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Is it time for Australia to embrace a blockchain-based digital currency?
The reality of an Australian central bank digital currency (CBDC) drew nearer when the Reserve Bank announced a research project to explore ways that CBDC could replace cash.
The RBA is partnering with the Digital Finance Cooperative Research Centre to see how a CBDC would function in reality, utilizing cloud-based technology. Treasury is included as a member of the project’s steering committee.
If the trial is successful, Australia could become one of the first countries to launch a digital version of its currency. The RBA has been investigating the possibility of a CBDC since at least 2018 and closely monitoring global developments.
“We want to be sure that we understand the implications of digital currencies for monetary policy, financial stability and payments efficiency before any decisions are made about whether or how to introduce a CBDC,” said RBA Deputy Governor Michele Bullock.
“A key focus of our research is understanding the demand for CBDC and assessing how best to meet that demand.”
Australia isn’t alone in its exploration of a CBDC. The Bank of England is also investigating the possibility, as is the European Central Bank. So far, no country has committed to launching a digital currency, but the trend is moving in that direction.
Several advantages could come with an Australian CBDC. One is that it would allow the RBA to directly control the money supply, giving it more power to manage inflation.
Another is that it could make it easier for the RBA to conduct monetary policy experiments. For example, the RBA could have negative interest rates on CBDC without people being able to withdraw their money and stash it under a mattress.
“A digital currency could also allow for more effective monetary policy transmission through the economy,” Michele Bullock said.
“The use of a digital central bank currency for retail payments could improve the efficiency of the payments system and reduce costs.”
However, there are also potential risks associated with CBDCs. One is that they could make it easier for people to evade taxes or launder money. Another is that they could upend the banking system, as people might choose to hold their money in a CBDC rather than a bank deposit.
“We need to be mindful of the potential implications of issuing a digital currency for financial stability,” Michele Bullock said.
“We must consider how a CBDC would interact with the banking system and whether it could create new risks.”
Advances in cloud technologies are powering the RBA’s move towards a digital currency. The central bank has been working with Microsoft on a proof-of-concept trial of a cloud-based payments system.
“This project will help us to understand better how we can use cloud technology in the financial sector,” said RBA Assistant
The idea of a digital currency isn’t far-fetched for Australians. We’re already early adopters of new payment technologies, with more than two-thirds of us using contactless payments. This recent advancement means Australia is well-placed to trial a CBDC in the coming years.
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