At last week's AFR Crypto Summit, Assistant Governor (Financial System) of the Reserve Bank of Australia (RBA), Brad Jones, delivered a speech exploring the future role of tokenised assets and money in Australia's future financial system and the potential economic benefits.
Historical Lessons
Mr Jones highlighted the co-dependence of commercial and monetary systems throughout history, drawing parallels between the chronic shortage of high-value coinage in China's Song Dynasty and the challenges faced by European merchants during the Renaissance era. In both cases, new technologies, such as paper money and the printing press, led to innovative solutions for facilitating trade.
Mr Jones emphasised that the interdependence between commerce and money continued to drive progress. The industrial revolution, which fueled global trade expansion, was preceded by various financial and monetary innovations:
Among [those innovations] were novel forms of money like bills of exchange, alongside new types of financial infrastructure and intermediaries – think of the double-entry book-keeping administered on paper ledgers by the Medicis of Florence. The socio-economic forces unleashed in this period were immense: the corporation was born, capitalism flourished and the new merchant class became a political force. Turning to the computerised age of more recent decades, the dematerialisation of finance saw paper-based forms of assets, money and record ledgers give way to electronic variants. This fuelled efficiencies that must have seemed unimaginable half a century ago.
Mr Jones noted that the two-tier monetary system, comprising the central bank and commercial private banks, had proven to be highly effective in combining the strengths of public and private money.
This is where "tokenisation" comes into play, presenting new opportunities for Australia's financial system.
Tokenisation and Its Possibilities
Mr Jones identified a number of potential benefits of tokenised assets, comparing them to traditional physical assets and electronic assets as shown in the table below:
Mr Jones analogised a tokenised asset as:
...digital bearer instruments that represent claims on underlying assets that exist in the real (traditional finance, 'off chain') world. They also contain rich, unique information that can be updated instantaneously, and can be programmed via smart contracts to perform functions that are not currently performed in traditional finance applications.
With the ability to exchange tokenised assets 24/7 on decentralised ledgers, Mr Jones noted that tokenisation may potentially reduce the need for intermediaries and manual record reconciliation.
Having identified the potential benefits of tokenisation, Mr Jones noted:
threshold policy question is what potential benefits could tokenisation crystalise, and are the downsides manageable?
Mr Jones identified the potential benefits including:
Increased asset liquidity, informational transparency and auditability;
Reduced risks, costs, and improved capital efficiency from shorter settlement cycles; and
Reduced intermediary and compliance costs.
The challenges included regulatory uncertainty, interoperability between different technologies (i.e. interactions between distributed ledger technology like blockchain and other "traditional" information systems), and the impact of prefunding on transactional liquidity.
Regulatory concerns are particularly prominent, as innovations in tokenised finance often operate in a regulatory grey zone. In that regard, Mr Jones highlighted the recent learnings from Australia's CBDC pilot and opined that enhancements to the regulatory sandbox arrangements in Australia, possibly informed by the UK's recent experience, are worthy of consideration.
Tokenised money
Mr Jones' speech discussed the prospects of different forms of tokenised money, which could include unbacked cryptocurrencies, asset-backed stablecoins, tokenised bank deposits, and a wholesale central bank digital currency (CBDC). Mr Jones observed that unbacked cryptocurrencies are risky due to their price volatility and lack of regulatory oversight.
With respect to stablecoins, Jones agreed with the use of stablecoins by existing "TradFi" players to settle other tokenised asset transactions:
It is certainly plausible that stablecoins issued by well-regulated financial institutions and that are backed by high quality assets (i.e. government securities and central bank reserves) could be widely used to settle tokenised transactions.
However, he considered that stablecoins might face collateral limitations and perceived credit risk, but one would need to compare that against the credit risk of the existing clearing and settlement systems to form a considered view.
Tokenised bank deposits were presented as a potentially viable option for settling transactions, given their similarity to the current banking system.
Contrasting these options with a wholesale CBDC, Mr Jones said:
only a wholesale CBDC would be completely free of credit and liquidity risk. In representing the ultimate form of safe money, it could help to anchor and spur innovation in the financial system - including realising the full benefits of atomic settlement and programmability
Concluding, Mr Jones said that a wholesale CBDC would represent an evolution rather than a revolution for Australia's two-tier monetary system. He did not, however, go on to consider the prospect of a retail CBDC and the potential policy challenges which may arise in implementing one, such as privacy concerns.
Hypothetical cost saving of asset tokenisation
Mr Jones quantified some of the hypothetical cost-savings that asset tokenisation may bring to the Australian financial system. One such hypothetical estimate suggested that savings of up to AUD$13b per year could be generated for Australia's capital markets.
The two factors driving the reduced costs were as follows: (1) tighter bid-ask spreads reflecting the increased trading volumes of tokenised assets; and (2) gains from atomic settlement (i.e. 24/7 instant settlement) driving down other fees, including those currently paid to corresponding banks involved in cross-border payments, savings from reduced collateral requirements, and reduced fees from a lower incidence of settlement fails.
The RBA's Future of Money Work Program
Mr Jones' speech concluded by outlining the RBA's future plans:
So where is the Bank on its future of money journey? Our overarching position is that we remain open-minded as to the functional forms of digital money and supporting infrastructure that could best support the Australian economy in the future.
Mr Jones stated that the RBA had an "active research program" underway and highlighted some of its key focus areas over the next year:
The RBA is in the early stages of planning for a new project assessing how different forms of digital money and infrastructure could support the development of tokenised asset markets in Australia.
The RBA and Treasury will publish a joint report around the middle of 2024 that will provide a stocktake on CBDC research in Australia and set out a roadmap for future work.
The Bank will continue to actively contribute to international work streams, including those aimed at reducing the frictions in cross-border payments.
The Bank will step up its engagement with a range of external stakeholders on the future of money. This will take a variety of forms and include industry, academia, government agencies, other central banks and the wider public.
It is apparent from Mr Jones' speech that the RBA keenly understand the potential benefits of asset tokenisation to the financial system and economy, and that those potential benefits are quantifiable. The RBA is however continuing to explore what a tokenised future might look like, and to that end, it is taking cautious steps to research and plan for that future, while mitigating the potential downsides. In this regard, the RBA is part of an ongoing global conversation among Government officials and policy makers on the future of our digital economies. Of course, the future of money is a question which does not just touch central bankers. It is one that is likely to be heavily debated by experts and policy makers of different stripes, and the public at large.
Written by Michael Bacina, Steven Pettigrove and Luke Higgins