Use of a central bank digital currency (CBDC) in Australia could increase the efficiency and resilience of our payments system; however, questions remain over the legality and the substantial regulatory changes required to implement these stablecoins, a newly released report by the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) has revealed.

The report assessed the results of a recent “limited-scale” pilot of a CBDC – a stablecoin, or digital money, issued by a central bank – by the RBA, which invited participants from the financial services industry to demonstrate how a CBDC could innovate payment and settlement services, potentially benefiting both consumers and businesses, and enhance the functioning of the payments system.

According to Brad Jones, Assistant Governor (Financial System) at the RBA, “key findings from the project will help to shape the next phase of the RBA’s research program into the future of money in Australia.”

Just 16 out of 140 use case submissions were selected by RBA/DFCRC to participate in the CBDC transaction trial, including submissions from the Commonwealth Bank of Australia (CBA), Mastercard, and ANZ Bank, which was involved in four separate use cases.

Each of the 16 use cases was trialled over the past year.

The report, which summarised the main findings from each use case, identified a number of benefits of implementing a CBDC, including:

• The enablement of ‘smarter’ payments: including support for a range of complex payment arrangements not well supported by existing payment systems. For instance, submissions highlighted the possibility of writing code, such as ‘smart contracts’, that could enable multi-party or multi-stage payments to execute automatically and simultaneously, reducing the need for costly reconciliation processes and the risk of failed transactions.

• The ability to claim on the central bank: Because the project involved a direct claim on the central bank, the CBDC was effectively “free of credit and liquidity risk”, thus eliminating counterparty risk when used as a medium of exchange. For participants, this was particularly valued in the settlement of high-value transactions, such as financial assets and property, where the risks associated with settlement in traditional commercial bank money were perceived to be greater.
• The tokenisation of financial and other real assets on DLT/blockchain platforms, enabling ‘atomic’, or instantaneous, settlement of transactions. For instance, the ability to instantly settle traditional debt securities, reduced from days, as well as facilitation of the trade of other liquid assets such as carbon credits or biodiversity credits, and supplier invoices.
• Increased transparency in CBDC balances and transactions: a feature of some DLT, or blockchain, platforms, which enabled end users to independently verify CBDC balances – for example, where CBDC is used as a risk-free asset to support the issuance of a stablecoin. However, it was noted that this feature was not “universally valued”, with transaction privacy necessary for a number of banking and other financial services use cases.
• Enhancement of payment system resilience: for instance, providing an alternative way to make payments, such as the ability to make offline electronic payments in situations where electricity and/or telecommunication services were not available. 

The project, however, also exposed various unresolved legal, regulatory and operational issues on using a CBDC in Australia, which the RBA and DFCRC noted require “further consideration as part of future research” for a fiat digital currency.

Notably, unlike other similar CBDC research projects, the pilot was structured as a real legal claim on the RBA rather than a proof-of-concept, “[forcing] the project to confront some of the legal and regulatory issues that would arise if a decision was ever taken to issue a CBDC.”

“Given the use cases involved pilot CBDC and real customers, participants in the transactional pilot needed to demonstrate that their use cases met all relevant legal and regulatory requirements.”

One notable concern was uncertainty around whether CBDCs were regulated as ‘financial products’ under the Corporations Act 2001.

Questions were also raised around the enablement of atomic settlement – in particular, whether the existing licensing and regulatory framework for clearing and settlement facilities under the Corporations Act are “well calibrated to the risks associated with new business models facilitating atomic settlement of transactions in tokenised asset markets”.

Another concern was around the issuing of smart contracts, and “how regulatory responsibility could be allocated if the entity deploying the smart contract could not be identified, such as in emerging decentralised finance (DeFi) applications”.

There was also uncertainty around the regulation of tokenised assets under the AML/CTF Act, with questions around whether the pilot CBDC was technically characterised as ‘money’ or another type of asset, and whether the technology providing access to the pilot CBDC (e.g. wallet software) could be characterised as a virtual ‘stored-value card’, an ‘account’, or something else.

“While there is no question that services involving a CBDC (should one be issued) should be subject to the AML/CTF Act, the nature of regulatory obligations and when they arise would ultimately depend on how the CBDC and related services are characterised in the supporting legal framework,” the RBA wrote.

Some technical issues were also addressed, but were ultimately not the focus of the report, the RBA acknowledged, with the Reserve noting that the choice of an Ethereum-based DLT implementation for the pilot CBDC platform “provided a customisable and open technology that is widely used for digital asset innovation”.

“Given the technical design of the pilot CBDC platform was not a primary focus of the project, further work would also be required to understand how different technical implementations could address non-functional requirements that are likely to be important for a CBDC, such as scalability, security, and resilience.”

Dr Andreas Furche, chief executive of the DFCRC, said: ‘The report underscores that innovation in finance is a continuous journey. The strong industry engagement in this project speaks to the importance of collaboration between central banks as ultimate issuers of national currency, and industry experts driving its potential use cases.

“As we move forward, our research on CBDC could look to target use cases where CBDC has the best potential to provide an infrastructure layer for further innovation in financial products and services.”