RBA Pilot Finds Benefits from CBDCs…with a Caveat
Posted by Colin Lambert. Last updated: August 24, 2023
A new report from the Reserve Bank of Australia (RBA) and Digital Finance Cooperative Research Centre highlights a range of areas where a central bank digital currency (CBDC) could enhance the functioning of the payments system, however it cautions that the project upon which the report is based, also raised a number of legal, regulatory, technical and operational issues associated with a CBDC that warrant further consideration in future research.
The key focus of the project was to engage with the financial and fintech industries to explore use cases for a CBDC, and involved the RBA issuing a limited-scale pilot CBDC in a ring-fenced environment to selected industry participants. These participants sought to demonstrate how a CBDC could be used to provide innovative and value-adding payment and settlement services to households and businesses. “Unlike earlier projects where the CBDC was purely a proof-of-concept, the pilot CBDC was issued as a real legal claim on the RBA,” the paper states. “The benefit of exploring use cases with a pilot CBDC was that it forced the project to confront, and provide insights into, a range of issues that would be associated with issuance of a CBDC, should a decision to issue one in Australia ever be made. This included legal, regulatory, technical, and operational considerations.”
The RBA says submissions coalesced around four key themes; tokenisation and “smarter” payments; extending the concept in financial and other asset markets; the promotion of private digital money innovation; and building resilience and inclusion in the digital economy.
The RBA says the results from the project indicate that a CBDC has the potential to support increased efficiency and resilience in some areas of the payments system, though more research is required. The use cases suggest that broad access to a CBDC could support (directly and indirectly) the creation of new or more efficient markets, and supply chain and business processes could also be enhanced. It adds there was particular interest from industry in exploring how the development of tokenised asset markets could be facilitated by the introduction of a CBDC.
Submissions also illustrated how a CBDC could be used in a variety of ways – including by facilitating atomic settlement, programmable payments and increased transparency and resilience in offline environments – that could help to unlock benefits for the economy as a growing share of activity occurs in the digital domain. Equally, some participants in the project noted that a CBDC could facilitate the development of new forms of privately-issued payment instruments and infrastructure, including stablecoins that are fully backed by CBDC. In this sense, a CBDC could be viewed more as an enabling complement to, rather than substitute for, private sector innovation, the central bank says.
At the same time, the project raised a number of questions and revealed various legal, regulatory, technical and operational issues that warrant further consideration as part of future research on CBDC in Australia. “For example, the project highlighted the need for more analysis of the legal underpinnings of a CBDC, including the legal basis on which one could be issued and its legal status,” the paper states. “Similarly, given a CBDC could give rise to new types of business models and change the nature of some risks in the financial system, further consideration may need to be given to whether (and if so, how) existing regulatory frameworks would require adjustment.”
While the technical design of the pilot CBDC platform was not a key focus of the project, the paper says the experience also highlighted potential challenges associated with the integration of use case applications with a CBDC platform. This included ensuring the efficiency and integrity of atomic settlements and programmability across networks. “Further analysis would also be needed to validate the business and technical design features of a CBDC so it could deliver on the identified capabilities,” the paper states. “Key non-functional characteristics that were not a focus of this project – such as performance, scalability and security – would also need to be considered as part of a wider research agenda.”
“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,” says Brad Jones, assistant governor (financial system) at the RBA. “It also highlighted the benefits of close engagement between industry and policymakers in exploring the opportunities and challenges associated with innovations in digital money. 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.
“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,” he continues.
Dr Andreas Furche, CEO of the DFCRC, adds, “The report underscores that innovation in finance is a continuous journey. The strong industry engagement in this project speaks to the importance of collaboration between central banks as ultimate issuers of national currency, and industry experts driving its potential use cases. As we move forward, our research on CBDC could look to target use cases where CBDC has the best potential to provide an infrastructure layer for further innovation in financial products and services.”