Why the Reserve Bank is trialling a digital currency

Sascha: [00:00:02] From Equity Mates media. This is The dive. I'm your host, Sascha Kelly. The Reserve Bank has been looking into the use of a central bank digital currency here in Australia. The world is rapidly moving towards a cashless society. Globally, cash was used for 59% of point of sale transactions in 2022, and that's down from 72% in 2019 only a couple of years earlier. Here in Australia, less than 25% of transactions use cash. In the UK it's just 15%. And get this, in Norway it's only 3% of payment transactions. Our currency is basically digital already. So when the RBA announced plans to create a Central Bank Digital Currency or a CBDC, our biggest question was why? Aren't we almost there? So we set out to better understand this emerging world of CBDC. It's Wednesday, the 8th of March, and today I want to know why is the RBA looking into creating one of these cbdcs and is it going to change how I use my money? To do this, I'm joined by Darcy Cordell, my colleague here at Equity Mates. Darcy, welcome to The Dive.

Darcy: [00:01:21] Hi, Sascha. Thanks for having me. 

Sascha: [00:01:22] When's the last time you took cash out of an ATM? 

Darcy: [00:01:25] Oh, that's a good question. I reckon months, years, decades, centuries. 

Sascha: [00:01:32] Hang on. You're pretty young. I can't imagine that it's been decades. But, Darcy, I work with crypto curious crypto podcast. You love crypto, but neither of us are crypto experts. So today we spoke to Blake from the Crypto Curious Equity Mates podcast to get our heads around this subject. Blake, welcome to The Dive. 

Blake: [00:01:55] Hey Sascha, great to be here. 

Sascha: [00:01:56] So let's start off with the most basic of basic questions. What exactly is a central bank digital currency or otherwise known as a Cbdc? 

Blake: [00:02:06] So a central bank digital currency is a currency that's issued or the management of the issuance is done by the central bank as opposed to your normal everyday currency that we use that is administered by the commercial banks like the big four that we talk about every day. And this is quite a different use case for a currency and hasn't been done in this way before. But now with the advent of technology like blockchain, it allows for the opportunity for a central bank digital currency to be issued. 

Sascha: [00:02:42] So the idea of a digital currency is based on cryptocurrencies like Bitcoin. That's why you hear them talked about in the same breath, but instead they're backed by governments or reserve banks or central banks, which is similar to physical cash. 

Blake: [00:02:56] So what blockchain does is something called the double spend problem. So if I have a meme of a cat on mine and I send it to you, Sascha. 

Sascha: [00:03:04] I know you love your memes of cats like. 

Blake: [00:03:07] That means I have a copy of the cat and then when I send it to you also have a copy of the cat meme. But with blockchain technology, we can prove that that cat lives on my computer and goes to yours, which is kind of what you want for currency. You don't want to have them after you send it. You only want one. 

Sascha: [00:03:22] You definitely can have as many memes as you want in the world, but you can't have as many dollars as you want. So that was an important place to start. 

Darcy: [00:03:31] Yeah, that's right. CBA says they are issued and backed by governments and they're similar to but not the same as Stablecoins. And this is where the comparison with CBDC in cryptocurrencies come in Stablecoins a specific type of private cryptocurrency that are pegged to another currency or a commodity or a financial instrument, and they try and maintain a stable value over time. But this Reserve Bank trial in Australia, it's not intended to replace the Australian dollar. This CBDC would exist alongside the Australian dollar. 

Sascha: [00:04:03] And that's where this gets confusing, right, Darcy? Because if we already have an Australian dollar, which we can already transfer digitally, I mean have you tried payment? It does leave the question: what are the use cases for a cbdc? Again, I turn to Blake.

Blake: [00:04:20] I see a day when I make a transfer to a user. You make a transfer to me, the GST will be automatically taken out through a smart contract and then, you know, my costs will be dispersed automatically through another smart contract, creating lots of efficiencies in your day to day transactions and minimise the administration of government and businesses and people. So the RBA was the other trial is funded by something called a Digital Finance Cooperative Research Centre. It's $180 million grant from the Federal Government and the RBA is involved in that, but they're only a small part. As many other groups involved that, you know, from fintechs to banks to your companies that do carbon credits and settlement agents that are, you know, trialling the technology. The obvious use case is just a small part. The trial in the commercial use case, the trialling it for being used as carbon credits. They're trialling it for in a retail setting for fintechs. But you know it's not really initially intended to replace the currency that we have. It's just kind of carve out a little area of where it's useful. And you know, the RBA or the government doesn't even know if it's useful. You know, they really don't want to do this. And they've just saying, you know, the other reason that we would is if other countries do it and then they kind of have to follow suit to be competitive. 

Sascha: [00:05:50] So can I pick up on that thread that you talked about earlier, which is that there are other countries around the world implementing Cbdcs. Have they been effective? And can you talk about some of those specifics? 

Blake: [00:06:03] Some of the small island nations like in the Caribbean have adopted a CBDC but obviously that's not at scale with throughput of trillions of dollars. The Central Bank of China has issued a cbdc and apparently it's been quite successful. But also we haven't had that great of data to look at in order to kind of assess that from here. And of course, you know, there's a lot of, you know, maybe 50 or 100 other countries looking to trial. The technology. Now, there's a lot of things to solve about using this technology in this way. And it will take another five, maybe even ten years for these guys to get it right, because there's a lot at play. Some countries are looking at just doing a commercial central bank, digital currency, which means that it would just be used by bigger financial institutions and companies. But a retail or a cbdc for everyday people to use in commerce would have different requirements. And that's being also trialled. 

Sascha: [00:07:09] So Darcy, you've been doing some research and looking at some specific examples from around the globe. 

Darcy: [00:07:15] I have at the moment this shocked me, but 87 countries which represent more than 90% of global GDP, are exploring a cbdc of their own. I've got a few examples for you. So the Bank of England, they're planning to launch a digital pound by the end of the decade. You mentioned earlier just 15% of transactions in the UK are cash at the moment. That's down from 60% just 15 years ago. So they're planning to launch a digital pound, which would be different to Australia's central bank digital currency. But it also said in the UK that they will cap PayPal to holding between 10 to £20000 of the digital currency to prevent a massive outflow of money from the banks. 

Sascha: [00:07:58] That's interesting. What other examples of. 

Darcy: [00:08:01] The European Central Bank, they're also considering a digital Euro. 

Audio Clip: [00:08:04] You know my views on Cbdcs and you know that I have pushed that project Fabio Panetti's working hard on that together with members in the entire Eurosystem. 

Darcy: [00:08:17] We've got one that's already in place in Jamaica called the Jam Decks and that launched last year and it was the first, CBDC to be ratified formally as legal tender. That one's interesting. It's not actually blockchain based, which is unlike the Bahamas Sand Dollar and the Eastern Caribbean central Banks De Cash. 

Sascha: [00:08:36] Darcy, these all have amazing time.

Darcy: [00:08:39] Day and day cash that what I just mentioned. That's an account based model which is being implemented in the Eastern Caribbean with day cash. People hold deposit accounts directly with the central bank rather than commercial banks. And then there's also a save, say, in China, which is the e CNY. They actually use this during the 2022 Winter Olympics in Beijing. Visitors and athletes could use the currency to make purchases within the Olympic Village. [00:09:05][25.9]

Sascha: [00:09:06] But again, my biggest question is why? What is the benefit of CBDCs when currencies are becoming more and more digital anyway? I mean, seriously, have they tried them? It totally blew my mind when I got that out. Look, let's take a break and then come back and explore this question. Welcome back to the Dive. I've got a really quick favour to ask you before we go any further. Open up your podcast app, give us a five star review. Right. Some lovely words. We got the nicest review the other day. It brought such a smile to our face, didn't it? 

Darcy: [00:09:59] Darcey It did. It did. I loved. 

Sascha: [00:10:01] It. But Darcy, today we're talking about one of the best acronyms I think we've done on this show. Cbdcs rolls off the tongue. I still want to dig into this big question of why. What are the benefits of a cbdc? And I asked Blake this question. 

Blake: [00:10:18] This blockchain technology really access like a trust layer in the economy. If it's if it's used broadly means less auditing or less hands on auditing. Auditing can be done from a code point of view and less friction. You know, these things can move around quicker, it can bring liquidity to new markets, do all sorts of stuff. But yeah, really at the end of the day, the RBA just has to be competitive with other central banks and will probably follow suit just because of that reason. 

Sascha: [00:10:46] Darcy, we've heard from Blake. Do you have any other benefits to add?

Darcy: [00:10:51] I do. Stacia There are a couple of other benefits that people have suggested in that we're already saying one of those is reduced costs. So financial service providers, they might save up to $400 billion annually in direct costs by shifting spending away from physical infrastructure and towards digital finance. It's also potentially increased speed, CBDC could improve the speed and efficiency of a lot of countries electronic payment systems. This is a big one as well. Greater access for those without bank accounts. Just under 5% of adults in the US actually don't have a bank account. And in 2016 there were 1.6 billion people around the world that didn't have a bank. So that's a huge percentage of global population and a cbdc means they don't need a bank, they can just have a mobile app and suddenly they've got access to money digitally. And a final benefit would be heightened security. So deploying a regulated digital currency accessible via mobile devices, it would probably enhance payment security and make sure that all transactions are finalised and unalterable. Even without a formal bank account. It really reduces the chances of fraud. 

Sascha: [00:12:02] Okay, so greater security, reduced costs and improved access. Some pretty important benefits there. Darcy, are there any negatives?

Darcy: [00:12:14] Well, the interesting thing about the positives is that they can kind of be spun into negatives too. When money becomes digital, it also becomes traceable and therefore more taxable. And some of these people that are unbanked, they might not want to be traced and taxed. So moving a currency completely digital and under the issuance of a central bank could be a hesitation for a lot of people who want to remain anonymous. 

Sascha: [00:12:38] Yeah, as the central bank will probably be able to see every last transaction you make, and that's probably a negative for those of us who might have embarrassing shopping habits or, on a serious note, are trying to avoid tax. 

Darcy: [00:12:54] Yes, I didn't want to say, but you put it well that. 

Sascha: [00:12:58] I was like, you know, sometimes I am embarrassed if I buy an extra couple of packets of Doritos at the shops. It's not criminal, but maybe it's not the best for my healthy eating plan. 

Darcy: [00:13:10] Love it. There are a couple of other negatives, Sascha, and one of those is technological stability in 2022. Last year, the digital version of Eastern Caribbean de Cas, which I talked about, it actually went offline for two months because of tech issues. And then CBDC might not actually lead to the increased speed that is predicted. A lot of developed countries now activate instant payments using other infrastructure. Think about beam, as you said, it's instant. So we're already seeing pretty quick transaction speeds in Canada and Singapore. The central banks there have pretty much come to the conclusion that there's no strong case currently for a digital currency. 

Sascha: [00:13:49] So what's the reaction been? I mean, let's start with the traditional finance industry, basically the banks. What do they think? 

Darcy: [00:13:57] Interestingly, in Australia, ANZ and Commonwealth Bank have both signed up. So they're getting involved in this pilot program here. ANZ is planning to test how CBDC could provide digital cash when there's no online connection. So I think if you're out of range or there's an Internet outage, you can still have access to your money.

Sascha: [00:14:16] Handy when you're doing those long road trips in Australia where sometimes you do go out of. 

Darcy: [00:14:21] Range. Absolutely. ANZ is also going to explore CBDC distribution and superannuation payments. CBA is going to develop automated GST payments, but also as a reminder, this is just a research project. So just because the banks are signing up, it doesn't mean that they necessarily believe in it. But at this stage they're clearly open to it. 

Sascha: [00:14:42] And another. Crucial reaction has to come from the crypto industry. As we said, neither you are experts in that field. So we again turn to Blake.

Blake: [00:14:51] You know, the crypto community believe is that the technology has been used in various ways and this is one way that it can be used. Satoshi Nakamoto, the founder of Bitcoin's vision that Bitcoin would be a peer to peer digital cash. This research and development project is really just developing its own more advanced version of Bitcoin that can have more throughput, less fees, create lots of efficiencies in the broader economy. Now there are, of course, some people that don't like the idea, and the reason for that is that there's the opportunity for government overreach. Now some of the good things and also the bad things about blockchain technology means that it's very affordable. Things can be changed at the click of a button. Policies can be implemented not through legislation but through code, which is completely new. 

Sascha: [00:15:43] So where to from here? Dorsey How is this going to affect you and I day to day? I mean, I've already got payment. I think they should have sponsored the episode. Honestly, the amount that I love that app. Is there anything that's going to change in my life after this trial takes place? 

Darcy: [00:15:58] Look, honestly, not really at the moment, Sascha, as you said, in Australia, the pilot program is around the commercial uses. So with the banks and other companies, it's not going to affect our retail use and the Australian dollar at the moment. Having said that, you can say with this push of countries all around the world to look into CBDC, I think it's just a matter of time before we see them implemented and we say different use cases around the world. 

Sascha: [00:16:26] And we also asked Blake his predictions about the future of the trial. What do you think will be the outcome of this trial? 

Blake: [00:16:32] Yeah, there's many different organisations and groups trialling it for different use cases. Of course, some are going to show a business case that say, Hey, this is probably worth doing another R&D project on to see, you know, if it can work at a larger scale because we're talking very small scale, like it being used between two or three entities or something like that, you know, very like a minimum viable product that we call in the tech space. Yes, of course, it's an R&D project. Some things are going to be right, some things are going to go wrong. And the end result would just be a report that will be publicised and say, Hey, this is where we could have improved or could have done better, or this is what worked really well and has a business case to maybe look at. You're trialling in a larger scale. 

Sascha: [00:17:15] Right? Darcy Let's leave it there for today. If you want to keep the conversation going, then don't hesitate to contact us by email we are at thedive@equitymates.com. Contact or hit, follow and subscribe wherever you're listening right now and then you're never going to miss an episode. Thank you so much for all those five star reviews. We appreciate them. We read every single one of them and they do make all the difference for us are climbing those charts. So again, a huge thank you to those of you who've done it. Darcy, I'll talk to you soon. 

Darcy: [00:17:45] Thanks, Sascha. 

Sascha: [00:17:45] Until next time.