While we continue to wait for the Reserve Bank of Australia's (RBA) report on its wholesale Central Bank Digital Currency (CBDC) research project, which is exploring the implications of a CBDC for efficiency, risk management and innovation in wholesale financial market transactions, the Bank of International Settlements (BIS) and a number of international central banks have made announcements in relation to CBDC in the last month.
Bank of International Settlements
The Annual Report from BIS details its work in CBDC innovation projects and the status of CBDC projects internationally (albeit with a curious choice of colour coding)
The Annual Economic Report from BIS devotes a whole chapters to the opportunities for innovation using CBDC for the monetary system, including:
Unique benefits of settlement finality, liquidity and integrity;
Open payment platforms and a competitive level playing field that is conducive to innovation; and
CBDCs built on digital identification could improve cross-border payments and limit the risks of currency substitution.
Bank of England (BOE)
The BOE has released a Discussion Paper on new forms of digital money including CBDC and stablecoins. Although the BOE has not yet made a decision on whether to introduce a retail CBDC in the UK it is actively exploring the opportunity and risks of doing so, saying:
A Central Bank Digital Currency (CBDC) could play an important role in sustaining, and potentially expanding, retail access to central bank money. Unlike cash, CBDC would be a new form of central bank money that is digital in nature.
The Bank has not yet made a decision around CBDC but is actively exploring the opportunities and risks of doing so. A CBDC would be a public liability backed by the security and resources of the state. Where coupled with innovations such as programmable money and micropayments, a CBDC may increase the utility of central bank money when compared to cash. And it could support a resilient, innovative and competitive payments landscape.
Bank of Jamaica (BOJ)
The Bank of Jamaica will begin a CBDC pilot from August to December of this year, which will be implemented and integrated with existing systems of financial institutions. The CBDC will be issued to commercial banks, building societies, merchant banks and other authorised payment service providers licensed or authorised by the BOJ. These entities will distribute CBDC to the retail market.
Consumers will be able to access download and deploy their CBDC wallets on their mobile devices and will be able to top up their wallets with CBDC through authorised agents or smart ABMs and do business using CBDC phone-to-phone with merchants. Once the pilot ends, a national roll-out of CBDC is expected in Q1 2022.
France and Singapore pilot
Banque de France and the Monetary Authority of Singapore (MAS) have announced the successful completion of a wholesale cross-border payment and settlement experiment using CBDC. The experiment simulated cross-border transactions involving multiple CBDCs on a common network between Singapore and France.
This was the first multiple CBDC experiment that applied automated market making and liquidity management capabilities to reap cross-border payment and settlement efficiencies.
Hong Kong Monetary Authority (HKMA)
In its Fintech 2025 strategy, the HKMA has announced it will strengthen its research to increase Hong Kong’s readiness in issuing CBDCs (to both wholesale and retail markets). In particular, HKMA:
has been working with the BIS Innovation Hub Hong Kong Centre to research retail CBDCs;
will begin a study on e-HKD to understand its use cases, benefits, and related risks; and
will continue to collaborate with the People’s Bank of China in supporting the technical testing of e-CNY in Hong Kong with a view to providing a convenient means of cross-boundary payments for both domestic and mainland residents.
Reserve Bank of New Zealand (RBNZ)
The RBNZ has announced it will be consulting extensively over the remainder of this year, releasing a series of money and cash issues papers for feedback from August to November, saying:
The first consultation will introduce and seek feedback on the broad concepts of money and cash stewardship, and outline specific topics to be covered in the rest of the series. Subsequent papers will look at the potential for a Central Bank Digital Currency (CBDC) to work alongside cash as government-backed money, issues arising from new electronic money forms including crypto assets (such as BitCoin) and stable coins (such as proposed by a Facebook-led consortium), and how the cash system might need to change to continue to meet the needs of its users.
What does this mean for Australia?
The above provides the RBA with a clear signal that CBDCs are only going to increase in prominence and, if the RBA report follows the trends in other countries, we would expect to see the RBA take a positive stance towards an eventual Australian CBDC. However we expect the RBA will remain focused on the wholesale CBDC space given the nature of the RBA itself. It seems to us that commercial bank issued stablecoins may well provide a CBDC-lite stepping stone to an eventual true CBDC and only time will tell if CBDCs become common place in our e-payments landscape where Australians already enjoy instant payments with the NPP.
However. the more countries that undertake successful trials of CBDCs, the more likely Australia is to join that club and start considering where CBDC advantages take payments beyond our current framework. Those countries still on the fence about CBDC may need play catch-up very quickly, including considering regulatory changes which may need to support a CBDC.