Australians unconvinced by digital currency

“The fundamental issue boils down to this: is our money fit-for-purpose in the digital age and, if not, how can we make it so?” the central bank’s assistant governor, Brad Jones, told a digital finance conference.

Speaking at the 17th Central Bank Conference, Mr Jones said the digital revolution is “reshaping the economy and raising important questions” over the future of money.

The Reserve Bank of Australia’s (RBA) project in partnership with the Digital Finance Cooperative Research Centre (DRFC) is exploring how digital money might be used, building on the RBA’s earlier proof-of-concept work.

The project involves the development of a limited-scale central bank digital currency (CBDC) pilot ‘eAUD’ program.

“Our project team is in the process of selecting a number of proposed eAUD use cases to take forward into the pilot phase early next year,” Mr Jones said.

The introduction of a general purpose central bank digital currency would be “revolutionary”, he said.

“A strong public interest case would first need to emerge. On balance, we have yet to see that case made in Australia,” he said.

Dr Jones said the RBA was not alone as no other advanced economy central bank has committed to issuing a general purpose CBDC.

“But with our eAUD pilot program in full swing, and changes in the digital economy and money and payments landscape occurring at a frenetic pace, the Bank is keeping an open mind,” Mr Jones said.

“This could include further advanced functionality in fast payment systems and greater direct access for non-bank service providers.”

For example, a payment stablecoin, fully backed by central bank money and government securities, issued by a regulated institution, and held in a digital wallet supplied by a non-bank payment service provider, is just “one of many possible examples”, Mr Jones said.

Given the role that exchange settlement balances already play in the Australian financial system, Mr Jones said it seems a smaller leap to imagine that a wholesale CBDC would circulate ahead of a general purpose variety.

Why do we need it?

Today, central bank money comprises banknotes issued to the general public and digital deposits at the central bank issued to financial institutions and government agencies.

“In Australia, as elsewhere, this is just a small fraction of the total value of money circulating in the economy; most money now consists of digital deposits issued to households and firms by regulated private institutions like banks,” Mr Jones said.

In some low-income countries where many households and small businesses are “unbanked” because there are no services available, a CBDC could strengthen financial inclusion.

“But, in Australia, a very small proportion of households are without access to banking and payment services, and it is not obvious how a CBDC would bring them into the fold,” he said.

Further, on the back of the recent extreme weather events in Australia — where cracks in the electronic and physical cash were noted — as well as cyber-induced disruptions, a case for a CDBC is enhanced, he said.

“This could include supporting government payments and peer-to-peer transfers in an offline environment, with programmability features — including value or time limits and restrictions on double spending — to safeguard their use,” Mr Jones said.

Some countries argue a digital coin would help where banknotes are hard to access or sparingly used.

“But physical cash in Australia is available and still appears valued by households as a useful backup for electronic payments and as a store of wealth,” he said.

In fact, 95 per cent of Australians live within four kilometres of a cash withdrawal point, yet only 15 per cent use cash for their payments.

While transactional demand for banknotes in Australia is clearly in structural decline, the value of banknotes in circulation has risen over the past decade, RBA data noted.

Concerns being raised

Some concerns raised include, if CBDC becomes the preferred source of liquidity holdings for households in normal times, central banks could find themselves “awash in household deposits” they don’t need.

“Meanwhile, commercial banks, which do need deposits to finance their operations, could have their funding and lending channels significantly affected, disrupting monetary policy transmission in the process,” Mr Jones said.

Thus, banks might have to offer higher deposit rates than otherwise, or raise more funding from higher cost and/or more volatile sources, he added.

“Some researchers have proposed possible workarounds, but none are straightforward,” Mr Jones said.

For instance, banks might opt to compete harder for low-cost deposits on safety grounds by providing loans only to the very highest quality borrowers.

“Alternatively, some have suggested that a CBDC would have little effect on bank funding and lending if central banks extended to them plentiful cheap loans as compensation for the loss of household deposits,” Mr Jones said.

While non-bank lenders in Australia do not rely on deposit funding and so may be less directly affected by a CBDC compared to banks, he added that a material increase in their lending market share might spark “closer regulatory scrutiny”.

Indeed, a major concern with CBDC is the threat to Australia’s financial stability.

“As bank deposits could be converted into CBDC at the stroke of a keyboard, it would be faster and easier to run into a CBDC than to queue outside a commercial bank and bury physical cash in the yard or under the mattress,” Mr Jones said.

Mr Jones added that a lot will depend on the design choices and there are many complex issues to be navigated before a scheme rolls out. 

[Related: RBA launches central bank digital currency pilot]