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Case for central bank digital currency in Australia still unclear: RBA
The introduction of a central bank digital currency (CBDC) would be “revolutionary” for monetary economics, but the need for one in a country like Australia with a well-functioning payments system is not yet clear, the Reserve Bank of Australia has said, while an “eAUD” digital currency pilot program is on track to test use cases in the new year.
“A couple of centuries on” from the industrial revolution, “it is the digital revolution that is reshaping the economy and raising important questions over the future of money,” RBA Assistant Governor (Financial System) Brad Jones told the 17th Central Bank Conference on the Microstructure of Financial Markets in Sydney on December 8. “The fundamental issue boils down to this: is our money fit-for-purpose in the digital age and, if not, how can we make it so?”
In a speech titled “The economics of a central bank digital currency in Australia,” Jones surveyed the case for a CBDC in Australia as it fits within the wider global discourse around digital currency. He said the issue has prompted “no shortage of excitable commentary about the future of money in the digital era,” but that “sometimes lost in this excitement is a clear articulation of the economic problems that new forms of digital money might solve, particularly in countries like Australia with a modern, well-functioning payments system.”
For instance, he said, a key motivation in issuing a CBDC for some countries, particularly low-income ones, is to strengthen financial inclusion – “but, in Australia, a very small proportion of households are without access to banking and payment services, and it is not obvious how a CBDC would bring them into the fold.” Likewise, arguments by proponents that a CBDC would support universal access to public money are less powerful in Australia, where physical cash “remains accessible and still appears valued by households,” Jones said.
On the other hand, he said, the prospect of CBDC issuance in Australia has prompted considerable concerns, particularly given the significant role of banks in the domestic financial system. Key among these are the potential of CBDCs to disrupt bank disintermediation and monetary policy transmission in normal times, and their potential to prompt bank runs in stressed conditions.
The Australian banking system is heavily dependent on deposit funding, with 60 per cent of funding coming from low-cost deposits – a 20 percentage-point increase since the global financial crisis, Jones explained. Small and regional banks with limited access to wholesale market funding are even more reliant on deposit funding.
“At a minimum, careful consideration would need to be given to the transition risks associated with new bank funding and lending models resulting from the introduction of a CBDC,” he said. “The bottom line here is that much will depend on CBDC design choices, and there are many complex issues that would need to be carefully weighed ahead of any decision to proceed with issuing a CBDC.”
Jones noted that the RBA is considering a “general purpose” or retail CBDC, which would be a widely available digital claim on the reserve bank and “would entail less change to the status quo,” since financial institutions already hold digital claims against the RBA in the form of Exchange Settlement balances issued by the bank.
‘eAUD’ pilot program under way
Jones also provided an updated on a program the RBA has engaged in with the Digital Finance Cooperative Research Centre to pilot a so-called eAUD digital currency, exploring possible use cases and building on proof-of-concept exercises the bank has carried out around CBDCs.
He noted that the program has attracted an unanticipated level of interest from industry stakeholders, with about 80 entities submitting more than 140 use-case proposals so far.
The pilot phase, expected to start in early 2023, will entail the RBA issuing a real digital claim to approved providers of use cases, which include large banks, financial market infrastructure providers and consultancies, and small digital asset firms and fintechs. A report on the program is slotted for mid-2023.
The use cases include e-commerce payments, offline payments, government payments, and trading and settlement of tokenised assets.
“As far as monetary economics goes, the introduction of a general-purpose CBDC would be revolutionary – for centuries, physical cash has been the only source of central bank-issued money to which households and non-financial firms have had access,” Jones said. “Prior to crossing this Rubicon, a strong public interest case would first need to emerge.”
He added: “We are not alone here – no other advanced-economy central bank has committed to issuing a general-purpose CBDC. But with our eAUD pilot program in full swing, and changes in the digital economy and money and payments landscape occurring at a frenetic pace, the bank is keeping an open mind.”
