Reserve Bank of Australia weighs pros and cons of CBDCs amid massive interest from financial firms

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Australia’s quest for central bank digital currency (CBDC) received a jolt during the week after it received over 140 use case proposals from operators in the finance industry.

However, the Reserve Bank of Australia (RBA) warned that using CBDCs could usher in several unforeseen problems for the financial system. Assistant Governor Brad Jones disclosed the central bank’s position at a conference, saying that despite the array of benefits, there exist inherent risks in CBDCs.

Jones warned that commercial banks could face the risk of bank runs if citizens lose confidence in financial institutions. He added that bank deposits could be changed to CBDCs “at the stroke of a keyboard,” which pokes holes in the argument that CBDCs could promote financial stability.

The official further noted that the widespread use of CBDC may impede the ability of central banks to lend to borrowers and raise capital buffers. This issue stems from CBDCs becoming the “preferred source of liquidity holdings” for households, negatively affecting the operations of commercial banks that require deposits to finance activities.

“For instance, banks might opt to compete harder for low-cost deposits on safety grounds by providing loans only to the very highest quality borrowers,” said Jones. “But this could disrupt credit supply in another way—by starving otherwise creditworthy borrowers of access to funding.”

Despite the downsides raised in his speech, Jones pointed out that the interest shown by financial services firms toward a retail CBDC was nothing short of impressive. Nearly 80 companies proposed a myriad of use cases bordering on the areas of e-commerce, cross-border payments, offline, and government payments.

The silver lining in the dark cloud

Jones highlighted several problems that CBDCs could solve in the Australian financial system, including consumer data protection. The assistant governor argued that central banks do not have the incentive to exploit users personal data, unlike private digital money.

Another benefit associated with using CBDC is safeguarding monetary sovereignty while avoiding the ”cryptoization” of the economy. Jones pointed out that China’s digital yuan is a keen example of the use of CBDCs to maintain the financial sovereignty of the nation.

Other benefits raised in his speech include the increasing liquidity in markets and reduction of settlement risks while ultimately improving competition and efficiency in the payments system. Jones stated that the bottom line for fostering healthy competition is reducing end users’ costs.

“This would be particularly welcome by small merchants, who continue to face significant costs in accepting electronic payments,” said Jones.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: The BSV Global Blockchain Convention presentation, CBDCs and BSV