In a speech to the Banking Conference last week, Assistant RBA Governor Brad Jones said the central bank’s digital currency (CBCC) – effectively the digital equivalent of banknotes – would serve Australia poorly.
“As far as financial economics goes, the introduction of a general purpose CBDC will be revolutionary,” Jones said.
“For centuries, physical cash has been the central bank’s only source of funds for households and non-financial corporations. A strong public interest case must first be made before crossing this Rubicon.”
“Relatively speaking, we haven’t seen that issue in Australia yet.”
General purpose or ‘retail’, CBCC will be an independent digital equivalent that can be held like cash and used to purchase goods and services.
With the growing popularity of cryptocurrencies, the idea has come to the fore as countries including China experiment with their own CBCCs.
Nigeria, on the other hand, has fully embraced CBDC and is now restricting cash withdrawals to encourage the country’s population to use its native digital currency.
Then there’s El Salvador, which went so far as to make Bitcoin legal tender – something the RBA said would never happen here.
Experts have warned that the retail CBCC will fundamentally reshape the way our economy works, at least for everyday Australians bypassing the banks.
The digital currency revolution
This is the revolutionary part: a general purpose CBDC could make central banks like the RBA intermediaries between people in the economy rather than banks and payment platforms.
In a speech last week, Jones proposed two extreme versions of the currency future: one in which the RBA joins the CBCC and “crowds out” other currencies, greatly increasing the central bank’s power in the process. And another is alternative forms of money – like cryptocurrencies – when people are losing trust in traditional institutions and the current financial system can’t keep up with the pace of change.
Jones also warned the local population to stop using its own native currency in favor of “stablecoin or foreign CBDC” which will complicate the “conduct of monetary policy and maintain financial stability”.
A CBDC could avoid this situation – but again, the RBA doesn’t think this is likely to be a problem in Australia.
When Facebook announced its ill-fated cryptocurrency project Libra, its currency replacement was a big concern.
Facebook was trying to bypass traditional payment systems for a huge number of users until regulators around the world understood the backlash.
Libra was supposedly designed to solve some of the problems that Jones and the RBA believe the CBCC could solve – namely lack of access to banking and financial institutions, which are not issues that Australians have.
“A very small number of households in Australia do not have access to banking and payment services, and it is not clear how CBCC will bring them into the fold,” Jones said.
He concluded by suggesting that the RBA favors an “evolutionary rather than revolutionary” approach to digital currencies.
More than 140 submissions for the RBA’s CBDC pilot program will begin in earnest next year.