Last year the Reserve Bank of Australia announced its partnership with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software on a collaborative research project to investigate the potential use of CBDCs locally.
The project aims to develop a proof of concept for the issuance of a tokenised form of CBDC and explore whether there is a future for a wholesale CBDC here in Australia.
But what would the future of CBDCs actually look like – and why does it matter? To understand this, it helps to zoom out on how the economy has changed in the past year.
An ever-changing payments landscape
The pandemic pushed a record number of Australian businesses online, and widespread disruptions created a profound shift in payments, accelerating the adoption of digital wallets in e-commerce while hastening the decline of cash at the point of sale.
According to our 2021 Global Payments Report, Australia is now one of the most cash-averse countries in the world, with the economy expected to be 98 percent cashless by 2024.
The research also found buy now, pay later (BNPL) is growing at breakneck speed and expected to represent 20 percent of the e-commerce market by 2024, while digital wallets expected to account for almost 16 percent of in-store payments in the same period.
But what does this have to do with cryptocurrencies?
In essence, these findings point to the fact that Australians readily embrace new payment innovations. In the past year, cryptocurrencies like bitcoin have piqued the interest of increasing numbers of financially savvy Australians.
And with bitcoin reaching a historic high of US$60,000 in March this year, we can only expect these numbers to soar, as more and more Australians look to cash in on the golden goose.
COVID-19 accelerates the use of digital currencies
The uncertainty created by the ongoing pandemic has led to cryptocurrencies including bitcoin becoming more mainstream.
As consumer demand for digital currency payment options rises, some merchants in Asia and Australia are now beginning to accept such payment options across various channels.
For example, bitcoin can be used to purchase luxury properties and vehicles and can also be used at some restaurants and retailers.
We’ve even seen the education industry embrace crypto payments with Flinders University accepting bitcoin payments for tuition and accommodation since 2014.
Beyond the border, both Apple Pay and PayPal recently started supporting bitcoin payments in the US. In Asia, Singapore’s DBS bank launched a digital currency exchange last December – this is the world’s first cryptocurrency exchange backed by a traditional bank.
By looking at these global markets, we can glean what the future of crypto payments could look like here in Australia if they continue to gain traction.
Enter central bank digital currencies
But let’s not get too ahead of ourselves. While cryptocurrencies are rising in popularity, they are not without their shortfalls.
For one, they are decentralised and operate independently of established banking or money transfer systems. Consequently, they lack the legal tender status declared by governments. This means that if all Australians suddenly started using cryptocurrencies, the Australian government wouldn’t be able to control monetary policy.
CBDCs on the other hand bring together the convenience and security of cryptocurrencies and the regulated, reserve-backed money circulation of the traditional banking system. They act as the digital form of fiat money and effectively replaces notes and coins.
As such CBDCs are a much more attractive alternative to cryptocurrencies for governments and banking institutions, which is one of the reasons they’re starting to make inroads.
CBDCs are gaining traction
Around the world, the growing popularity of cryptocurrencies, coupled with the rapidly declining use of cash, is putting pressure on central banks to accelerate their digital currencies efforts. While the Reserve Bank here in Australia may only be in an initial research phase, we can expect CBDCs will eventually play a key role in the financial services ecosystem, promising a number of benefits.
Firstly, a centrally backed digital currency provides better security, while reducing fraud and lowering costs. It allows for better monitoring of financial activity making crimes such as tax evasion much more difficult and offers a higher level of control and traceability in comparison to private cryptocurrencies and cash, with better tracking for tax collection.
There are also social motivations. They could make the transfer of money across borders much easier, with positive flow-on effects like enabling foreign workers, for example, to transfer money back to their home countries. They can broaden financial inclusion, by increasing accessibility of cash and funds to more people around the world, particularly in emerging economies.
Digital currencies could also help businesses with cash flow, especially in the hard-hit retail and hospitality sectors. We also may see the rise of programmable money, which could allow key workers discounted goods and service tax rates, among many other features.
Navigating the path toward CBDC adoption
However, questions remain around how CBDCs will be regulated and how they will interact with existing forms of currencies, and there are also concerns that CBDCs could draw money out of private banks.
Cryptocurrencies also raise privacy concerns. With a large amount of data stored in a central system, this means that an individual’s financial information could be easily monitored by the government or worse, exposed to criminals. Ultimately, there will need to be a marriage of trust and opportunity for digital currencies to see mass acceptance.
Clearly, there are still many barriers and considerations around the adoption of cryptocurrencies both globally and here in Australia. However, recent moves from the RBA and other major financial institutions to explore the feasibility of an Australian CBDC signal that a new era of digital payments may be on the horizon.
While a lot remains unclear, one thing is for certain. If or when cryptocurrencies are used in Australia, they will be a game changer, bringing about a rapid shift to the banking and payments ecosystem that has never been seen before.
Anita LeMaire, managing director ANZ at FIS