Australia's Central Bank Pairs With Industry on Digital A$ Projects

Australia's central bank, the Reserve Bank of Australia (RBA), has collaborated with industry on multiple digital A$ projects. Through these initiatives, RBA aims to maintain a stable currency, full employment and economic growth throughout Australia.

The Reserve Bank of Australia is launching a pilot program to explore potential uses and economic advantages of central bank digital currency (CBDC). They're working in collaboration with the Digital Finance Cooperative Research Centre, an industry group supported by government.

What is a CBDC?

CBDCs are virtual money issued and supported by a central bank, unlike cryptocurrencies which lack this backing and instead link to physical currencies or other financial instruments.

Some cryptocurrencies are linked to the value of a commodity, while CBDCs are tied directly to fiat currency values. This allows for faster payments and greater currency stability - especially when dealing with foreign currencies.

A CBDC provides several advantages, such as lower transaction costs and easier access to the financial system. Furthermore, they ensure increased security and transparency that can be advantageous for both consumers and businesses alike.

There are various approaches to CBDCs that can be tailored to meet different requirements, such as account-based models and token-based solutions. Both provide universal access, but the design of each depends on regulatory requirements and security considerations.

Account-based approaches, such as DCash in the Eastern Caribbean, depend on consumers holding deposit accounts directly with a CBDC. These accounts would be linked to user identities and allowed payments to be verified by banks while meeting KYC and anti-money laundering/combating the financing of terrorism (AML/CFT) regulations.

However, these systems require robust identity management in order to create a single unique identifier for each person across payment systems. As such, central banks must monitor and protect the privacy of CBDC users.

Hedera, a public ledger, can serve as an effective verification tool for CBDCs operating within permissioned blockchain frameworks. This boosts transaction speed and efficiency while eliminating counterparty credit risk for both parties involved.

Wholesale CBDCs could be beneficial in expediting domestic and cross-jurisdiction payments, where time lags in settlement can make transactions less efficient. With wholesale CBDCs, these transactions can be settled more quickly and securely - helping prevent banking fraud as well as providing merchants with the ability to pay without needing intermediaries. Retail CBDCs would be even more advantageous for individuals by providing them with direct payment capabilities without needing intermediaries.

What is the RBA’s CBDC Pilot Project?

The Reserve Bank of Australia (RBA) recently unveiled a multi-year pilot project to assess the economic advantages and potential risks related to central bank digital currency, or CBDC. They are teaming up with 14 banks, fintechs and payments companies on this venture.

The RBA has invited industry participants to submit use cases that demonstrate the potential of CBDCs in Australia, and has selected a few for its pilot. Furthermore, it has extended the deadline for submissions that have potential benefits but are not yet ready for implementation in the transactional pilot.

Participants include Australian and New Zealand Banking Group Limited, Mastercard, Monoova, the Australian Bond Exchange, DigiCash, and Commonwealth Bank. With this project the central bank aspires to become one of the leading global central banks in exploring how digital cash could enable commerce within the rapidly developing blockchain economy.

According to the RBA's white paper, the CBDC project is scheduled for completion by mid-2023 and will "examine innovative use cases." It also examines the benefits, costs and regulatory ramifications associated with establishing a CBDC.

Central bank digital currency, or CBDC for short, is a digitalized version of a country's national fiat currencies that is denominated in the issuing nation's own currency. It serves to eliminate the middleman and create more efficient value transfer systems without depending on commercial banks or clearing houses for valuation transfers.

This pilot project is intended to give the RBA and Australia's Digital Finance Cooperative Research Centre (DFCRC) an idea of how a CBDC would operate in practice, while giving industry an opportunity to provide their input on potential benefits of a CBDC for Australia's economy and financial system.

The pilot will utilize a CBDC ledger managed by the RBA and DFCRC, as well as identity validation services for end users and Know Your Customer (KYC) processes for authorized participants. The platform will be built upon Consensys' private Ethereum network Quorum.

What is the RBA’s CBDC Research Project?

The Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) have joined forces on a year-long pilot project to assess the potential economic advantages and uses cases of central bank digital currency, or CBDC. Industry participants are invited to suggest innovative use cases and business models that could be supported by a CBDC.

This project is being funded by the Reserve Bank of Australia, Government-backed DFCRC and universities. It seeks to identify cases and business models suitable for CBDC support as well as gain a better insight into its technological, legal and regulatory requirements.

This project stands apart from other tests of CBDCs, such as the Fed's tokenized currency or Japan's DCash pilot which have only been conducted on a limited scale. These pilots have been used to gauge how a CBDC will impact traditional payments systems.

Advocates of CBDCs argue they can speed up and reduce transaction costs, promote financial inclusion and give central banks more freedom in setting monetary policy. Yet progress on CBDCs has been slow; only a handful of countries have either launched them yet or are in the process of doing so.

Today, the Reserve Bank of Australia (RBA) joined 14 banks, fintechs and payment companies to investigate potential uses and economic benefits from a CBDC. This puts them ahead of most global central banks racing to determine how digital cash can facilitate commerce within the emerging blockchain economy, according to the RBA.

ANZ and Commonwealth Bank are among the participating institutions creating "specific use cases" to showcase how a CBDC could be utilized to offer innovative payments and settlement services. These use cases are expected to involve customers of these institutions or their clients.

Furthermore, the RBA will collaborate with regulators to guarantee that any effects from the CBDC pilot do not have unintended consequences. It plans on publishing a report that examines each use case developed as well as any benefits or risks related to them.

The project is part of the 10-year, $180 million Digital A$ Program launched late August by RBA and DFCRC to examine the development and use of emerging digital assets. It primarily focuses on CBDCs, stablecoins, and other digital currencies with the potential to disrupt traditional payment systems.

Why is the RBA’s CBDC Pilot Project Important?

The Reserve Bank of Australia (RBA) has initiated a research project to examine the use cases and economic benefits associated with CBDCs. Through collaboration with the Digital Finance Cooperative Research Centre (DFCRC), it hopes to identify instances and business models which could be supported by CBDCs, as well as identify operational, technology, policy and regulatory obstacles that need to be overcome.

In its pilot project, the RBA has invited 14 banks, fintechs and payments companies to explore the potential of digitally issued Australian dollars issued by the central bank. These include ANZ, Commonwealth Bank and Mastercard.

Many countries around the world have launched their own digital currency pilot programs. China's eCNY was launched in 2020 and has been extensively tested; Sweden's e-krona program ran until 2022, while The Bahamas followed suit until 2022.

Global central banks are scrambling to figure out how best to employ distributed ledger technologies, and the RBA's initiative to partner with industry on its CBDC research project puts it ahead of the competition. The pilot project seeks to identify use cases which cannot be supported by existing payment and settlement infrastructure in Australia.

According to a press release from RBA and DFCRC, they have collaborated on this project by inviting industry participants to develop use cases that showcase how CBDC could offer innovative payment and settlement services. A small-scale pilot CBDC will be utilized for testing these use cases within a ring-fenced environment.

"To date, we have received a substantial number of submissions from an array of participants," the RBA's announcement reads. It then goes on to mention that various industry players will be responsible for designing and running their own technical platforms in support of approved functions under the CBDC pilot project.

In addition to ANZ and Commonwealth Bank, the RBA has invited other fintechs to participate in its pilot program, such as Monoova - a blockchain platform for digital asset capabilities; Circle's USDC stablecoin which was used for the first Australian bank-issued Australian dollar (A$DC) public permissionless blockchain payment last March; and Canvas Digital which uses zero-knowledge rollups on Ethereum for transactions.