Central banks look to a less racy alternative to counter the crypto craze

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A CBDC is a digital token that is a liability of the central bank – a banknote to the digital world. They would be different from the electronic money you see when you open a banking app, which is a responsibility of the commercial bank.

No rich country has issued a CBDC yet, but China is testing one, and dozens of central banks are frantically studying the subject.

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Their reasons for doing so are varied. Some say we will need a digital equivalent of cash when people switch to electronic payments; some claim that CBDCs will increase competition; while China’s digital yuan will give the government greater powers of surveillance over its people.

But what is particularly interesting is the idea that CBDCs could push back the incursion of privately issued cryptocurrencies.

The Swiss-based Bank for International Settlements, a strong supporter of CBDCs, has highlighted these risks. In recent months, he has urged central banks to design CBDCs in response to the crypto boom and the expansion of tech giants into payments, which could challenge banks’ business models.

Locally, the RBA’s director of payments policy, Dr Tony Richards, acknowledged these concerns last week.

While the RBA is not convinced that we need the CBDCs, Richards said there was an argument abroad that a new digital form of central bank money “could be important in preserving confidence in national currencies and the role of fiat currencies at the heart of monetary, financial, and payment systems. ”He also noted the risk that technology companies could end up dominating payments.

Which tech giants would central bankers be most concerned about?

The main competitor is expected to be Facebook, which is behind a long-standing proposal to introduce a new global cryptocurrency known as Diem. If that happens, Diem would be a type of ‘stablecoin’ – a crypto asset linked to fiat currency – with the aim of limiting volatility.

Ross Buckley, KPMG-KWM Professor of Disruptive Innovation at UNSW, explains that one of the main reasons central banks put so much effort into reviewing CBDCs is Facebook’s plan to introduce its own currency. private.

Mark Zuckerberg plans to launch a cryptocurrency called Diem.Credit: Bloomberg

“Due to its global reach, Facebook’s Diem could become systemic very quickly. So if they do go, it could pose a threat to the monetary sovereignty of established nations, ”says Buckley, who has done extensive research on CBDCs and fintechs.

Buckley says central banks recognize that Facebook has the power to shake up the global payments system and that monetary authorities must be ready to respond. They could ban Diem or offer something better, like a CBDC.

Will we see a CBDC in Australia?

The RBA and Banks are researching wholesale CBDCs (for use by banks and other large businesses) and many believe they are likely.

Richards also says the RBA is stepping up its research on retail CBDCs. But don’t expect to get your hands on an eAUD anytime soon – the RBA isn’t convinced that we need digital banknotes for consumers, given that we already have a real-time digital payment system.

And the RBA is not alone – the CBDCs are divisive. Despite all the interest in this area, some experts are unsure what problem a digital ticket would solve.

Managing director of payments consultancy The Initiatives Group, Lance Blockley, said there was no obvious reason for the RBA to introduce a new form of e-money, given the many alternatives consumers already have. to pay in cash.

While not convinced by CBDCs, Blockley says there is a crucial difference between how CBDCs and cryptocurrencies, such as bitcoin, would be used.

While bitcoin and other cryptos are primarily of interest as a volatile speculative asset, CBDCs would have nothing to offer speculators. They would only be useful to facilitate new types of payments and give people another safe place to put their savings.

“I don’t think the current binge eating crypto has much to do with its use to make payments. It’s an asset game, as central banks turn to digital currencies to make payments, ”Blockley said.

The idea of ​​digital banknotes may not generate enthusiasm for cryptocurrencies such as bitcoin. But if they end up being a useful new form of money, they could play a key role in how the mainstream financial world responds to the huge changes triggered by the cryptocurrency boom.

Ross Gittins is on leave.

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