Last week, the Reserve Bank of Australia announced a one-year research project with the Digital Finance Cooperative Research Center to explore “use cases” for a central bank digital currency (CBDC). Here’s what happens.
What is a CBDC and how is it different from cryptocurrency?
Banknotes are a physical form of currency that we exchange for goods and services. And we are doing more and more digital transactions, whether using credit cards or smartphones. The use of ATMs has fallen by about a third in three years, says the RBA.
Now the RBA and its counterparts around the world are exploring new forms of digital currency that central banks themselves could issue. The research will examine CBDC uses for commercial banks – the wholesale market – and a retail version that the public may one day use.
Cryptocurrencies, on the other hand, are decentralized, unlike “fiat currencies” produced and regulated by governments. Bitcoin and Ethereum are among the leading digital currencies that rely on cryptography to secure transactions.
To curb crypto price volatility, stablecoins have been created to mimic “fiat currencies” by anchoring value to assets such as the US dollar. The failure of TerraUSD and other stablecoins reflect the infancy of the sector. CBDCs could fill the void.
“A fully realized central bank digital currency has the promise of bringing regulatory certainty and the power of digital assets to a place that is coupled with the trust and faith we have in the money issued by the Reserve Bank. today,” said Michael Bacina, a partner at Piper Alderman and a financial technology specialist.
Why is the RBA involved?
Partly exploratory. “I don’t think it’s inevitable” for the bank to issue CBDCs, says RBA Deputy Governor Michele Bullock.
“In terms of the day-to-day payments that affect you and [me] and our friends and family, we don’t know exactly what it is,” she said. “We have tickets. We have many, many alternatives to digital cash [including] fast payments now.
“I think we just have to keep our toes in and not be on the forefront of bleeding.”
The focus will be less on the technology itself, and more on the design principles of decentralizing these currencies, while maintaining privacy standards that the public can accept.
“Do you put limits on the amount of money people can have in there? Does the central bank issue it directly, or [as] we do it with banknotes issue CBDCs through existing banks,” says Bullock. “I don’t think anyone has come to full consensus.”
Is there an appetite?
If an Australian Securities and Investments Commission report on investor behavior published Thursday any guide, the digital currency market is growing rapidly.
Its survey of 1,053 investors found that cryptocurrencies were second only to Australian stocks in terms of the most common assets held, at 73% and 44%.
In terms of holding value, cryptos were also on par with residential investment properties.
What are the researchers saying?
Andreas Furche, managing director of the Digital Finance Cooperative Research Centre, notes the RBA’s continued caution.
“It’s not something that’s done,” says Furche. “It’s not yet clear whether, from the RBA’s perspective, this is going to be suitable or useful or not.”
The trial will be “closed” and will only participate in registered parties. However, it will be open in another direction: “We don’t have a preconceived result.
“Those of us who build or discuss or provide infrastructure are not necessarily the innovators who build new types of market infrastructure, business models or anything on that infrastructure,” says Furche. “If we just make this assessment based on what we can think of ourselves, we’re not going anywhere.”
He says the rise of stablecoins indicates that there is an opportunity to cater to people’s interest in digital currencies without being exposed to as much volatility.
“Despite the name, [stablecoins] are often still fraught with risk because they are not necessarily 100% backed,” he says. CBDCs, based on a national currency, are an “ultimate stablecoin”.
What are market players saying?
Chloe White, an independent consultant and former Treasury representative on the Council of Financial Regulators reviewing cryptos, says blockchain and the ecosystems built around it will continue to function and grow whether or not governments issue CBDCs.
“What we’re seeing happening in the cryptocurrency markets right now mirrors a lot of what we’re seeing in the traditional system,” White says. “You have a so-called real economy where people trade goods…and then you have a financial layer wrapped around it” with derivatives, insurance, etc.
There may even be national security reasons for having CBDCs and not missing out on emerging technologies and new ways of doing business.
“China, in particular, seems quite determined to want to take advantage of this technology in some way,” she says. “And there’s hardly a corner of the world that you can point to that has influence and economic power that isn’t addressing these issues in one way or another.”
Bacina says the world of fintech is changing faster than the internet at its genesis. “It’s the same thing that we couldn’t predict Netflix and we couldn’t predict Amazon next day delivery when the internet was invented and deployed.
“There are no wires to lay, and this physical infrastructure to connect – it’s already there.
“We’re talking about the ability to automate things like bank guarantees and other slow manual processes that currently drive up compliance costs.”
As for who could benefit from the RBA and Digital Finance Cooperative Research Center study, Bacina says participants can learn as much as institutions.
“It’s a six or seven lane street,” he said. Interest will focus on “in-depth analysis of system contracts, regulatory interfaces – this type of analysis doesn’t happen very often”.