Reserve Bank of Australia explores use cases for Central Bank Digital Currency

By John Bassilios

In partnership with the Digital Finance Cooperative Research Centre, the Reserve Bank released a White Paper on 26 September 2022 defining its objectives to explore use cases and economic benefits for a Central Bank Digital Currency (CBDC) in Australia. CBDCs are digital currencies that are pegged to a country’s official currency and issued by the country’s central bank. They differ from stablecoins as they are state issued and operated.

The Reserve Bank hopes to gain insight on how real problems can be solved using CBDC. Further, by engaging Australian regulators for all risk, regulatory and compliance considerations, it seeks to inform policy on regulating innovative business models.

The three questions set to be addressed by the Pilot Project include:

1. What, if any, are the emerging business models and use cases that a CBDC would support, that are not effectively supported by existing payments and settlement infrastructures in Australia?
2. What might be the potential economic benefits of issuing a CBDC in Australia?
3. What operational, technology, policy and regulatory issues might need to be addressed in the operation of a CBDC in Australia?

Of the more than 140 use cases that were submitted by industry participants, the CBDC Pilot Program has selected a few to be utilised in a transactional trial that will run in the first half of 2023. Here is a summary of each selected use case.

1. Digicash will trial different custody models of CBDC holdings for the purpose of online payments. They will pilot non-custodial holdings, custodial with beneficial ownership and custodial holdings with pooled ownership. This opportunity is focused on informing policy decisions.
2. ANZ will test a solution where approved holders of Exchange Settlement Accounts can purchase and distribute CBDC to other entities that require CBDC but do not operate Exchange Settlement Accounts. This solution aims at compliantly extending the responsibility of distribution to alleviate the challenges on the central bank.
3. NonCentralised and team will explore how programmable payments using digital escrow plus proof of reserves can allow for a more transparent, safe environment for contractors and their clients. The pilot will be tested in a commercial bathroom renovation project consisting of oracle-driven payments delivered in a milestone-based arrangement.
4. Australian Bond Exchange’s use case involves leveraging CBDC to facilitate faster settlements of corporate bonds to improve the market’s efficiency. CBDCs will be used in the purchase, coupon payments and sale stages of the corporate bond process.
5. Monoova seeks to utilise CBDCs to improve the speed of settlements for the AUD component of foreign exchange transactions and reduce counterparty risk by increasing transparency around the holdings of the received fund.
6. Commonwealth Bank and Intuit will trial programmable payments powered by CBDCs to automate GST collection. This opportunity could relieve businesses of their duty to manually collect GST and claim credits via their quarterly Business Activity Statements.
7. Mastercard and Cuscal Limited’s use case tokenises CBDCs to be operable on different blockchains with a security system that ensures only authorised parties can hold, use and redeem the currency.
8. Fame Capital will test an online peer-to-peer auction platform for livestock that uses a programmable payment system that automatically distributes fees and levies to livestock associations. As it stands, such payments are directed through third-party auctioneers – a process that increases costs and risks.
9. ANZ and Commonwealth Bank have created a pilot that tokenises CBDCs to represent nature-based assets such as carbon credits and biodiversity credits. The risk-free settlement assets support institutional demands for a net-zero future.
10. ANZ, Capgemini Australia, Secretarium, Thales DIS France SAS, RMIT University, and Southern Cross University are testing whether CBDCs can uphold advantages that cash has for offline users. They are developing for CBDCs to facilitate offline payments via NFC-enabled smart cards that are pre-loaded with funds and used in consumer-to-merchant scenarios.
11. ANZ, Oban, H.E.S.T Australia, CBUS, Australian Administration Services (Link Group), and Grow Inc are trialling the use of CBDCs by employers for superannuation contributions to enhance efficiency in the process of transmitting funds. In turn, it is predicted this would lead to significant boosts to the compounding effect on a member’s account balance.
12. Unizon Blockchain Technology and Zerocap will use ERC-3525 tokens to create invoices on the chain that once verified, transferred, split, or merged, can be paid using CBDC-backed stablecoins to reduce counter party risk. This use-case will lower payment delays which often cause wholesale suppliers liquidity stress.
13. CANVAS will trial whether continuous trading and global movement of foreign currencies can be done more effectively and efficiently using blockchain technology. By utilising ZK Layer 2 technology on the CANVAS Connect Platform, risks and costs involved with traditional Foreign Exchange Trading and Remittance networks will be abolished.
14. Imperium Markets is hoping to revolutionise trading within financial institutions by utilising distributed ledger technology to enable atomic settlement using CBDCs. This solution aims to establish more marketplaces for tokenised assets by minimising financial and technical risks involved.

A report on the findings of the project is set to be published in mid-2023.

This article was written with the assistance of Sogand Shamsaria, Law Graduate.

We encourage you to read the Australian chapter of the Lexology Getting The Deal Through Fintech 2023 publication, which is also written by Partner John Bassilios, our Fintech and Blockchain Lead (and Blockchain Australia Director).