By Alvin Chia, Senior Vice President – Head of Digital Assets Innovation at Northern Trust
Whether buying stocks, making bank deposits or doing international transfers, few among us have been spared the days-long wait and fees that come when cash changes accounts.
In this era of instant services, one might wonder: how is that still the case? Reserve Bank of Australia (RBA) assistant governor Brad Jones raised a similar question in a speech at a central bank conference in Sydney last December when he asked: is our money fit-for-purpose in the digital age? And if not, how can we make it so?
The reality is that despite technological advancements, our systems for handling money are far from perfect. Cash remains expensive and time-consuming to move, exposing investors to potential risks.
To borrow Brad Jones’ term, a system that’s fit for purpose will have to make moving money fast, safe and reliable.
That pie in the sky might, in fact, be within reach for Australia, given its recent central bank digital currency (CBDC) pilot. The e-AUD trial distinguishes itself from global counterparts due to the wide range of use cases; earlier efforts by nations such as China and India operated on the central bank prescribing where CBDCs might be best applied. But Australia’s program invited the industry to imagine the possibilities for digital currency, resulting in a marvellously diverse range of submissions, from which 14 were shortlisted for testing.
Expanding the number of scenarios where digital currency is useful marks a turning point in the emerging era of CBDCs, which have been incubating for the past half-decade. In developed nations with well-functioning payment systems, it may be challenging to justify the need for one. But several of the test cases in RBA’s pilot could mark breakthroughs in how e-money might make our lives better.
Money moves faster
Money moves slowly across financial systems today primarily due to legacy processes, some of which involve third-party intermediaries. CBDCs bypass these systems, eliminating intermediaries, and streamlining backend processes, facilitating faster transfers.
In e-AUD trials, for example, payment service provider Monoova will harness blockchain technology to instantly convert payments coming in to local businesses, from foreign currency to Australian dollars. In another use case, the Australian Bond Exchange will leverage e-AUD to settle corporate bond trades within a day, instead of the current two-day term.
What difference does a few days’ wait make? LexisNexis Risk Solutions estimates that failed payments cost the global economy US$118.5 billion (A$177.8 billion) in fees, labour and lost business in 2020, while a survey of 300 finance decision-makers by payments firm Flywire found nearly 8 in 10 businesses lose 4 to 10 percent of revenue a month to payment inefficiencies. Recovering these losses could significantly boost Australia’s bottom line.
Some might argue that stablecoins offer the same instant settlement ability as CBDCs. But the recent Silicon Valley Bank incident has shown that adverse events can result in stablecoins de-pegging from their reference assets, making government-backed CBDCs a safer choice.
Still safe, but more reliable
There is no point in transacting faster if we sacrifice safety and stability. While CBDCs have the edge over existing solutions in terms of speed, regulations governing their use should not be relaxed simply to move things along. The e-AUD should be and is being subject to stringent regulatory approvals.
One tangible benefit CBDCs have over cash is that the underlying smart contracts can be programmed to ensure money is used for the right purposes. This includes facilitating efficient investment in sustainability assets at scale: under the RBA trial, ANZ and Commonwealth Bank of Australia are tokenising carbon and biodiversity credits that can be paid for with e-AUD backed coins. An example can be seen from Singapore’s Project Orchid, with CBDCs programmed to ensure the funds reach the intended recipients reliably. In the case of carbon credit trading, this benefits project developers, whose profits are often undercut by agents and the secondary market.
As for reliability — with RBA data revealing 95 percent of Australians live within five kilometres of a cash withdrawal point, CBDCs might be unneeded on normal days, but what about times of disaster, when increasingly frequent bushfires and floods cause power outages and cut access to ATMs or online banking?
In such situations, offline payment could be a lifeline. One of the e-AUD pilot cases examines this scenario, with a group of seven organisations – including ANZ, Capgemini, Southern Cross University and RMIT University – developing a smart card loaded with CBDCs for use in emergency situations. This could turn the e-AUD into a key source of reliable access to money.
Making money work
Naturally, the traceability of CBDC transactions will give rise to questions around user privacy, but major bodies such as the International Monetary Fund have already begun exploring potential solutions, such as offering users privacy for transactions of a certain sum and below; selecting validation architecture that collects only the minimum amount of data; or building systems that can use encrypted data to verify transactions.
Although finding a workaround will require time, the rollout of e-AUD is still several years away, giving RBA a window to explore solutions that will make it fit for public use.
Online payments revolutionised money several years ago with the advent of the digital era. In the same way, CBDCs could mark another leap forward in convenience. And with a pilot packed with potential new applications, Australia is placed to be a leader in this technology.
Even in 2023, we still work around the inefficiencies of traditional money systems, to some extent. But the e-AUD could just make our dollars work better for us.
Disclaimer: The content of the article is provided as general information only and not intended to be construed as investment advice.