RBA project finds efficiency gains in wholesale digital currency

Any introduction of a wholesale central bank digital currency is still some years away, despite a Reserve Bank project finding that it could deliver efficiency gains.

A central bank digital currency could deliver efficiency gains and improve risk management in wholesale financial market transactions, according to an RBA report. Picture: iStock

Any introduction of a wholesale central bank digital currency is still some years away, despite a Reserve Bank project finding that it could deliver efficiency gains and improve risk management in financial markets.

Announcing the findings of the RBA’s long-running Project Atom, assistant governor, financial system, Michele Bullock said on Wednesday that the work demonstrated the potential for a wholesale CBDC and digitised assets to improve efficiency, risk management and innovation in wholesale financial market transactions.

“The project also demonstrated the benefits of collaboration in advancing our knowledge in this area,” Ms Bullock said.

“The bank will continue its research on CBDCs as part of its strategic focus area on supporting the evolution of payments.”

Project Atom, which brought in external partners Commonwealth Bank, National Australia Bank, Perpetual and blockchain technology company ConsenSys, was a collaborative research project undertaken over the past year.

CBA head of blockchain and digital assets Sophie Gilder said it was likely to be “some years” before the concept investigated in the project became a commercial reality.

There were several important issues, she said, that were not part of Project Atom, including a preferred structure, scalability, cyber risk and 24/7 availability.

“But we proved that some elements would add to the efficiency and transparency of the syndicated loan market, which is ripe for digitisation to replace paper processes and phone calls,” Ms Gilder said.

While no agreement had been reached on further work to be undertaken, she said CBA was open to more collaborative work with the RBA on a wholesale CBDC.

Project Atom examined the implications of a wholesale CBDC using distributed ledger technology by developing a proof-of-concept for wholesale market participants in the funding, settlement and repayment of a tokenised syndicated loan.

Reserve Bank assistant governor Michele Bullock. Picture: AAP

The proof-of-concept incorporated a two-tier distribution model for issuing and distributing the CBDC, where the central bank is responsible for issuing CBDC to commercial banks holding exchange settlement accounts.

The banks, in turn, act as sponsors for the wholesale market participants, and are responsible for ensuring that only eligible parties can access the CBDC.

The advantage of a two-tier distribution model is that the banks keep responsibility for a wide range of customer-facing activities, such as customer support, account-keeping services, transaction monitoring and anti-money laundering requirements.

The project explored a number of issues, including the extension of a CBDC to a wide range of market participants, some of which would not normally have access to RBA accounts.

It looked at whether a commercial-scale DLT platform could be viable for a wholesale CBDC, and the potential benefits that could flow.

The RBA said in a statement that the proof-of-concept demonstrated that the digitisation of syndicated loans on a DLT platform could provide efficiency gains and reduce operational risk by replacing highly manual and paper-based processes.

Integrating a wholesale CBDC on the same DLT platform, it said, enabled “atomic” settlement so an asset could be transferred to a buyer at the same time as a payment is made with no settlement risk.

Finally, the project also showed that an enterprise-grade DLT platform with appropriate controls on access and security could address many of the potential requirements for a wholesale CBDC system with a tokenised assets platform.

“As is to be expected in a research project such as this, the project has also highlighted a range of additional questions and issues that need to be explored to help address the question of whether there is a case for a wholesale CBDC and how one could be developed,” the Project Atom report said.

“(It) also demonstrated the benefits of collaboration in advancing the participants’ knowledge and understanding of the role that CBDCs and asset tokenisation could play in shaping the future of finance.”