Reserve Bank takes on partners to explore central bank digital currency

The RBA is partnering with two major banks, fund manager Perpetual and a blockchain company to explore a wholesale central bank digital currency.

The RBA and its partners expect to publish a report and its main findings in the first half of 2021. Picture: Brad Hunter

The Reserve Bank is partnering with two of the major banks, fund manager Perpetual and a blockchain company to explore a wholesale central bank digital currency (CBDC).

The project involves the development of a proof of concept for issuing a token-based CBDC capable of use by wholesale market participants for the funding, settlement and repayment of a syndicated loan on an Ethereum-distributed ledger platform.

Financial system assistant governor Michele Bullock said the aim was to explore the implications of a CBDC for efficiency, risk management and innovation in wholesale transactions in financial markets.

“While the case for the use of a CBDC in these markets remains an open question, we are pleased to be collaborating with industry partners to explore if there is a future role for a wholesale CBDC in the Australian payments system,” Ms Bullock said.

The project, which features Commonwealth Bank, National Australia Bank, Perpetual and blockchain technology company ConsenSys Software, is expected to be completed around the end of this year.

The parties expect to publish a report and its main findings in the first half of 2021.

Announcement of the RBA project follows the Australian Securities Exchange’s move last week to increase the scope and extend the go-live date for replacing its CHESS settlement system by 12 months to April 2023.

The new ASX system also uses distributed ledger, or blockchain, technology.

Unlike cryptocurrency bitcoin’s use of a public blockchain, which provides a record of transactions, the distributed ledger to be used by the ASX will be a permissioned system, with a managed onboarding process for participants.

A token-based CBDC system, such as the one under examination by the RBA, would involve a type of digital token, issued by — and representing a claim on — the central bank.

It would function as the digital equivalent of a banknote so that the holder of the token would be deemed as the owner, as opposed to a record of account balances.

CBDC tokens could be stored on devices, such as mobile phones or some kind of chip-based card, and move from one device to another when there is a transaction.

A survey late last year of 66 central banks by the Bank for International Settlements found that most were doing some type of work on CBDCs, wholesale or retail.

However, about 70 per cent of the central banks saw themselves as unlikely to issue either kind of CBDC in the foreseeable future.

Despite this, a number have explored the potential benefits of embedding a wholesale CBDC in a distributed ledger platform, along with tokenised assets.

The RBA said in a paper last September that the benefits of a wholesale CBDC had not always been obvious, and central banks in most advanced economies were proceeding cautiously.