It’s hard to ignore the cryptocurrency craze. Commonwealth Bank chief executive Matt Comyn this week joked he couldn’t go anywhere without discussing the topic, after CBA this month became the first local bank to allow customers to trade crypto assets.
In one anecdote, Comyn said he’d been told of a barista who paid off their mortgage after they “punted” on cryptos. Speaking at a Committee for Economic Development of Australia dinner in Sydney, Comyn also relayed a friend’s tale of a cleaner who had apparently put their entire self-managed super fund into crypto assets – something Comyn stressed was a “really bad idea”.
These stories illustrate the highly volatile and speculative nature of many crypto assets – which is of course what makes them so attractive to some people.
But if you’re interested in the future of money, an equally important topic to get across is the prospect of central bank digital currencies.
CBDCs, as they’re known, are a potential future form of money akin to digital banknotes. Unlike cryptocurrencies, they almost certainly won’t produce overnight billionaires. However, central banks around the world, including here, are rapidly doing more research into CBDCs and how they could shake up the world of payments.
An important reason for all that research is, to put it simply, central bankers want to protect government-backed or “fiat” money that lies at the heart of the financial system against the disruptive threat from cryptocurrencies, which are not issued by governments.
‘Because of its global reach, Facebook’s Diem could become systemically significant very swiftly … it could be a threat to the monetary sovereignty of established nations.’
Ross Buckley, KPMG-KWM Professor of Disruptive Innovation at UNSW
This contest between the guardians of fiat money and privately-issued cryptocurrencies will be fascinating to watch.
So, what exactly is a CBDC? How much is the burst of interest in digital banknotes a response to the crypto boom? And are we going to be seeing what RBA governor Philip Lowe has dubbed an “eAUD”?
A CBDC is a digital token that is a liability of the central bank — a banknote for the digital world. They would be different from the electronic money you see when you open up a banking app, which is a liability of the commercial bank.
No wealthy country has yet issued a CBDC, but China is testing one, and dozens of central banks are frantically researching the topic.
Their reasons for doing so are varied. Some say we’ll need a digital equivalent of cash as people switch to electronic payments; some claim CBDCs will lift competition; while China’s digital yuan will give the government greater surveillance powers over its people.
But what’s particularly interesting is the idea that CBDCs could push back against the incursion of privately-issued cryptocurrencies.
The Switzerland-based Bank for International Settlements, a firm supporter of CBDCs, has been highlighting these risks. In recent months it has been urging central banks to get on with designing CBDCs in response to the crypto boom, and the expansion of technology giants into payments, which could challenge banks’ business models.
Locally, the RBA’s retiring head of payments policy, Dr Tony Richards, last week acknowledged these concerns.
While the RBA is unconvinced we need CBDCs, Richards said there was an argument overseas that a new digital form of central bank money “could be important for safeguarding confidence in national monies and the role of fiat currencies at the heart of monetary, financial and payment systems”. He also noted the risk of technology companies coming to dominate payments.
Which tech giants would the central bankers be most concerned about?
The leading contender would have to be Facebook, which is driving a long-running proposal to introduce a new global cryptocurrency known as Diem. If it happens, Diem would be a type of “stablecoin” – a crypto asset linked to a fiat currency – in an attempt to limit volatility.
Ross Buckley, KPMG–KWM Professor of Disruptive Innovation at UNSW, says a key reason central banks are spending so much effort looking at CBDCs is because of Facebook’s plan to introduce its own private currency.
“Because of its global reach, Facebook’s Diem could become systemically significant very swiftly. So if they launch, it could be a threat to the monetary sovereignty of established nations,” says Buckley, who has researched CBDCs and fintech extensively.
Buckley says central banks recognise that Facebook is in a position to shake up the global payment system, and monetary authorities need to be ready with their response. They could ban Diem, or offer something better – such as a CBDC.
Will we see a CBDC in Australia?
The RBA and banks are conducting research into wholesale CBDCs (to be used by banks and other large companies) and many think these are likely.
Richards also says the RBA is stepping up research into retail CBDCs. But don’t expect to get your hands on an eAUD soon – the RBA is not convinced we need digital banknotes for consumers, given we already have a real-time digital payment system.
And the RBA is not alone – CBDCs are divisive. For all the interest in this area, some experts aren’t sure what problem a digital banknote would solve.
Managing director of payments consultancy The Initiatives Group, Lance Blockley, says there’s no obvious reason for the RBA to introduce a new form of electronic money, given the many alternatives consumers have to paying by cash that are already available.
Even though he’s unconvinced by CBDCs, however, Blockley says there is a crucial difference between how CBDCs and cryptocurrencies, such as bitcoin, would be used.
While bitcoin and other cryptos are mainly of interest as a volatile speculative asset, CBDCs would have nothing to offer speculators. They would only be useful for facilitating new types of payment, and giving people another safe place to put their savings.
“I think the feeding frenzy today around crypto has little to do with using it to make payments. It’s an asset play, whereas the central banks are looking at digital currencies for making payments,” Blockley says.
The idea of digital banknotes may not generate the excitement of cryptocurrencies such as bitcoin. But if they end up being a useful new form of money, they could play a key part in how the traditional financial world responds to the huge changes being unleashed by the cryptocurrency boom.
Ross Gittins is on leave.