Blockchain & Cryptocurrency

Following on from its early sceptical position in 2017, the Reserve Bank of Australia (RBA) has published a detailed paper setting out its continued cautious position on retail central bank digital currency (CBDC). The updated paper "Retail Central Bank Digital Currency: Design Considerations, Rationales and Implications" explores some issues around the possible design, rationales for issuance, and implications of issuance of a retail CBDC.

In short, the paper sets out the RBA's position that, despite ongoing decline in the use of cash, as well as the broader digitalisation of the economy:

there does not seem to be a strong public policy case for [CBDC] issuance in Australia

Helpfully, the paper starts by summarising the specific aspects of the RBA's mandate that are relevant to the consideration of a CBDC, being:

1. at the foundational level, the RBA is responsible for maintaining monetary and financial stability in Australia, so must ensure a CBDC is capable of meeting this goal;
2. under the Reserve Bank Act 1959 (Cth), the RBA is responsible for the issuance of banknotes in Australia;
3. under the Payment Systems (Regulation) Act 1998 (Cth), the RBA is required to determine payment system policy in a way that will best contribute to controlling risk in the financial system and promoting competition and efficiency in the market for payment services; and
4. the introduction of a CBDC could have major implications for the operation of the Reserve Bank Information and Transfer System (RITS), Australia’s real-time gross settlement system.

The paper suggests that unless a CBDC can be shown to fit within this existing regulatory and policy framework, "the public policy case" for a CBDC will be unable to be made out.

Proponents of a fully decentralised CBDC might argue that the point of a CBDC is to ensure financial stability and extricate responsibility for maintaining financial stability from commercial banks, particularly given the RBA's acknowledgement that:

currency represents only 7 per cent of M1 and just 3.7 per cent of broad money

with the majority of the remainder being "digital money" in the form of deposits at commercial banks.

As the digital money deposits are a liability of commercial banks, not liabilities of the RBA, they carry inherent risks. The RBA paper helpfully summarises very succinctly the various forms of money in the below and what the future is likely to hold:

The paper also responds to the accelerating development of CBDC's internationally, considering in some detail the position of the Swedish Riksbank and the Bank of Canada. In Sweden’s case, the RBA noted that the decline in cash use there is more severe than in Australia, and that the Riksbank has expressed concern about the future resilience, competition, innovation and data integrity in a payments system that excludes universal access to a form of central bank money.

Regarding the Bank of Canada, the RBA emphasises that despite the "extensive CBDC work" completed to date (considered here and here), the Bank of Canada has stated that "there is currently no compelling case to issue a CBDC".

Despite implicitly acknowledging that "currently" is the operative word there, the Bank of Canada is still proceeding with extensive capacity building to ensure that should a retail CBDC become more "compelling", it is in a position to avoid being left behind and can move swiftly to issue a retail CBDC. This is a position that we believe Australia should be following.

Although the RBA acknowledges the elephant in the room, China's ongoing and well-known development of a CBDC, it only manages to do so in a footnote, saying that:

available reports indicate that a pilot is well advanced and involves a two-tier model where the CBDC would be issued by the PBOC and then distributed by commercial banks or other payment providers.

Interestingly, the RBA goes on to speculate that:

the primary rationale for the PBOC’s CBDC may be to promote a bigger role for central bank money as an alternative to the e-money provided by the large private sector wallet providers (most notably Alipay and WeChat Pay).

Going beyond what the other central banks are up to, the RBA stressed the uncertain future for private, globally relevant stablecoins such as Libra. With what could be read as hopeful tone, the RBA suggests that it remains to be seen whether Libra will be able to “gain regulatory approval and become operational."

Interestingly, the RBA comments on stablecoins generally that:

In Australia, to date, there has been essentially no issuance of stablecoins nor any use of them as a payment method

This of course is not entirely correct, with various stablecoin projects underway in Australia, and significant growth in acceptance of stablecoins for payment, including yours truly at Piper Alderman through RelayPay.

Overall, in summarising the view that there is no strong public policy case for the introduction of a retail CBDC, the RBA finds that:

1. demand for Australian banknotes continues to increase and has risen significantly since the onset of the COVID-19 pandemic;
2. Australia’s electronic payments system compares favourably with other jurisdictions, particularly the NPP, which represents a major upgrade to the payments system, allowing realtime, data-rich, easily addressed account-to-account payments that can be made 24/7;
3. Regulation remains an option for dealing with any concerns associated with private-sector provision of payment services; and
4. It would be a major decision to implement a retail CBDC.

Or in short, it's super complicated and if it ain't broke, don't fix it.