RBA tests the case for central bank digital currencies

The RBA and other central banks are aiming to develop shared platforms for cross-border transactions using multiple CBDCs.

Central banks are eyeing a form of digital currency.

The Reserve Bank has combined with the BIS innovation Hub and other central banks to test the use of central bank digital currencies for wholesale international settlements.

The multi-year research initiative, dubbed Project Dunbar, aims to develop prototype shared platforms for cross-border transactions using multiple CBDCs.

The objective is to enable financial institutions to transact directly with each other in the digital currencies issued by participating banks, eliminating the need for expensive intermediaries and cutting the time and cost of transactions.

Distributed ledger technology (DLT) platforms, such as those to be used by the Australian Securities Exchange in the replacement of its CHESS payments system, will be used to develop the prototypes.

Under the current system, large wholesale payments go through a network of correspondent banks.

A lot of intermediaries are involved in the process, creating friction as well as billions of dollars in unnecessary costs and transparency issues.

A shared platform using DLT could slash the cost of cross-border transactions and make the process a lot more efficient.

The other central banks in the project are Bank Negara Malaysia, Monetary Authority of Singapore and the South African Reserve Bank.

They will use the innovation hub at the central bankers’ club, the Bank for International Settlements.

Many issues require resolution, including who would have access to the platform, and management of risks associated with money laundering and counter-terrorist financing.

The focus is on the wholesale user case, with the case for a platform for international retail payments likely to be examined further down the track.

Reserve Bank governor Philip Lowe has previously said there is not a compelling policy argument to issue a retail CBDC.

The RBA said in a statement on Thursday that Project Dunbar‘s work would explore the international dimension of CBDC design, and support the efforts of the G20 roadmap for enhancing cross-border payments.

“Its results, expected to be published in early 2022, will inform the development of future platforms for global and regional settlements,” the statement said.

“Technical prototypes of the shared platforms, developed in collaboration with different technology partners, will be demonstrated at the Singapore FinTech Festival in November 2021.”

RBA assistant governor financial system Michele Bullock said enhancing cross-border payments had become a priority for the international regulatory community and “something that we are very focused on in our domestic policy work”.

Andrew McCormack, head of the BIS Innovation Hub in Singapore, said he was confident that the work on multi-CBDCs for international settlements would “break new ground and lay the foundation for global payments connectivity”.