Reserve Bank calls in big banks for Aussie blockchain-based digital currency project

The Commonwealth Bank of Australia and the National Australia Bank will work with the authority to develop a proof-of-concept for the issuance of a tokenised form of central bank digital currency.

The Reserve Bank of Australia (RBA) is looking into the potential use and implications of a wholesale form of central bank digital currency (CBDC) using distributed ledger technology (DLT) -- blockchain.

In undertaking work, the RBA is partnering with the Commonwealth Bank of Australia, the National Australia Bank, investment advisory firm Perpetual, and blockchain company ConsenSys Software.

The five participant organisations will work collaboratively on the project that will involve the development of a proof-of-concept for the issuance of a tokenised form of CBDC.

The tokenised form of CBDC is expected to be used by wholesale market participants for the funding, settlement, and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform.

See also: 10 things you thought you knew about blockchain that are probably wrong (TechRepublic)

The proof-of-concept, the RBA said, will be used to explore the implications of "atomic" delivery-versus-payment settlement on a DLT platform, as well as other potential programmability and automation features of tokenised CBDC and financial assets.

The project, expected to be completed around the end of 2020, forms part of ongoing research at the Reserve Bank on wholesale CBDC. The parties intend to publish a report on the project and its main findings during the first half of 2021.

"With this project, we are aiming to explore the implications of a CBDC for efficiency, risk management, and innovation in wholesale financial market transactions," RBA financial system assistant governor Michele Bullock said.

"While the case for the use of a CBDC in these markets remains an open question, we are pleased to be collaborating with industry partners to explore if there is a future role for a wholesale CBDC in the Australian payments system."

In a submission to the Select Committee on Financial Technology and Regulatory Technology and its probe into the opportunities the two vectors present to Australia, the RBA said there was "not a need" for central banks to issue a new type of electronic money in the form of a CBDC, possibly on a blockchain platform.

"The bank's assessment -- like those of most other central banks -- is that the case for issuing a CBDC for use by households has not been established," it said in January.

"One possibility is that there would be little demand by households for such an asset, given that they already have good access to digital money in the form of commercial bank deposits that provide payment services, are interest-bearing, and are protected (up to AU$250,000 per account) by the Financial Claims Scheme."

It said, however, a greater demand for a CBDC could emerge, particularly in "times of uncertainty".

The RBA, through its in-house Innovation Lab, has been exploring if there is a role for a digital Australian dollar in the context of the bank's responsibilities for issuing the currency and overseeing the payments system.

In the lab, the RBA developed a proof-of-concept of a wholesale settlement system running on a private, permissioned Ethereum network.

According to the bank, the proof-of-concept simulated the issuance of central bank-backed tokens to commercial banks in exchange for exchange settlement account balances, the exchange of these tokens among the commercial banks, and their eventual redemption with the central bank.

Buy now, pay later: 'Merchants just can't say no'

Facing Senate Estimates last week, Bullock touched on the currently stalled work the RBA has been undertaking on the buy now, pay later (BNPL) industry in Australia, saying the bank hopes to strike a balance between allowing innovation in the payments space and meeting market expectations.

BNPL is the name for a kind of credit payment that allows for the purchase of goods without having to pay immediately. Instead, users can pay for the purchased goods later or in instalments.

BNPL is offered by fintechs such as Afterpay, zipPay, and Klarna but it's also a service customers of the likes of Amazon can use on its online marketplace.

See also: Austrac gives Afterpay all-clear following anti-money laundering investigation

"With buy-now pay-later, our concern isn't about the consumer side of that. That's not our interest. Our interest is really in the payments system," Bullock said, citing consumer protections in place through the likes of the Australian Competition and Consumer Commission.

"The issue we're looking at is really based around no-surcharge rules, which is an issue to do with competition and level playing fields. So that's the issue we're focused on."

Bullock said Australian Securities and Investments Commissions (ASIC) is yet to make any decisions, rather it is "just engaging with it".

"We've had discussions, and we've submissions from the buy-now pay-later schemes themselves, as well as others. We haven't got a conclusion on it yet, so I can't give you a conclusion. All I can say is that we're engaging on the issue," she continued.

She said ASIC is noticing similarities with BNPL and credit cards, specifically where the idea of surcharging is concerned.

"The issue here, the market failure here, is that merchants find it very difficult to say no to anything. They find it very difficult to say no to accepting anything. And what they tend to do -- and we observed this with credit cards, and we're observing it now with buy-now pay-later -- is they want to accept everything just on the off chance that the person who comes in wants to use it," she said.

"They just build all those prices into their price level. That's the market failure -- that the merchants don't have a little more leverage to say, 'Can you lower your prices, please?' They don't have leverage to be able to do that."

She said observations indicate that not allowing no-surcharge rules, or only allowing cost-based recovery, "actually puts a little bit of leverage back in the hands of the merchants".

"We've seen that with the credit card systems. My question would be: Is that market failure also evident in the buy-now pay-later space? And that's the question we're examining," she said.

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