Reserve Bank of Australia testing Ethereum-based CBDC
What is atomic blockchain settlement and why is the RBA testing it?
The Reserve Bank of Australia (RBA) is testing an Ethereum-based central bank digital currency (CBDC) in partnership with ConsenSys, Commonwealth Bank, National Australia Bank and Perpetual.
"The project will involve the development of a proof-of-concept (POC) for the issuance of a tokenised form of CBDC that can be used by wholesale market participants for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform," the media release says.
"The POC will be used to explore the implications of ‘atomic’ delivery-versus-payment settlement on a DLT platform as well as other potential programmability and automation features of tokenised CBDC and financial assets."
Let's break that down.
Syndicated loans are large loans with multiple lenders, making them considerably more complex and paperwork-intensive than most. In this proof of concept a purely digital version of the Australian dollar will be used in the funding, settlement and repayment of a syndicated loan.
The main emphasis of this POC is to "explore the implications of 'atomic' delivery-versus-payment settlement on a DLT platform".
This means it will be trialling transactions where delivery is only made upon payment, and vice versa. The "atomic" part refers to the way this can be automated through the use of blockchain technology.
In blockchain, "atomic settlements" are trades where the transfer of one asset only occurs if and when the other asset is also transferred. This brings efficiency and safety benefits: near-instantaneous transactions with zero counterparty risk.
The main catch is that atomic settlements can only be used with blockchain assets.
That's where the CBDC comes in. By putting real, hard Australian dollars directly on a blockchain you can start using them with blockchain features such as atomic swaps. The syndicated loan in this case is likewise tokenised, meaning it's also been put on a blockchain.
It helps when the dollars themselves are digital, because otherwise you're still just moving around and transacting with "promises of payment" rather than actual payments, which undermines some of the benefits of using this system in the first place.
"With this project, we are aiming to explore the implications of a CBDC for efficiency, risk management, and innovation in wholesale financial market transactions," said RBA assistant governor (financial system) Michele Bullock. "While the case for the use of a CBDC in these markets remains an open question, we are pleased to be collaborating with industry partners to explore if there is a future role for a wholesale CBDC in the Australian payments system."
"We believe that the interoperation of digital assets and CBDCs will be a fundamental building block of the next generation of financial market infrastructure. We are looking forward to collaborating with the RBA, CBA, NAB and Perpetual to experiment with these transformational capabilities and unlocking learnings for the wider industry," said ConsenSys Australia director Claudio Lisco.
The times they are a-changin'
As recently as 17 September this year the RBA said there was no need for a CBDC, yet here we are.
But while this POC may seem like a sudden about-face, and is being widely reported as such, the truth is closer to the opposite.
Retail and wholesale CBDC are very different things, and the RBA's messaging has consistently been that even though there's currently little case for retail CBDC, there's a much better case for wholesale CBDC.
As RBA head of payments policy Tony Richards said some years ago:
"[CBDC] 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."
That's precisely what this proof of concept is now exploring. It's also a neat reminder that many of the developments we're now seeing in cryptocurrency and blockchain have been a long time in the making.
Time subjects everything to change though. RBA cash rates currently stand at record lows of 0.25%, and 67% of experts are predicting a further cut to new record lows of 0.10% in the RBA cash rate announcement tomorrow. With so much change in the air, it's perfectly possible that current stances on retail CBDC will change too.
Disclosure: The author owns a range of cryptocurrencies including at the time of writing
- Why Ethereum’s price is outperforming Bitcoin after Saturday’s crash
- Bitcoin price plummets overnight – experts think more drops may be on the way
- Ethereum within 2% of new all-time-high price as another global brand adopts NFTs
- Bitcoin’s stagnation is alarming and could be followed by more bearish price action
- Ethereum’s price rallies after adoption by a major Gulf State