RBA – Digital Currency, 0.1% and $100b QE
It’s been a big week for the RBA. On Monday they announced that they were researching a proof-of-concept central bank digital currency and yesterday announced a lowering of interest rates down to a historic low of 0.1%.
From the RBA:
“The Reserve Bank today announced that it is partnering with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software, a blockchain technology company, on a collaborative project to explore the potential use and implications of a wholesale form of central bank digital currency (CBDC) using distributed ledger technology (DLT). This is part of ongoing research at the Reserve Bank on wholesale CBDC.
The project will involve the development of a proof-of-concept (POC) for the issuance of a tokenised form of CBDC that can be used by wholesale market participants for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform. The POC 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.
Assistant Governor (Financial System) Michele Bullock said 'With this project, we are aiming to explore the implications of a CBDC for efficiency, risk management and innovation in wholesale financial market transactions. 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.'”
This announcement didn't come as much of a surprise as society and other countries make moves towards a similar financial infrastructure. With a changing payments landscape, Central Banks have recognised that they too need to develop to aid this transition and incorporate new technology to stay with the times. If a private e-money issuer was to control the majority of payments in a country and there was a clear move away from the fiat currency, the CB would lose power and its ability to implement monetary policy. Against this backdrop, Central Banks are trying to understand the financial and economic impact of introducing their own digital currency.
There is a multifaceted range of factors driving the shift to a cashless or "less-cash" society in countries across the world. Regional analysis exposes key changes in the forces driving us towards a cashless society. In western countries, convenience has emerged as the primary force driving a natural evolution towards a cashless system (which has been accelerated by the pandemic), supported by lower transaction costs that make contactless payments just as competitive as cash transactions.
A CBDC would potentially improve the safety and efficiency of both retail and large-value payment systems. On the retail side, the focus is on how a digital currency can improve the efficiency of making payments—for example, at the point of sale (POS), online and peer-to-peer (P2P) – making payments cheaper and quicker than already existing infrastructure.
The benefits of a CBDC also extend to wholesale and interbank payments – an area the RBA has stated the digital currency is targeting. For example, it could improve and facilitate faster settlements and extended upon settlement hours. The current model for cross-border payments relies upon CBs operating the RTGS infrastructure within which commercial interbank obligations must settle. There is a list of limitations to this system. The primary restraint is that there are time lags for cross-jurisdictional payments, during which counterparties are exposed to credit and settlement risk from their correspondents.
So, what does this mean for your investment portfolio?
The impacts of the CBDC will be influenced by the availability and design of the CBDC, the form of which is open to many different options. The CBDC implementation will also be impacted by the regulatory regime introduced by the RBA to support commercial banks. At this stage, the RBA is in the exploratory phase - with their findings of the project to be released at the end of the year. The RBA will need to consider the impact that they wish the CBDC to have; on monetary policy which will be determined by whether or not the CBDC bears interest, the personal and commercial implications and the viability of implementation using existing technology.
Viewed through the lens of a crypto purist, the idea of a CBDC might seem like a betrayal of the essence of what blockchain and crypto were supposed to represent. Acknowledging that, it is also important to keep in mind that the true potential of blockchain and crypto will not be realised until it achieves mass-market adoption. Numerous obstacles continue to stall wider usage; technical complexity, unfamiliar user interfaces, regulatory ambiguity, and concerns over how to disclose, report and insure crypto assets. All the RBA and other CB's are doing by exploring CBDCs is validating the existence of other cryptocurrencies as legitimate forms of currency.
CBDCs might not have been the original idea of blockchain and crypto, but the continued development of them is good news for blockchain and crypto adoption. It's important to remember that Central Banks love to print money (as we recently discussed here) and it's almost a certainty that they will create a digital currency without a supply limit. Much to the contrary, crypto-assets such as bitcoin have a supply limit. The recent interest rate cut by the RBA from 0.25% to new historic lows of 0.1% is being accompanied by another rush into QE – with the RBA committing to buying up $100B in 5-10-year government bonds over the next 2 quarters. For the last 6 months the RBA has sat on the sideline playing the "wait and see" game claiming they were waiting to see the fine details of how lockdown impacted the economy. Not any more – there's a clear story being told within these most recent actions.
Even as the world moves all finances to the digital space, it's going to be even more prevalent to own inflation hedging assets such as bitcoin and precious metals either physically or in a fully allocated model like our gold and silver-backed cryptos, Gold Standard (AUS) and Silver Standard (AGS) tokens. This is also more validation and adoption for the Ethereum network that the RBA proposes using and that our tokens also use.