Why Australia is considering a central bank digital currency

- By Collaborative Media & Publishing
Central bank digital currencies (CBDCs) could create a more efficient and innovative payment system, and the Reserve Bank of Australia (RBA) is one of almost 70 central banks[1] that have been researching or developing a central bank-backed digital equivalent of cash.

Countries such The Bahamas and Nigeria have already launched their own CBDCs (The Bahamas’ Sand Dollar and Nigeria’s eNaira), largely aimed at boosting financial inclusion, while several other countries are running pilots.

But while the RBA already has recently wrapped up two research projects of its own – Project Atom and Project Dunbar – the path to an eAUD central bank digital currency may not be so clear cut.

How a CBDC differs from today’s digital money

Cash usage has plummeted in recent years thanks to the popularity of contactless card payments, the rise of online shopping, and more recently, the impact of pandemic lockdowns. Transactions made with cash fell from 69 per cent in 2007 to 27 per cent in 2019 as digital transactions have skyrocketed, according to the RBA.

But these digital dollars represent the movement of value between bank accounts, while a CBDC is comprised of tokens issued, backed and controlled directly by a central bank. (This is different than privately-backed crypto currencies which have attracted speculative investment, although a CBDC can also be built using distributed ledger technology.)

A CBDC also offers greater functionality than today’s digital version of cash, allowing a central bank to make money smarter.

One potential use is to program certain regulatory requirements into the CBDC design rather than relying on regulators to implement and monitor compliance. For example, a CBDC could include an enforceable pre-condition that Know Your Customer (KYC) regulations are met before allowing transfers over a threshold amount.

While this could bolster the efficiency of the payments system, a CBDC could also spur more exciting consumer innovations.

“Token-based CBDCs can enable payments in newer contexts like the ‘internet of things’, and programmability could allow payment services to be embedded into commercial and social interactions and enable their orchestration,” according to a recent Bank for International Settlements (BIS) report.

Financial inclusion benefits

However, many of the central banks actively engaging in CBDC research remain focused on how it could boost financial inclusion, according to the BIS report[2].

An estimated 1.7 billion people are still outside the formal financial system according to the World Bank, including low-income populations and those living in remote locations.

Domestic retail payment services can be expensive and low-value cross-border payments attract high fees. A CBDC can allow central banks to speed up the benefits of digital transformation when the market size or profit potential fails to attract the private sector.

For example, the islands of The Bahamas create geographic barriers to financial inclusion. Its Sand Dollar, like cash, has zero transaction fees for individuals with the benefit of improved safety (given the currency is accessed but not stored on a mobile phone) and a record of income and spending, which can support micro-loan applications.

However, a CBDC isn’t the only way to improve payment efficiency and innovation.

“Combining different payment innovations – such as open application programming interfaces (APIs), fast payment services, contactless chips and QR codes – could achieve many of the same goals,” according to the BIS report.

Australia’s innovative payment system already delivering for consumers

Australia’s payment infrastructure is among the most advanced in the world, which has dampened demand for a retail focused CBDC.

“We have not seen a strong public policy case to move in this direction, especially given Australia's efficient, fast and convenient electronic payments system,” RBA Governor Philip Lowe said last December.

“It is possible, however, that the public policy case could emerge quite quickly as technology evolves and consumer preferences change. It is also possible that these tokens could offer a lower-cost solution for some types of payments than provided by the existing technologies.”

Australia’s New Payments Platform (NPP) enables consumers and businesses to make payments in real-time while including more complex data. BPAY Group used the NPP infrastructure to build real-time payment service Osko, which is now embedded in most major banking apps and is used by government to roll out emergency payments such as flood relief or COVID-19 support payments.

BPAY Group, NPP Australia and eftpos recently merged to form Australian Payments Plus. The BPAY scheme continues to grow as new APIs have made it simple for FinTechs and other service providers to connect to the billing payment service.

However, the RBA has acknowledged that there may be more CBDC benefits in a wholesale setting, such as bank-to-bank transactions involving digital assets or cross-border transactions.

Last year, the RBA’s Project Atom explored how wholesale market participants could use a tokenised CBDC for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based platform. It was also involved in Project Dunbar this year, which created a common platform to enable international settlements using multiple central bank digital currencies (mCBDCs).

[1] Auer, R., Banka, H., Boakye-Adjei, N. Y., Faragallah, A., Frost, J., Natarajan, H., & Prenio, J. (2022, April 12). Central bank digital currencies: a new tool in the financial inclusion toolkit? Retrieved from https://www.bis.org/fsi/publ/insights41.htm
[2] Auer, R., Banka, H., Boakye-Adjei, N. Y., Faragallah, A., Frost, J., Natarajan, H., & Prenio, J. (2022, April 12). Central bank digital currencies: a new tool in the financial inclusion toolkit? Retrieved from https://www.bis.org/fsi/publ/insights41.htm

Published by BPAY Pty Ltd (ABN 69 079 137 518) email: marketing@bpay.com.au. The BPAY Scheme is managed by BPAY Pty Limited.  When you use BPAY payment products, the BPAY Scheme is paid fees relating to processing costs and BPAY Scheme membership.  Contact your financial institution to see if it offers BPAY payment products and to get the Product Disclosure Statement.  Any financial product advice provided by BPAY Pty Limited in relation to BPAY payment products is general advice only and has been prepared without taking into account your objectives, financial situation or needs.  Before acting on such advice, you should review the Product Disclosure.

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