RBA joins central banks looking at using digital currencies for global payments

The Reserve Bank will take part in an international project testing whether digital currencies issued by central banks could be used to make cross-border payments cheaper and quicker than the complex systems used today.

Amid strong growth in cryptocurrencies, monetary authorities around the world are examining the case for issuing “central bank digital currencies”, or CBDCs, which would essentially be a digital equivalent to banknotes.

The RBA’s Michele Bullock said the project would explore whether CBDCs could improve the speed, cost and transparency of cross-border transactions.Credit: Louise Kennerly

Most of this work has so far focused on domestic usage of CBDCs, but the Bank for International Settlements (BIS) on Thursday announced a project to test whether this new form of digital currency could be used to bring about much-needed improvements in international payments.

Apart from the RBA, the research - called “Project Dunbar” - will also involve the BIS and central banks from Malaysia, Singapore and South Africa. It will aim to develop prototypes to allow CBDCs from multiple countries to be exchanged on a global platform.

The hope is that CBDCs could cut the cost of moving money around the world because they would allow financial institutions to transact directly with each other, instead of using “correspondent banking” arrangements that can result in money flowing through several banks, with fees being charged along the way.

The RBA’s assistant governor for the financial system, Michele Bullock, said the project would explore whether CBDCs could improve the speed, cost and transparency of cross-border transactions.

“Enhancing cross-border payments has become a priority for the international regulatory community and something that we are also very focused on in our domestic policy work,” Ms Bullock said.

The project is a sign of how the fintech revolution, including the rise of cryptocurrencies, is prompting central banks to examine the types of money they issue. Currently, the RBA issues physical currency and provides a form of digital currency directly to banks through so-called exchange settlement accounts held with the central bank.

The RBA has previously said it does not see a case for issuing a retail CBDC, but it is also working on a project involving the Commonwealth Bank, National Australia Bank and Perpetual to issue a domestic wholesale CBDC. That research is expected to report back soon.

The BIS said CBDC payment prototypes would be built using “distributed ledger” technology, a type of database that is shared among members of a network, rather than being operated centrally.

The head of the BIS Innovation Hub Singapore Centre, Andrew McCormack, expressed confidence the project would “break new ground in this next stage of CBDC experimentation and lay the foundation for global payments’ connectivity.”

The G20 has made it a priority to improve cross-border payments, a system that is complicated by strict anti-money laundering and counter-terrorism financing laws.

The Financial Stability Board, a global body that works with governments on the financial system, said last year that improving cross-border payments would promote economic growth, trade and financial inclusion.

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