using Australian dollar stablecoin (A$DC) on a decentralised network and subsequently retired by Grollo Carbon Ventures to voluntarily offset carbon emissions.

This came on the heels of ANZ executing the first Australian-bank issued A$DC payment through a public permissionless blockchain transaction in 2022. ANZ delivered the stablecoin for Victor Smorgon Group via Zerocap, a private wealth management firm.

Other banks are also joining the push and it seems a healthy digital asset market will continue to develop.

However digital currencies continue to evolve, central banks will play a major role in that evolution. Even if the central banks are not the entities issuing the digital currencies.

Brett Foley is Managing Editor of bluenotes

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

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