Central banks firm up plans for digital currencies

In an era where consumers are much less reliant on cash, central bank digital currencies could quickly fill the void.

Countries are weighing up their involvement in a new central bank digital currency.

At a glance

  • Central bank digital currencies (CBDCs) could remove the need for a third-party intermediary in cross- border transactions.
  • Some central banks are evaluating the possibility of making CBDCs available as an alternative to, or replacement for, cash.

By Gary Anders

There’s a currency race on right now, involving an elite field of central bankers from around the world.

How this race pans out is anyone’s guess. Among other things, the actual course is undefined and could rapidly change direction, and there is no consensus on where the finish line is or what it should look like.

Unlike most races, this one involves a mix of direct competition and co-operation.

It is all part of a concerted global push to research the potential for the development of central bank digital currencies (CBDCs) – fully backed, administered and regulated by governments.

CBDCs used at a wholesale level stand to revolutionise the global payments system as we know it by enabling the real-time settlement of cross-border financial transactions without the need for third-party intermediaries.

Yet some central bankers are delving even further by examining whether CBDCs could be made available to the general public as an alternative to, or a complete replacement for, physical cash.

In an era where consumers are much less reliant on cash, CBDCs could quickly fill the void.

Central bank progress

The Switzerland-based Bank for International Settlements (BIS), whose roles include research and policy analysis on issues of relevance for monetary and financial stability on behalf of more than 60 central banks, noted in a report released in January 2020, that central banks were continuing to research CBDCs.

“Motivations for CBDC research continue to be diverse,” BIS said in the report. “Cash use is the key to driving many central banks’ plans, with EME [emerging market economy] central banks aiming to reduce reliance on cash, and advanced economies acting to pre-empt any issues that might be faced by the general public in accessing central bank money.

“Although motivations are fairly stable, central banks with firmer plans to issue CBDC are now imminently close to doing so. Some 10 per cent of the central banks surveyed are likely to issue a CBDC for the general public in the short term, representing 20 per cent of the world’s population.”

"Although motivations are fairly stable, central banks with firmer plans to issue CBDC are now imminently close to doing so." Bank for International Settlements

In January, the Bank of Canada, the Bank of England, the Bank of Japan, the Sveriges Riksbank (Sweden) and the Swiss National Bank, together with the European Central Bank and BIS, announced they had formed a group to assess the opportunities for CBDCs in their home jurisdictions. The group will also assess economic, functional and technical design choices, including cross- border interoperability, and the sharing of knowledge on emerging technologies.

The Bank of England released its own discussion paper in March on the opportunities, challenges and design for a CBDC in Britain.

However, other central banks are going it alone. China is set to become the first country to launch a digital sovereign currency and digital wallets to manage and distribute its yuan currency electronically. While no firm date has been announced, the “digital yuan” launch is expected to be imminent.

Is Australia lagging in the CBDC stakes?

In November last year, the Reserve Bank of Australia (RBA) released an issues paper to begin a review of the regulatory framework for retail payments, taking into account previous recommendations from the Productivity Commission, in addition to submissions from a range of financial services providers.

One of those submissions was from law firm Mills Oakley, summarising the pros and cons involved in the issuance of an electronic Australian dollar, or CBDC, for retail use.
Joni Pirovich, Mills Oakley special counsel, taxation, blockchain and digital assets, says the RBA should be commencing trials as soon as possible around the issuance of an “eAUD” for household use, or the hybrid applications of an eAUD for blockchain infrastructure initially targeted at wholesale investors.

“We should be experimenting and generating those now, or soon, rather than kicking the can down the road and almost overnight it becomes quite hard to transition to what could become a new global financial system.”

Pointing to the multiple layers of discussions and research happening globally, including in Europe and China’s advanced CBDC plans, she adds: “I think we’re probably late to the game”.

Pirovich says the use of a CBDC at a wholesale level in Australia would create more efficiencies by eliminating the use of legacy systems, repeated reconciliation processes and high fees.

“The research the RBA seems to be doing, the wholesale testing that they did late last year and the results that they reported to the Select Committee on Financial Technology and Regulatory Technology were actually reasonably informative and showed strong positives around the adoption of a wholesale CBDC.

“Yet the RBA has positioned itself to say Australia’s motivations aren’t as strong as they are for other countries that don’t have the payments infrastructure that we currently do.

They also have the view the demand by Australians for digital currency is not high enough to warrant a retail CBDC.

“However, it’s important for them to see how quickly this CBDC discussion and momentum is moving, because there could be an effectively overnight increase in demand.”

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