Australian Central Bank Goes Public With CBDC Trial

Last year, the Reserve Bank of Australia (RBA) pronounced that it “saw no strong case” for a retail central bank digital currency (CBDC). In a curious about-turn, the RBA has now announced it is “exploring use cases”.

A few alarms bells have been raised, to say the least:

So RBA is trialing a Central Bank Digital Currency, as APRA works the with Banks to ensure they can handle negative interest rates. These new "tools" will offer greater control over our spending patterns and should concern us all. Are we sleeping walking into central control?

— Martin North (@DFA_Analyst) August 9, 2022

CBDCs in a Nutshell

A CBDC is best understood as a digital form of fiat currency issued and regulated by a central bank (rather than retail banks, as is the case today). They can be classified as either retail or wholesale.

Retail CBDCs are issued directly to people and companies. By contrast, wholesale CBDCs are issued to financial institutions such as banks. The former are said to be useful as a mechanism to deliver “helicopter money” or universal basic income, whereas the latter are suitable for interbank transfers.

Risks and Benefits

Over 100 governments are at some stage of experimenting or implementing CBDCs, and cite their numerous benefits to include:

• technological efficiency – money transfers and payments can be made in real time, directly from the payer to the payee;
• reduced risk for merchants as settlement is instant;
• financial inclusion – in that any legal resident or citizen can be provided with a free or low-cost basic bank account;
• preventing illicit activity by tracking each unit of CBDC since all transactions are traceable;
• improved tax collection – taxes can simply be deducted at source;
• combating crime – the blockchain is transparent, making it easy to track criminal activities; and
• improved safety – as carrying physical cash constitutes a risk.

However, enormous privacy and surveillance concerns have been raised from the outset, with critics describing CBDCs as “programmable money” capable of being switched on and off at the whim of centralised authorities. It is considered to be the seed of a social credit score, as once you are able to control the money, you become capable of controlling the citizenry through behavioural economics, as is the case in China:

China Social Credit System explained:
What it free about that? pic.twitter.com/Z8QRsLnf1h

— DonCamillo1984 (@Camillo68523381) August 9, 2022

What Is the RBA Up To?

According to the announcement, the research project is a collaboration between the RBA and the Digital Finance Cooperative Research Centre (DFCRC) to focus on the uses for, and potential economic benefits of, a CBDC:

The project, which is expected to take about a year to complete, will involve the development of a limited-scale CBDC pilot that will operate in a ring-fenced environment for a period of time and is intended to involve a pilot CBDC that is a real claim on the Reserve Bank.

RBA announcement

The announcement adds: “Interested industry participants will be invited to develop specific use cases that demonstrate how a CBDC could be used to provide innovative and value-added payment and settlement services to households and businesses.”

RBA deputy governor Michelle Bullock described the project as “an important step” on the path to a potential Australian CBDC, saying on ABC Radio’s The World Today program it was effectively “an experiment”.

The RBA indicated that part of the motivation for the experiment was that it didn’t want to be left behind. A report is expected in around a year’s time and according to Bullock, an Australian CBDC is not necessarily a certainty.

RBA ‘Jawboning’ on Stablecoins v CBDCs

This all comes as just three weeks ago, RBA chief Philip Lowe indicated that private stablecoins were “probably better than CBDCs“. Then again, the RBA also forecast inflation to be 1.5 percent this year, which has since risen to 6.1 percent, a 21-year high. Macro policy commentators would describe this as “jawboning”, and would suggest watching what the RBA does, and not what it says.