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The Reserve Bank of Australia's (RBA) research has found that a central bank digital currency (CBDC) in the country could pose opportunities for payments innovation, but the chances of one being issued in the short term are unlikely.
“Given the many issues that are yet to be resolved, any decision on a CBDC in Australia is likely to be some years away,” the RBA said after completing a research project into the possibilities of a CBDC.
The project involved the central bank issuing a limited-scale pilot CBDC that was a real legal claim on the RBA.
This pilot CBDC was used by selected industry participants, including Mastercard, Worldline and the country’s biggest banks, to demonstrate how a CBDC could be used to provide innovative payment and settlement services to Australian consumers and businesses.
“The project yielded valuable insights into how a CBDC, alongside other innovations in digital money, could potentially unlock benefits for the Australian financial system and the wider economy,” said Brad Jones, RBA deputy governor.
“It also highlighted the benefits of close engagement between industry and policymakers in exploring the opportunities and challenges associated with innovations in digital money.”
Use cases explored in the project highlighted a range of areas where a CBDC could enhance the functioning of the payments system.
At the same time, a number of legal, regulatory, technical and operational issues surfaced that warrant further research.
One of the biggest issues associated with the pilot was regulation.
For example, industry participants found it difficult to understand how the relevant regulatory regime might apply to their use case.
For example, there were several use cases that involved the use of a pilot CBDC for the settlement of transactions in various types of digital assets, such as stablecoins or tokenised financial or non-financial assets.
In many of these use cases, the RBA said that there was uncertainty around the legal and regulatory treatment of digital assets, in particular, whether they were regulated financial products under the country's Corporations Act 2001.
This had implications for the regulatory status of the use case.
According to the RBA, there were also concerns about anti-money laundering compliance, as services that would be in scope were involved in many of the use cases.
The central bank said that many instances could hinge on whether the pilot CBDC was technically characterised as money or another type of asset, and whether the technology providing access to the pilot CBDC, such as wallet software, could be characterised as a virtual "stored-value card", an "account", or something else.
"While there is no question that services involving a CBDC should be subject to the AML/CTF Act, the nature of regulatory obligations and when they arise would ultimately depend on how the CBDC and related services are characterised in the supporting legal framework," says the report.
More broadly, by underscoring the potential for new CBDC-enabled business models to emerge in the future, the project raised questions about whether existing regulatory requirements would remain appropriate for entities offering regulated products and services supported by a CBDC.
Some of the business models explored in the project could change the nature of risks involved in performing regulated financial services and may therefore warrant consideration of different regulatory treatments.
Top benefits
Participants identified four key benefits of a CBDC in Australia.
This includes the possibility that a CBDC could improve the resilience of the payments system by providing households and businesses with an alternative way to make payments in certain scenarios.
Specifically, the ability to make offline electronic payments in scenarios where electricity and/or telecommunication services were not available, for instance following natural disasters.
Participants in the study also suggested that access to a digital form of money that does not rely on having a commercial bank account could offer social benefits to certain groups who may encounter difficulties using conventional banking services.
This echoes the EU’s plans for a digital euro, where a lot of focus has been on the need for it to be possible to make offline payments and an easy payment method for the financially excluded.
For example, if the EU’s regulatory proposal passes in its current form, then EU citizens who do not have a bank account would be able to open and hold an account with a post office or another public entity, such as a local authority.
The RBA said that submissions highlighted the role that a CBDC could potentially play in promoting interoperability and uniformity of new forms of private digital money, such as tokenised bank deposits and stablecoins backed by high-quality assets.
In this role, a CBDC could serve a similar function to settlement balances held at the central bank for settling payments made using commercial bank money.
A number of submissions also highlighted the potential for privately-issued stablecoins that were fully backed by CBDC to more readily compete with digital forms of money issued by regulated financial institutions.
Tokenisation was an area that stakeholders said had the ability to directly control and program a CBDC. This could enable a range of complex payment arrangements that are not effectively supported by existing payment systems.
Submissions highlighted how it was possible to write code, such as smart contracts, that automatically initiate payments using a tokenised CBDC when pre-defined conditions are met.
This can allow complex transactions, such as multi-party or multi-stage payments, to execute automatically and simultaneously. This reduces the need for costly reconciliation processes and the risk of failed transactions.
There was significant interest from industry participants in exploring the tokenisation of financial and other assets on distributed ledger technology (DLT) platforms, with CBDC being used in the settlement of transactions.
This included traditional debt securities markets, where settlement times are typically measured in days.
Participants noted that the tokenisation of assets on DLT platforms had the potential to deliver a number of benefits including improving the efficiency, transparency, liquidity and accessibility of asset markets.
“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,” said Jones.
“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.”
