Reserve Bank sees potential in ‘digital Australian dollar’

The Reserve Bank of Australia has already conducted Ethereum-based digital currency experiments and is eyeing opportunities for third parties to participate in its research

Australian currency / money / banknotes / dollars
Brodie Miller

The Reserve Bank of Australia believes that although there may be risks associated with a “digital Australian dollar,” it is exploring whether there is potential value in developing a digital currency that could be used by wholesale participants in the payments sector.

The RBA’s assessment is that there is not currently a case for creating a so-called central bank digital currency (CBDC) — an alternative to a privately issued cryptocurrency but still potentially leveraging blockchain — for household use.

In a submission (PDF) to a Senate inquiry examining fintech and regtech the bank said that there may be very little demand among consumers for a CBDC given Australia’s relatively stable banking system and the availability of interest-bearing accounts. In times of uncertainty such a digital currency might facilitate bank runs, and if it did enjoy widespread adoption, it might mean a drop in bank deposits that could flow through into fewer funds available for household and business loans.

However, the bank’s in-house innovation lab, which was established in 2018, is examining the potential of an Australian CBDC but specifically in the context of wholesale settlement. The RBA lab’s work in the area has included developing a proof of concept of a wholesale settlement system using a CBDC.

The RBA said the lab used a private, permissioned Ethereum network for the project, simulating a central bank issuing tokens to commercial banks, as well as those tokens being exchanged among banks and eventually redeemed with the central bank. That research is expected to continue in 2020, with the RBA potentially bringing external partners on board to participate.

A national digital currency “fully integrated” into a blockchain platform could allow 24/7 payments between participants without relying on an external payment system, the RBA said. Other benefits include facilitating so-called ‘programmable money’ and ‘atomic transactions’ (which only allow a transaction to go ahead if all parts of an exchange are executed, reducing settlement risk).

When it comes to cryptocurrencies in general, the RBA’s view is that so far they “do not provide the usual functions of money”, although the bank noted emerging cryptocurrencies seek to address some shortcomings such as price volatility.

In that context the bank noted that the Facebook-backed Libra Association was planning to launch a global stablecoin dubbed Libra.

“This has the potential to become widely used given the involvement of various companies such as Facebook that may be able to leverage their large existing user bases and technological capabilities,” the bank said.

“Based on what is known publicly about Libra, it will be distinguishable from existing cryptocurrencies as it will be fully backed by an asset reserve comprised of a basket of bank deposits and short-term government securities denominated in a range of national currencies. This is designed to instil confidence in the cryptocurrency and reduce price volatility, though the value of Libra units will still fluctuate with respect to any given currency.”

The RBA said that it endorsed the view of the G7 that global stablecoins should not be permitted to launch until risks relating to consumer/investor protection, data privacy, monetary policy, and financial stability are addressed.

“A key consideration for regulators is to ensure that private sector stablecoin initiatives operate under a comparable regulatory regime to existing payment systems, and in particular, that they do not fall outside the existing regulatory framework,” the RBA said.

“The Bank is working closely with relevant agencies domestically and internationally to understand recent proposals to ensure they will be adequately regulated and supervised.”

The RBA said it was unclear if there would be strong demand for Libra-style stablecoins, given the availability of low-cost real-time payment methods, such as the New Payments Platform.

Copyright © 2020 IDG Communications, Inc.

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