Australian CBDC receives unexpected interest but could hurt banks: RBA

A central bank digital currency (CBDC) pilot program in Australia has received more than 140 use case proposals from the finance industry. Still, the Reserve Bank of Australia (RBA) warns that it could displace the Australian dollar and result in people avoiding commercial banks entirely.

The RBA released a speech on Dec. 8 to be given by Assistant Governor Brad Jones at a central bank conference held from Dec. 8 to Dec. 9 local time, in which Jones spoke at length about what effect a CBDC could have on the Australian economy.

Jones notes that the RBA has been surprised by the industry interest they have received since releasing a white paper on Aug. 9, with over 80 financial entities proposing use cases covering many areas such as e-commerce, offline and government payments.

The team working on the pilot eAUD program is working out which of the proposed use cases to take into its pilot phase early next year and is expecting to publish a report on the project around the middle of 2023.

Jones also discussed the potential risks that are associated with an Australian CBDC and pointed to liquidity issues and other issues the banks could face if a CBDC becomes the preferred source of holdings.

For example, with deposits of Australian residents such as savings accounts now making up over 60% of total funding for their banks, enough Australians choosing a CBDC over the Australian dollar could result in banks not having sufficient capital to lend to consumers, which in turn would make it harder for the RBA to transmit monetary policy, he said.

*Funding composition of banks in Australia. Source: RBA*

Jones also notes that Australians preferring to hold their funds in a “risk-free” CBDC could lead to bank runs, with Australians withdrawing deposits en masse.

However, the Assistant Governor suggests CBDCs could also provide Australians with many benefits, such as privacy benefits — arguing that the central bank has no incentive to use personal data which can be exploited by private organizations — and could help safeguard monetary sovereignty that may be lost if a stablecoin or foreign CBDC fills a domestic vacuum.

He also points to the potential for offline transactions to increase the resilience of existing payment systems, in addition to increased efficiency and cost reductions for end-users.

Jones finished the speech by adding that Australians should be confident the Reserve Bank will continue to issue banknotes “for as long as they place value on them as a public good.”

Critics are often concerned that the introduction of CBDCs will end with banknotes being phased out. However, a fear which is given credence by Nigeria’s move to further limit cash withdrawals on Dec. 6 following the issuance of the eNaira.