The $6 trillion gamble the RBA isn’t willing to take

The Reserve Bank has decided against a new form of money – partly out of fear it could lead to the downfall of the nation’s $6 trillion banking system.

Bank assistant governor Brad Jones, in a speech in Melbourne on Wednesday, revealed the RBA would not move ahead with a so-called central bank digital currency, instead focusing on a digital currency aimed at major financial players such as banks.

The Reserve Bank has decided against creating a digital currency for retail payments.Credit: Reuters

Unlike an electronic currency, which people can withdraw from a bank and hold in a physical form such as cash and coins, a digital currency only exists in a digital form.

It’s similar to cryptocurrencies such as Bitcoin, however a central bank digital currency would be fully backed by the government of the day rather than private investors. Only four central banks in the world – Jamaica, the Bahamas, China and Nigeria – are currently offering digital currencies, with little demand for their use.

The RBA and with several other major central banks, such as the Bank of England, have been examining whether to offer a digital form of their respective currencies.

But Jones said at this stage the risks posed by such a new form of money meant the RBA would not go ahead.

“Australians are generally well served by a safe, efficient and innovative retail payments system,” he said.

“Given the potential benefits of a retail central bank digital currency in Australia appear modest at the present time, and a retail central bank digital currency would create non-trivial challenges for financial stability and monetary policy implementation, we are yet to see a strong public policy case emerge for issuing a retail currency.”

One of the risks identified by the RBA was a potential threat to the entire banking system.

Jones revealed bank staff had examined what would happen to commercial banks if all Australian households transferred $5000 from their accounts into a Reserve Bank digital currency.

If no other actions were taken to protect the banks, this would reduce by up to 60 per cent the cash buffers they are required to hold to protect themselves from a run on their deposits, big falls in asset prices or broad economic turmoil.

“Central banks have examined measures that could forestall or limit the effects of bank runs involving central bank digital currencies, including limits on holdings, penalties on bank deposit withdrawals and negative interest rates on digital currencies in periods of stress,” he said.

“But what such measures have in common is an effort to restrict the use of central bank digital currencies, which to my mind at least, raises the question of whether the benefits of a central bank digital currencies would be forfeited in the process.”

RBA assistant governor Brad Jones says the case for a retail digital currency in Australia were not strong enough at present.Credit: Alex Ellinghausen

The CrowdStrike outage in July, which shut or slowed down the computer systems of millions of companies that used Microsoft Windows, and the threat of cyber-attacks has prompted calls for protection of physical cash.

Jones said while some payment systems could work offline, moving to a digital currency could prove problematic during an electrical or digital system breakdown.

“Many countries are uplifting their crisis preparedness arrangements in response to national security threats and the risk of natural disasters. Social cohesion, not just economic disruption, is foremost in mind here,” he said.

“Some countries are also reconsidering the back-up role that physical cash might play for short-term transactional purposes, albeit access to and acceptance of cash still requires supporting offline capabilities.”

Jones said the RBA would prioritise its work on wholesale digital money, which would likely be used by major banks and financial institutions. It will undertake a three-year research program into the future of digital money.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.