No cash decline here and no need for central bank crypto currency, says RBA

RBA sees no compelling policy reason to introduce a central bank digital currency.

Unlike the precipitous decline of cash in Sweden, it was only falling gradually in Australia, with demand for banknotes not only increasing but rising significantly in the COVID-19 pandemic. Picture: AFP

The Reserve Bank sees potential financial instability and no compelling policy reason to introduce a central bank digital currency, despite active consideration of the move by other countries such as Sweden, Canada and China

The RBA also cast doubt over the future of so-called “stablecoins”, including the Facebook-sponsored Libra, which have emerged as a type of cryptocurrency designed to minimise price volatility and make them more attractive as a means of payment.

In a payments paper issued on Thursday, the central bank said it remained to be seen if Libra would “gain regulatory approval and become operational”.

The paper said that, unlike the precipitous decline of cash in Sweden, it was only falling gradually in Australia, with demand for banknotes not only increasing but rising significantly in the COVID-19 pandemic.

Also, advances like real-time payments through the new payments platform (NPP) meant that Australia compared favourably to other countries, with safe, convenient and low-cost payment services from commercial banks and other providers.

“The (RBA’s) view is that there is currently no strong public policy case to introduce a CBDC for retail use,” the paper concluded.

“Even though the use of cash for transactions is declining, cash is still widely available and accepted as a means of payment.

“Households and businesses are also well-served by a modern, efficient and resilient payment system that has undergone significant innovation in recent years, including the introduction of the NPP, a new, real-time, 24/7 and data-rich electronic payments system.”

In the meantime, the RBA said it would continue to provide reasonable access to high-quality banknotes “for as long as Australians wish to keep using them”.

The RBA’s view on a retail CBDC has not changed since 2017, when governor Philip Lowe said in a speech that the central bank had no intention to issue a retail or wholesale digital currency.

Shift to electronic payments

Dr Lowe said the ongoing shift to electronic payments would continue, but largely through products offered by the banking system rather than non-bank e-money providers or cryptocurrencies

However, banknotes would continue to occupy a place in the payments system.

In principle, the governor said, it would be possible for a retail CBDC to coexist with commercial bank deposits and private electronic payment systems.

But if a CBDC were issued, it would most likely be in a two-tier model, where the ultimate claim was on the central bank but the distribution and customer-facing aspects would be handled by the private sector.

The RBA paper said the two advanced economies to have done the most work on a CBDC were Sweden and Canada.

Sweden’s Riksbank had been considering an e-krona for several years to complement cash, largely because of the country’s rapid shift to electronic payments and the growing difficulty some households and businesses faced in continuing to use cash.

The Bank of Canada said last February it planned to build the capacity to issue a retail CBDC in case it became desirable; for example, if banknotes could no longer be used for everyday transactions, or where monetary policy was threatened by the adoption of some private-sector digital currency.

While there was limited information available about work by the People’s Bank of China, reports indicated that a pilot was well-advanced.

The RBA speculated in its paper that the main rationale for the PBOC’s move was to promote a bigger role for central bank money as an alternative to the e-money issued by the huge private sector wallet providers – Alipay and WeChat Pay.

The paper also canvassed some of the downsides of a CBDC, including higher funding costs for the banking system due to a potential switching out of bank deposits.

Commercial banks currently source about 60 per cent of their funding from deposits, with about two-thirds of that coming from at-call deposits.

If the banks were to suffer an outflow of deposits, the paper said more of their lending would have to be funded from equity or capital markets.

“The loss of deposit funding and greater reliance on other funding sources could result in some increase in banks’ cost of funds and result in a reduction in the size of their balance sheets and in the amount of financial intermediation,” the RBA said.

A CBDC could raise challenges during times of stress in financial markets.

Currently, there were practical limits on the amount of money able to be withdrawn from a bank through branches and ATMs in a crisis.

“However, in the presence of a CBDC, a run on the banking system as a whole would become feasible; if depositors had concerns about the entire financial system, they could seek to make large-scale transfers of commercial bank deposits into CBDC,” the RBA said

The central bank conceded that a bank-run scenario was highly unlikely in Australia, given the protection offered by the financial claims scheme to household deposits.