RBA: We have no plans to create digital AUD. No demand, no point
Where the RBA stands on central bank digital currency, and why it carefully chose to stand there.
Australia has joined the many other countries whose central banks are examining the potential of a national cryptocurrency, or central bank digital currency (CBDC) as should probably be more properly known.
But today on 26 June, Tony Richards, RBA's head of Payments Policy Department, threw cold water on the idea citing firstly a probable lack of demand, and secondly the problems that would arise if there did turn out to be serious demand for it.
In the same speech, he noted that cryptocurrency doesn't raise any major concerns, in either direction, with the RBA due to its very low usage in Australia.
"Of course, there are network effects in payments and ingrained habits in the behaviour of households and businesses, so observations about the current limited acceptance of bitcoin may not be surprising and may be a little unfair," he conceded.
Bottom line: No point
"So the question is: 'should the Reserve Bank introduce a new form of cash – an eAUD as the Governor called it – to give households an electronic payment instrument issued by the central bank for their everyday payments'?" Richards asked.
"Our current thinking is that there would not necessarily be all that much demand for an additional form of money in normal times, though this would presumably depend partly on design decisions such as the interest rate (if any) that would be paid on this money. But to the extent that there was significant demand, particularly if this occurred at times of financial uncertainty with households switching out of the banking sector, there could be significant implications for the Bank's financial stability mandate."
The gist is that there's probably not going to be much demand, and if there does turn out to be a lot of demand then that will cause more problems than it solves.
This is because the liability for Australian dollars is split between the RBA and the banks. Whichever institution is liable is responsible for ensuring that the dollars being held and used around Australia can be exchanged for the appropriate amount of value.
Cold hard cash is the RBA's liability, but it only accounts for about 3.5% of the money in circulation. The remaining 96.5% is bank deposits, which the liability of whichever bank is holding it.
Creating an CBDC, and then issuing directly to consumers, would be a seismic shift in the scope of the RBA's responsibilities. It would undermine banks, create new risks for economic stability and generally serve no real point now that most money is held in a digital form through the banks anyway.
At the same time, cash use is declining while cards and other electronic payments are becoming more popular.
"In 2007, cash accounted for nearly 70 per cent of the number of household transactions. Nine years later, this had fallen to 37 per cent," Richards noted.
It's not entirely relevant, but it is interesting to note that BPAY has plateau'd hard and may be on the way out, cheques are almost entirely a thing of the past, plastic is now more popular than cash was ten years ago, and the growing popularity of direct debits and credits seems to be lagging behind card.
At the same time the measurements show number of transactions, and there's an overall increase in the number of transactions being conducted by Australians. Credit cards might be picking up the majority of new everyday spending while direct debits are getting those more occasional large transactions.
With no clear benefits and plenty of downsides, it's easy to see why the RBA is ready to take a hard pass on the idea of direct-to-household CBDC.
The RBA's counterparts in other countries are mostly thinking along the same lines, Richards said, with the notable exception of Sweden, which is already widely regarded as the world's most cashless society. Cash still accounts for a hefty 37% of transactions in Australia and a much heftier 83% globally by some measures, but only 2% in Sweden.
"For the time being at least, consideration of a possible new electronic form of money provided by the Reserve Bank to households is not something that we are actively pursuing. Based on our interactions with our counterparts in other countries, it is also not front of mind for most other advanced economy central banks. An exception is Sweden, where the shift away from the use of cash is significantly more advanced than in Australia and elsewhere. Sweden's Riksbank is studying the issues regarding the possible issuance of an e-krona and expects to report by late 2019," Richards said.
Direct-to-household digital currency might be off the table for now, but there are other flavours which are still being examined.
Different flavours of CBDC
"There might be a stronger case for considering a new form of central bank liability for use by businesses and financial institutions," Richards said.
He notes that the RBA already offers electronic balances to banks, which serves as a way of quickly passing around a risk-free liquid asset between financial institutions to prevent the build-up of large risk exposures that could threaten financial stability.
An RBA CBDC designed for banks and other institutions might bring benefits here, Richards said, similar to how blockchain technology can bring benefits to businesses even without any connected cryptocurrency.
"For example, it could allow the simultaneous exchange of money and other assets on blockchains. A central bank digital currency on a blockchain could potentially also enable 'programmable money', involving smart contracts and the simultaneous execution of complex, linked transactions," Richards says.
That would probably be kind of a big deal, and more than enough reason for the RBA and many other banks to take a running jump at a non-consumer type of CBDC.
This is more or less the same page the Bank of England is on, and seems like it might be the most likely outcome for most central banks at this point.
"Moving in this direction would involve two major changes to current arrangements: it would involve the introduction of a new form of settlement asset and it would presumably involve broader access to central bank money for non-bank institutions. Consideration of the first aspect will require an assessment of issues relating to the technology. Consideration of the second aspect would get into some of the issues that are relevant to thinking about giving households access to electronic central bank money, namely the implications for financial stability and the structure of the financial sector," Richards said.
"As we think more about a model along these lines we will be considering whether the benefits could be equally well facilitated by other means. For example, could there be commercial bank money on blockchains [Japanese bank MUFG is currently aiming at this] – say Bank X tokens, Bank Y tokens, and the like, rather than RBA digital settlement tokens?" he asked.
The kibosh on RBA crypto for everyday use might be disappointing for the more ardent Australian futurists, but other than cutting out the entrenched banking industry, it's hard to make an argument for its benefits.
But in the shorter term, there might be infinitely more practical CBDC models to look forward to, if you're into that kind of thing.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, NANO
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