An evolution of Australia’s monetary arrangements is a step closer this week, with the Reserve Bank of Australia (RBA) and Commonwealth Treasury releasing an important new paper on central bank digital currency (CBDC). The paper, Central Bank Digital Currency and the Future of Digital Money in Australia (Paper) (available here), summarises RBA and Treasury research to date and sets out a roadmap for future work in Australia. The related speech by Brad Jones, Assistant Governor (Financial System) of the RBA, on financial innovation and the future of CBDC in Australia (Speech) is available here.
CBDCs present a major opportunity to ensure Australia’s monetary system is fit for purpose in a digital age, amplify its functionality, and support the ongoing importance of the Australian Dollar (AUD) in the global digital economy. Central to the success of any such initiative is industry engagement. In particular, it is critical that industry engages with forthcoming initiatives to explore viable use cases and consider the benefits that a modernised representation of AUD could bring for the efficiency, safety and competitiveness of the Australian financial system. Similarly, an ongoing eye on global developments and transnational collaboration opportunities will help ensure that one of the most important use cases for CBDCs (trusted cross-border monetary flows) can also develop.
A quick summary
Some highlights from the Paper and Speech include:
- The current assessment of the RBA and Treasury is that:
- wholesale CBDC has “potentially more tangible benefits and use cases, and so from a relative point of view, it is a more promising topic for further applied research”; whereas
- there is “no clear public interest case to issue retail CBDC in Australia as yet” (noting that a retail CDBC for use amongst the general public would “entail material changes to the financial arrangements in Australia”).
- The most compelling potential benefit of a wholesale CDBC is identified as supporting innovation in wholesale markets, particularly for the tokenisation of asset markets, including in light of its potential to increase efficiency in the issuance and trading of assets, reduce settlement risk and reduce reliance on intermediaries.
- The RBA is making a strategic commitment to prioritise its work agenda on wholesale digital money and infrastructure, including wholesale CBDC.
- There is a significant applied research program underway, including the launch of “Project Acacia” to explore, with industry input, uses for CBDC in settling transactions in wholesale tokenised asset markets. Key topics will include understanding new ledger arrangements and concepts such as “programmability” and “atomic settlement” in tokenised markets.
- Retail CBDC requires further consultation, with the RBA and Treasury finding there is no clear case for this new form of digital money yet.
- Industry, academic and public consultation and engagement will continue.
- Practically, a CBDC (whether it was retail or wholesale) would be issued by the RBA.
- The Australian Government would be the ultimate decision making authority on whether to introduce a retail CBDC and, if introduced, may have to enact enabling legislation and regulatory reforms.
- For a wholesale CBDC, the critical first step is to determine its design, scope of use and features, and then consider whether any legislative and regulatory amendments are required to facilitate the desired structure.
- If a public policy case does emerge, the RBA, Treasury and Australian Government would closely consult ahead of any decision to issue a CBDC – retail or wholesale.
We have set out some more detail on some aspects of the Paper and Speech below.
The Hong Kong Monetary Authority is simplifying e-CNY usage for residents. The Monetary Authority of Singapore is facilitating cross-border e-CNY transactions for tourists. And the Bank for International Settlements, the Swiss National Bank and SIX have concluded their 'Project Helvetia III' pilot, exploring wholesale CBDCs for seamless transaction settlements with tokenised assets.
In our latest update on what’s happening in the world of CBDCs, there’s a strong theme of cross-border connections, research and progressive pilots. You can also watch KWM Partner Urszula McCormack in conversation with Global Digital Finance co-chair Greg Medcraft at our KWM Digital Future Summit.
Visit KWM Pulse for more.
What is a CBDC (and other forms of digital money)?
At its core, a CBDC is a digital representation of a central bank liability. Notably:
- CBDCs are typically split into two types: retail CBDC and wholesale CBDC;
- the digital infrastructure used to record and transfer CBDCs does not necessarily need to involve blockchain or other distributed ledger technology;
- neither a retail CBDC nor wholesale CBDC must (by definition) be a claim directly enforceable against a central bank – indeed, some markets have adopted, or are exploring, an intermediated model where commercial banks are involved; and
- CBDCs can co-exist with other representations of money, including physical cash.
The Paper states that retail CBDC can be thought of as a digital version of cash issued by the central bank that would be denominated in an existing unit of account (such as the Australian dollar). Importantly, this new form of digital money would be available for use by all households and businesses, and would be convertible with other forms of money, like bank deposits or cash.
A wholesale CBDC differs from a retail CBDC in that it could be held only by a limited range of entities for use in wholesale payment and settlement systems. The Paper contemplates that a wholesale CBDC could be used in wholesale payments and settlements between financial institutions. Significantly, it notes that:
“While it is possible that the group of eligible entities using a wholesale CBDC could eventually extend beyond financial institutions to include corporates, such a scenario is sufficiently far off, and would entail such a different set of issues, that we do not pursue it in this paper”.
However, limiting the entities eligible to access a wholesale CBDC may have significant impacts on the potential use cases.
The table below, from the Paper, shows the differences between CBDCs and other existing and emerging forms of money.
The Paper also acknowledges that, in addition to the various options for state-backed digital currencies, the private sector itself may react to “evolving payment preferences and technological developments” by developing and issuing their own “types of money”, including Australian dollar denominated stablecoins and tokenised bank deposits. It is contemplated that these could circulate in the absence of, or alongside, a CBDC.
Technical architecture
The choice of technology to issue and record CBDC is another key decision point, with pilots and prototypes ranging from traditional to newer distributed ledger technologies, but the Paper also contemplates that the features offered by DLT may also be achievable using other traditional technologies and that DLT presents some challenges (eg regarding complexity, scalability and complex legal and regulatory issues).
In our experience, three further questions that commonly arise are:
- Who builds and maintains the infrastructure?
- How does the infrastructure interact with existing ledger arrangements and payment systems?
- Is there an opportunity to interoperate with transnational CBDC platforms (and if so, how)?
The case for pursuing CBDCs in Australia
The Paper evaluates various benefits, risks and other considerations of wholesale and retail CBDCs, including the following:
|
Potential Benefits
|
Risks and other considerations
|
Example
uses 2
|
|
|
|
All systems go - green light on wholesale CBDC work
The Paper conveys that the focus of the RBA and Treasury will be on wholesale digital money, with an assessment that:
- issuance of a wholesale CBDC in Australia could represent a more incremental change to the status quo;
- relative to retail CBDC, there are likely to be fewer new issues and uncertainties to resolve; and
- wholesale CBDC has potentially more tangible benefits and use cases, and so from a relative point of view, it is a more promising topic for further applied research.
Importantly, the current Australian financial system already has a form of central bank-backed wholesale digital money – being the balances held by eligible institutions with the RBA in Exchange Settlement Accounts (ESAs) in the Reserve Bank Information and Transfer System (RITS), and so we expect it will be important to examine what incremental benefit a wholesale CBDC offers beyond existing ESAs. In this regard, the Paper notes that, compared to the existing ESAs, a wholesale CBDC could use new technology to offer greater functionality or allow new types of transactions such as achieving “atomic settlement” of transactions in wholesale tokenised asset markets. However, the Paper also contemplates that another possibility is that the supporting infrastructure for ESAs is upgraded to provide for more functionality than is currently available.
There are also important by-design constraints of ESAs, including that balances generally need to be held beneficially, and not (for example) on trust for a third party. We expect there may be demand for alternate structures for a CBDC, even within a wholesale ecosystem.
Although any reforms may be some time away, financial market infrastructure (FMI) operators and participants should understand the possible impacts on their business, including interoperability with any new infrastructure. This is particularly the case because the focus of the Paper on, and the proposed use case of wholesale CBDC for, tokenised asset markets contemplates the need for tokenised markets to be interoperable with traditional infrastructure for a considerable period. In this regard, it remains important for FMI operators and participants alike (and governments, central banks and regulators) to consider the Principles for Financial Market Infrastructures (PFMIs), including the point recognised in the PFMIs that it is safest to conduct asset settlement in central bank money where practicable. In the context of FMIs, it is important to also consider the reforms to the regulation and supervision of FMIs, and resolution of domestic Australian clearing and settlement facility licensees, which have passed the Australian Parliament and received Royal Assent on 17 September 2024.
The road ahead – key issues for consideration
The Paper and Speech acknowledge that there are a range of complex issues to consider and resolve, including:
- governance and legal issues involving smart contracts and tokenised securities;
- non-functional considerations, including the impact of issuing wholesale CBDC on central bank balance sheets and the trade-offs between transaction processing speed and ledger/platform security, liquidity, netting benefits, settlement finality, transaction privacy and programmability; and
- the monetary and financial stability implications of widening access arrangements to wholesale central bank money and the impact this could have on bank stability.
In relation to financial institutions that may be eligible to access a wholesale system, dealing with a CBDC and considering its potential use cases raises a range of complex issues, including in relation to:
- the prudential treatment of CBDCs (noting that the prudential treatment of CBDCs is not currently described in the existing Basel framework and the Basel Committee has indicated that it will give further consideration to the treatment of CBDCs as they are issued); and
- the challenges involved in considering the potential benefits, costs and risks associated with use cases, including the relative impact of using digital financial market infrastructure and atomic settlement compared to traditional financial market infrastructure from a capital, netting and liquidity perspective.
Market participants should be encouraged by the assessment in the Paper to explore potential use cases in the area of tokenisation of asset markets (noting that the Paper states that the most compelling of the potential benefits of wholesale CBDC is to support innovation in wholesale markets). These CBDC developments follow other efforts by market participants to prepare for a tokenised future. The International Swaps and Derivatives Association, for example, has long been at the forefront of considering the benefits of the tokenisation of financial markets, having recently published its recent work on model provisions for tokenised collateral for Variation Margin Credit Support Annexes (available here), its guidance note for tokenised collateral (available here) and its paper on netting and collateral enforceability in respect of digital assets (available here). It is worth noting that there is still some uncertainty as to how best tokenisation in asset markets can be supported. Yet it is expected that the RBA and Treasury will explore this in their forthcoming “active and multi-faceted” work program on CBDC over the coming years (which we discuss below).
Yellow light on retail CBDC, for now
The RBA and Treasury have found that there is no clear public interest case for a CBDC for Australian retail customers as yet. This is informed in part by a view that “Australians are generally well served by the capabilities and resilience of our current retail payments system”. However, the RBA and Treasury have indicated that they “remain open to the possibility that this assessment could change over time as the benefits and costs of retail CBDC are better understood, both internationally and in a domestic context”.
Retail CBDCs involve a wide range of structural, legal and design issues that need further consultation, such as implications for monetary policy implementation and for financial institutions. For example, if a new form of digital money became a substitute for commercial bank deposits, there may be a higher risk of disintermediation and, in times of financial stress, bank runs.
The Paper sets out a thoughtful explanation of various issues regarding the potential positive, and negative, impact that CBDCs could have on systemic stability and on financial institutions.
It will be very important to carefully consider the impact of the issuance of a CBDC on the stability of financial institutions and the financial system generally. In referring to work done by other central banks, the Paper states:
“A related concern associated with the issuance of a retail CBDC is that it could threaten financial stability by facilitating bank runs if households lost confidence in the banking system” and acknowledges that, in “the presence of a retail CBDC, a run on the banking system would become more feasible; if depositors had concerns about the entire banking system, they could seek to make large-scale transfers of their commercial bank deposits into CBDC”. Reassuringly, the RBA and Treasury emphasise in the Paper that, “given the central role of the financial system in the Australian economy, a retail CBDC would not be issued in Australia without careful consideration of the impacts on the stability of the financial system, both in normal times and in conditions of financial stress. The RBA and the Treasury do not yet have a position on what the appropriate policy responses would be and have been exploring the trade-offs among them”.
These issues are likely to be top of mind, not only for the RBA and Treasury, but also for the Australian Prudential Regulation Authority (APRA) and prudentially regulated institutions assisting APRA to develop resolution plans. As proposals for the issuance of CBDCs develop, it will be important to consider the impact of any such significant change to our monetary arrangements on liquidity, potential deposit outflows, valuations and other aspects of resolution plans.
A range of policymakers and transnational bodies are also considering these issues abroad. For example, the Organisation for Economic Co-operation and Development (OECD) explored the role of “public money” (whether in digital or other form) in its July 2023 policy paper, Central Bank Digital Currencies (CBDCs) and democratic values, and highlighted a number of opportunities, challenges and retail CBDC architectures. We are aware of several jurisdictions also considering use cases and trust-enhancing features, with multiple pilot programmes afoot.
What’s next for CBDCs?
In pursuing their CBDC program, RBA and Treasury have announced several initiatives we set out in the table below.
|
Description
|
Timing
|
Example
uses 2
|
|
|
Project Acacia: Wholesale Digital Money and Infrastructure
|
In his Speech, Brad Jones noted that Project Acacia aims to build on the lessons from the RBA’s CBDC pilot from 2023 by focussing on “opportunities to uplift the efficiency, transparency and resilience of wholesale markets through tokenised money and new settlement infrastructure”. The Paper states that a “key question is whether there is a need for a new form of tokenised central bank money in the form of a wholesale CBDC to maximise the benefits from asset tokenisation, or whether there are enhancements to existing infrastructure that could support settlement using ESA balances, perhaps complemented by privately issued tokenised money such as tokenised deposits”. The first phase will explore how different forms of wholesale digital money (such as ESAs, wholesale CBDC and deposit tokens) could support settlement of transactions in tokenised asset markets. A key focus of the project is whether enhancements to existing infrastructure would be sufficient to maximise the benefits of asset tokenisation or a wholesale CBDC is needed. A further phase of this work will examine the role that new forms of digital money could play in improving cross-border payments, most likely in collaboration with other central banks. |
First phase: underway and expected to complete in the second half of 2025 Further phase: from 2026 |
|
|
Industry and academic CBDC advisory forums
|
The RBA and Treasury will launch and convene regular industry and academic CBDC advisory forums to gather input from key stakeholders and allow structured systematic engagement on both retail and wholesale CBDCs. |
From the first half of 2025 |
|
|
Public engagement on retail CBDC
|
A range of consultation options, including “deliberative workshops” (with groups that are either representative of the broader Australian population or of particular interest groups) and representative surveys following a period of education outreach, will help inform the RBA and Treasury’s understandings of the public’s needs, preferences and concerns regarding retail CBDC. |
From 2025 |
|
|
Enhanced Regulatory Sandbox
|
As part of a wider review into the Enhanced Regulatory Sandbox framework, Government and Treasury will assess how the framework might encourage competition and innovation in payments, payments infrastructure and new forms of digital money like CBDCs. In his Speech, Brad Jones noted that Treasury will work with the Government to consider the recommendations of an independent review into the sandbox, and, where appropriate, implement reforms. |
From 2025 |
|
|
Retail CBDC considerations paper (based on further research and experimentation, including with industry)
|
A follow-up paper on RBA and Treasury thinking regarding merits, design issues and the potential form of a retail RBDC, in addition to further exploring potential benefits and use cases of retail CBDC. It also includes an assessment of experiences in other jurisdictions. Topics for research include distribution models, offline functionality, privacy, financial stability and how CBDC could support payments innovation and competition. |
2027 |
|
|
Stepping up engagements with peer jurisdictions
|
The RBA and Treasury will continue to engage with policymakers internationally to ensure Australian CBDC research reflects lessons from aboard. |
Ongoing |
|
What about cross-border collaboration?
The Paper highlights a number of cross-border collaborations including Project Dunbar and Project Mandala (in which Australia was involved), as well as Project mBridge and Project Agorá. The Paper also contemplates that a further phase of Project Acacia will examine the role that new forms of digital money could play in improving cross-border payments, most likely in collaboration with other central banks. These collaborations should be watched with interest.
What does this all mean and what should you do?
We are approaching a critical point for the future of Australian, and international, monetary arrangements.
Money underpins the modern financial economy (and, by extension, real economy). The effective functioning of our monetary arrangements is fundamental to the smooth operation of our economy. Digitisation, developments in technology and business structures, both for payments and more general developments, are already changing important parts of our financial system and the way we transact. As the Paper states, these developments raise questions as to whether available forms of money are fit for purpose in a digital age.
Any change in our monetary arrangements or financial system, whether evolutionary or revolutionary, must be very carefully considered, lest unintended consequences adversely affect individuals, businesses or the stability of the system. Accordingly, it is imperative to understand the impact that the introduction of any form of digital money could have on your business and the opportunities that this would present. This is the case irrespective of whether distribution is limited to financial institutions, some other subset of wholesale market participants or generally available to the public.
This Paper, and the upcoming research initiatives, present an opportunity to reimagine the foundations of our financial system, infrastructure and markets, and are too important to disregard. As Brad Jones noted, quoting Larry Summers, “Money shapes economies, economies shape nations, nations shape history”. Now is the time to shape our monetary future. As we noted above, we think it is critical that industry engage with these upcoming research initiatives to proactively consider CBDC reform in Australia, including by exploring uses cases and benefits that strengthen the efficiency, security and competitiveness of the Australian financial system.
We are here to help
We have been on this journey in the development of a modern form of money and development and maintenance of a safe and efficient financial system since the beginning, including early work on wholesale CBDC research (see our alert on Project Atom here) and pilots exploring potential use cases of CBDC (see our alert on the RBA and Digital Finance Cooperative Research Centre here).
When thinking about the future of money, it is really important to understand the interactions with other important developments in our financial system, including:
- reforms to payments and payment systems (see more Regulatory renaissance: treasury releases draft legislation to regulate BNPL providers - KWM, Radical overhaul underway for Australia’s payments system - KWM and Modernising Australia’s financial system - Developing a Strategic Plan for the Payments System - KWM);
- digital asset reforms (see more Fintech regulatory timeline - KWM and Digital Payments & Virtual Assets - KWM);
- reforms to the regulation, supervision and resolution of financial market infrastructure;
- resolution planning for banks, insurers and superannuation entities;
- development of the data economy (see more Rebooting the system – the Government announces its plans for the Consumer Data Right - KWM, Breaking down the barriers - operational enhancements set to better facilitate participation in the CDR - KWM, 5 critical things for the Consumer Data Right in 2023 - KWM and Consumer Data Right in 2023 - KWM);
- the July 2024 Consultation on Central Clearing of Bonds and Repos in Australia by the Council of Financial Regulators; and
- many more.
Our team is here to help you pull together the threads of all these developments, understand the opportunities they present for your business and participate in the upcoming research program.
Please do get in touch with us if you would like to discuss how we can help.
