Digital Currency Eyes Wholesale — Not Retail — Payments Down Under

Add Australia to the list of countries with central banks looking to bring fiat currencies into the digital realm — with some conditions attached.

As stated in a report to the Senate Select Committee on Financial Technology and Regulatory Technology, the Reserve Bank of Australia (RBA) said it has “established a small in-house Innovation Lab as a way to strengthen engagement with, and understanding of, new and emerging technologies that are relevant to its policy and operational responsibilities.”

As part of those efforts, the lab is being used to explore “whether there is a role for a digital Australian dollar — that is, an Australian [central bank digital currency (CBDC)] — in the context of the bank’s responsibilities for issuing the currency and overseeing the payments system.”

The language is interesting — and noteworthy. The nod toward “overseeing the payments system” seems to give a wide berth to the idea that a CBDC could underpin a broad swathe of the Australian financial system, and would keep things closely held.

In its report, the central bank said that a digital currency would possibly be issued on a blockchain platform, and would exist as a digital version of money, “which is a liability of the central bank, rather than a commercial bank. … A CBDC would be denominated in the sovereign currency, and convertible at par with other forms of money.”

At a high level, Australia’s central bank is joining the likes of China and Sweden in exploring central bank digital coins. Thus, the RBA is positing the creation and administration of a digital offering that would track the Australian dollar, as well as ostensibly sidestep the volatility that has marked the likes of bitcoin and its brethren.

What It Won’t Do

An idea that may get a splash of cold water is that the development of a digital fiat (at least, in Australia) would lead to a groundswell of payments at the retail point of sale — in other words, through a boost in use cases. The document states that the RBA (and its Innovation Lab) has been focusing on the digital dollar being used as way to facilitate payments between banks as they settle balances and conduct wholesale activities between themselves.

The Rewards

The RBA said that digital currencies would be able to avoid the pitfalls of technical disruptions, and would make transactions independent of external payment systems. Payments would be streamlined, as the RBA could “attach conditions to how money can be spent or transferred, which could be automatically executed, without the need for a trusted third party,” the paper noted.

The lab’s activities come at a time when parameters are seemingly being drawn around crypto’s place in the land down under. Anthony Richards, head of payments policy at RBA, said at a Parliament meeting that bitcoin “hasn’t become a mainstream payment option. It doesn’t meet many of the criteria that we would normally attach to money — [as] a stable store of value, it hasn’t proved to be that. [As a] unit of account, people don’t post their prices in bitcoin, even [at] bitcoin conferences. As a means of payment, it is possible for person-to-person transactions, but it is not something that people are using in day-to-day transactions.”

… And Risks

There are inherent risks, too. As stated in the paper, and in laying out the arguments against retail, during times of uncertainty, if bank deposit holders were able to easily switch between traditional currency and digital offerings, “a CBDC could facilitate bank runs at such times,” it said. “In the event that there was significant ongoing demand by households for CBDC, the implication would be … a fall in commercial bank deposits, and a reduction in the availability of funds for lending to households and businesses.”

With further distancing from the retail environment, the paper stated that there might be “little demand” by households because “they already have good access to digital money in the form of commercial bank deposits that provide payment services, are interest-bearing and are protected (up to $250,000 per account) by the Financial Claims Scheme.”

Consider the fact that, as the paper noted, there seems to be uncertainty about demand for a CBDC. Responses from the FinTech industry, as surveyed by EY, ranked digital sovereign currency as “least effective” among 14 policy options explored.

The exploration and testing of the CBDC, however, does not mean deployment. The RBA has said that it intends to extend its research over the coming year, “potentially” through collaborative efforts with external partners.

As seen in China, the Australian efforts seem focused on a utilitarian niche for a digital currency. This should give the enthusiasts who envision crypto at every merchant a bit of pause. We are clearly not there yet, if ever we will be.