The banks could then exchange these tokens among themselves to settle obligations, and could eventually redeem them with the central bank.

Speed and cost advantage

Although the Reserve Bank said it remained an "open question" whether there was a case for using central-bank digital currencies in settlement systems, it does highlight several potential advantages from their use.

In the first place, it could reduce the speed and cost of payments. The Reserve Bank argued that a central bank digital currency "fully integrated into a blockchain platform could enable payments to be made between participants in real time and 24/7 without relying on external payment systems."

RBA head of payments policy Tony Richards is looking at whether there are benefits from using central bank digital currency in the payments system. Louise Kennerley

(This contrasts with the present situation where financial institutions exchange instructions with each other throughout the day. But because the costs of settling a large number of low-value payments in real time are too high, they wait until the close of the business day to calculate their net obligations to each other.)

In addition, having a central bank digital currency integrated within a blockchain platform would make it easier to do "atomic" transactions.

These are those "all or nothing" arrangements, where all parts of the transaction are executed or none at all.


It would also make it possible for vendors to reduce their settlement risk, because it would be possible for payment and the exchange of the corresponding asset to take place simultaneously.

Finally, the Reserve Bank points out that the combination of a central bank digital currency with smart contracts on a blockchain could make it possible to develop new kinds of "programmable money". (This is money which has conditions attached as to how it can be spent or transferred.)

In its submission, the Reserve Bank said that although it was not considering a central bank digital currency for retail use at present, "the availability of a wholesale settlement token based on distributed ledger technology could allow payment and settlement processes to become more integrated with other business processes".

The simulation trial was conducted in its small in-house Innovation Lab, which the Reserve Bank set up in late 2018 to examine new technologies that affect its policy and operations.

Changing structure

The Reserve Bank said it intended to extend this research over the coming year, "potentially through collaboration with one or more external partners".

But why isn't the Reserve Bank looking to issue its own digital currency – which, like physical money, would be a liability of the central bank, rather than of commercial banks – for retail customers to use?

Tony Richards, the head of the payments policy department at the Reserve Bank of Australia, told The Australian Financial Review last month that there were many issues that central banks needed to consider because digital currencies had potential to change the structure of the financial system.


One possible scenario, he said, was that central banks issued digital versions of their currencies, only to find that people were already more than happy with the electronic payments services provided by their existing commercial banks.

"So perhaps the central bank goes to a lot of effort, but there's little interest in holding the digital version of the currency," he said.

But there was also a possibility that "in times of uncertainty, people might decide that they want to switch their savings from bank deposits to holding the central bank’s digital currency. So that could have the effect of making bank runs easier."

There was also another alternative – that "people decide that they would much prefer to hold the central bank’s digital currency rather than keeping their money on deposit in commercial banks".

But, he pointed out, "that raises the question as to who is going to fund mortgages and business loans – it would change the whole structure of the financial system.

"You'd then end up with pressure for the central bank to lend money to the banks, so they could on-lend to households and businesses."

As Dr Richards pointed out, "there is a risk that if central bank digital currencies were wildly successful, it would lead to a fundamental change in the structure of the financial system.


"And that's why most central banks have taken the view that digital currencies are an interesting idea, but they don't see any significant problem with the current system."

'More efficient and inclusive'

Although central bankers may profess to be content with the status quo, big global tech players continue to be beguiled by rewards they could reap from controlling a new global payments system.

Last June, Mark Zuckerberg's Facebook unveiled plans to mint its own digital currency, to be known as Libra, with a tentative start date of 2020.

Facebook argued its new cryptocurrency would "empower" the 1.7 billion adults around the world who are excluded from the financial system, with no access to a traditional bank account.

Libra was to use blockchain, like other cryptocurrencies such as bitcoin. But unlike them, Libra would be backed up by a basket of international assets, which should help to keep its value steady.

But a report published last October by the G7 group of major economies warned that although global stablecoins – digital currencies such as Libra that are pegged to international assets – had the potential to be more efficient and inclusive than existing payment methods, they also raised significant legal and regulatory risks.

As the Reserve Bank pointed out in its submission, the G7 report "cautioned that private-sector global stablecoin initiatives should not be permitted to launch until all risks and regulatory requirements have been addressed".

And, the Reserve Bank added, it supports this view.