A 3D animated graphical representation of a series of blockchain.
The RBA is planning to trial a currency using distributed ledger, or blockchain, technology.(ABC News: Alistair Kroie)

The Reserve Bank of Australia will trial its own digital currency as part of a research project to evaluate the future of Central Bank Digital Currencies (CBDC) in Australia.

Key points:

  • The RBA will launch a pilot central bank digital currency (CBDC) as part of a research project
  • The CBDC will be a real claim on the Reserve Bank, meaning it will be recognised as legal currency
  • The research project is expected to last for a year and assess the possible uses for a CBDC and challenges that need to be addressed

Unlike well known cryptocurrencies such as Bitcoin and Ether, which were created by private entities or individuals, a CBDC is issued and controlled by the central bank just like cash and electronic stores of sovereign currency sitting in bank accounts.

The research project the RBA is undertaking in collaboration with the Digital Finance Cooperative Research Centre (DFCRC) will focus on the uses for, and potential economic benefits of, a CBDC.

“The project, which is expected to take about a year to complete, will involve the development of a limited-scale CBDC pilot that will operate in a ring-fenced environment for a period of time and is intended to involve a pilot CBDC that is a real claim on the Reserve Bank,” the RBA noted in a media release.

“Interested industry participants will be invited to develop specific use cases that demonstrate how a CBDC could be used to provide innovative and value-added payment and settlement services to households and businesses.”

RBA deputy governor Michelle Bullock said the project was “an important step” on the path to a potential Australian CBDC.

“It is basically an experiment,” she told the ABC’s The World Today program.

“We and other countries have done pilots where we’ve looked at the sorts of things you’d need to do.

“The difference this time is that because it’s a real claim on the Reserve Bank, it’s a real-life experiment, which allows companies or businesses that have businesses ideas to actually come and use those claims on the Reserve Bank to see how it would work in practice.”

Ms Bullock said while the claims on the Reserve Bank would be real, they would be kept within a “closed loop”.

“They would purchase digital currency from the Reserve Bank, it would be a claim on the Reserve Bank, but it would only be able to be used within the closed-loop system of the particular business case they are putting up,” she explained.

“It’s not money in the legal sense, but it is backed by the Reserve Bank in the sense that if a particular business has bought some of the digital currency from us for the purposes of the experiment, they sell it back to us and they get their money back.”

Andreas Furche, the chief executive of the DFCRC which is undertaking the research project with the RBA, said the doubts around CBDCs are mainly centred on how useful they could actually be, and in what ways.

“CBDC is no longer a question of technological feasibility,” he argued.

“The key research questions now are what economic benefits a CBDC could enable, and how it could be designed to maximise those benefits.”

Ms Bullock said individuals already had a wide range of safe, fast and low-cost electronic payment options, but there might be some niche areas where a CBDC could be useful.

“I suspect where its role might be more important is perhaps in delivery versus payment for physical assets,” she speculated.

“Possibly things like property, possibly things like gold — these sorts of things that might give businesses an opportunity to exchange real assets on a digital ledger for currency on a digital ledger.”

‘Don’t want to be left behind’

The Reserve Bank said Treasury is involved with the project, which will soon invite industry participants to pitch specific uses for a CBDC that might be selected for trials in the pilot.

The project will then help to understand some of the technological, legal and regulatory issues that arise from a CBDC.

A report on the results of the project is expected in about a year’s time.

“I think we just don’t want to be left behind,” Ms Bullock explained.

“I think we don’t want to be at the absolute leading edge on this, but we also want to make sure that we’re continuing to work on this issue … so that if it looks like it’s a product that is coming, if it looks like it’s needed, then we’re not coming from behind.”

However, Ms Bullock does not see an Australian CBDC as a certainty.

“I don’t think it’s inevitable,” she said.

“Probably if you’d asked me this question five years ago, I’d have said, ‘probably very unlikely’. Now, I’d say ‘less unlikely’.”

If a widespread CBDC did get adopted, Ms Bullock said it might threaten the future of so-called stable coins, which are supposed to be pegged to sovereign currencies.

“It does mean that the role of stable coins might change in a world where there are central bank digital currencies, because central bank digital currencies will basically give a credit-risk-free asset because they’re backed by the central bank,” she said.

Source – https://www.abc.net.au/news/2022-08-09/reserve-bank-of-australia-to-trial-digital-currency/101313556