The growing potential of central bank digital currencies

Central bank digital currencies (CBDCs) could potentially bring many benefits to consumers, however, banks still approach the new technology with caution given the many uncertainties.  

A new Westpac report, highlights the innovations that digital currencies can bring to consumers and banks alike.  

CBDCs are cryptocurrencies issued directly by central banks and could act as a form of electronic cash. 

Jarek Kowcza, senior economic at Westpac Group said CBDCs could address the biggest issues with private cryptocurrencies, given that they do not currently meet the key characteristics of money.  

CBDCs have many potential advantages, including lowering the cost of payments and removing price volatility. In developing countries, they could also increase financial inclusion and participation. 

This is an area of evolving interest, which most central banks are investigating, according to Kowcza. 

In Australia, the Reserve Bank (RBA) has been working with researchers to consider the merits of a CBDC. So far, they haven’t been convinced that a strong public policy case exists. 

Australia already has a modern and efficient payment system. For example, the New Payments Platform enables near-instant electronic transfers from one account to another – replicating one of the key touted potential benefits of crypto. 

Countries with less well-developed payment systems and with higher costs may benefit more from a CBDC. Certain types of payments may also become cheaper, with overseas transfers an obvious example. 

Kowcza said the crypto crash of 2022 promoted louder calls for increased regulation and oversight of the cryptocurrency industry, including stablecoins and DeFi.  

“The current global regulatory framework around cryptocurrencies, DeFi and other digital assets is fragmented. Different countries are approaching the issues from various perspectives to balance innovation with consumer protection needs,” he said.  

“Regulatory frameworks are likely to continue to evolve alongside innovations in the space, as regulators settle on best-practice approaches.” 

However, innovation will continue.  

He said, “As development grows, CBDCs may become the prominent forms of digital currencies in mainstream use by the public. These have the potential to address many of the current drawbacks of digital currencies, while providing a ‘nominal anchor’ onto which other digital financial services could be built.” 

Even in Australia’s modern payments system, use cases still exist. Kowcza said the future may be closer than you think. 

The RBA recently launched a pilot eAUD project to work with around 80 stakeholders on over 140 potential use cases. This will be an area to keep an eye on as proposals are trialled through early 2023. 

Some of the more revolutionary possibilities lie in using CBDCs as a foundation on which to build a more efficient and interoperable digital domestic and global financial system. 

CBDCs could provide a stable, secure base from which other innovations can be overlayed. This could lead to improved financial products and services, offered at a lower cost, with less need for intermediation, and with reduced counterparty risks.