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Summary
- The Reserve Bank (RBA) is collaborating with CBA, NAB, Perpetual and ConsenSys to explore possible use and consequences of a wholesale form of CBDC, or central bank digital currency.
- RBA intends to look at CBDC for effectiveness, risk management, and advancement in wholesale financial market transactions.
- The project is expected to complete by 2020 end.
On 2 November 2020, Reserve Bank of Australia announced that it is collaborating with Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB), Perpetual Limited (ASX:PPT) and blockchain technology company, ConsenSys Software on a collaborative project under which the partners would explore the possible use and implications of a wholesale form of CBDC (central bank digital currency) utilising distributed ledger technology. The project forms a part of the ongoing research by the RBA on CBDC.
A Glance at the Project:
The project comprises:
- Creation of a proof-of-concept for the issue of a tokenised form of CBDC. The CDBC can be used by market participants to fund and repay a tokenised syndicated loan on a DLT platform (Ethereum-based).
- The POC would be used for exploring the implications of ‘atomic’ delivery-versus-payment settlement on a DLT platform. It could also be used for other possible programmability and automation characteristics of tokenised CBDC as well as financial assets.
With this project, the RBA is trying to look at the effect of CBDC on risk management, effectiveness, and further development in wholesale financial market transactions.
The project is anticipated to complete nearly by the end of 2020. The parties intend to update on the project and the findings in 1H 2021.
What could be the effects of CBDC on Financial System and Financial Stability?
As per the report released by the RBA on 17 September 2020, there would be a significant change in the structure of the financial system.
The RBA believes that the demand for CBDC might come from switching out of cash. Possibilities could be that customers may also switch out of the bank deposits. In the extreme situation, there are chances that most households & businesses might decide to stop using deposit accounts at commercial banks. Instead, they might prefer to keep their liquid funds in CBDC and use them to make payments.
Another challenge which might arise because of the existence of CBDC is the stress in the financial markets. If households or businesses become cautious about their deposits in a particular bank, they could withdraw their funds by a transfer to an account at another bank or could withdraw cash at ATMs or branches.
CBDC Impact on Monetary Policy
In case CBDC gets implemented, the RBA feels that there could be implications on its Balance Sheet. Further, by bringing a small change in the issuance of CBDC and an equivalent might decline the amount of cash in circulation. However, it need not pose challenges for the implementation of monetary policy as monetary policy is not implemented through banknotes and coins. Monetary policy is influenced by the quantity of ESA balances plus the level of interest rates in the money market.
