At the Payments Innovation 2016 Conference in Sydney earlier this week, the Head of Payments Policy from the Department of the Reserve Bank of Australia (RBA), Tony Richards, discussed digital currencies and distributed ledgers. He disclosed that Australia could one day have its own digital dollars, citing that Bitcoin has stimulated “interest in the potential offered by distributed ledgers, extending to the possibility of central-bank-issued digital currencies.”
“Let me stress that the Bank has not reached a stage where it is actively considering this, but in the more distant future it is even possible that we may see a digital version of the Australian dollar.”
- Tony Richards, Head of Payments Policy Department, Reserve Bank of Australia
Richards expects to see the rise of electronic payment methods and whole new systems for payments to replace cash soon, such as Australia’s New Payments Platform (NPP) infrastructure. These innovations are being developed in conjunction with banks and other deposit-accepting financial institutions in response to the Reserve Bank’s recent payment innovation strategy, which aims to fill the hole left by the rapid decline of Australia’s usage of cash and checks. In comparison with other English-speaking economies, check usage in Australia is quite low today, according to Richards.
The number of checks written in Australia have fallen drastically over the last two decades. With this current decline, it is now accelerating downwards from around 50 checks per capita annually in the mid-1990s, to only six in 2015.
Cash usage is also falling, although unlike checks it has remained the most important payment method for low-value transactions according to the Central Bank’s most recent study in late 2013. However, it confirmed that the use of cash had declined significantly, with the proportion of all transactions involving cash falling from 70 per cent in the 2007 survey to 47 per cent in 2013. Meanwhile, the demand for holding cash has grown.
“As payment habits and processes become more digital and cheques continue to decline and become harder and more costly to use, there will be a requirement to transition cheques to more efficient and sustainable payment methods. Our initiative will deliver a collaborative approach to ensuring more convenient payment choices are made available to all users of the payment system, prior to the identification of an end date for cheques.”
- Tony Richards, Head of Payments Policy Department, Reserve Bank of Australia
Nationalized digital currencies were mentioned repeatedly at the conference, and on at least one occasion, accompanied by details about how to bring them into circulation and what role they would play in society. “A plausible model would be that issuance would be by the central bank, with distribution and transaction verification by authorised entities,” Richards explained and continued to describe how digital currency could “circulate in parallel (and at par) with banknotes and other existing forms of the national currency.”
Richards made clear his doubts about how privately-established virtual currencies such as Bitcoin could ever displace well-established, low-inflation national currencies in terms of usage within individual economies. He also acknowledged that Bitcoin has ignited widespread interest in blockchain technology to the point that countries are now exploring issuing their own digital currencies.
In regards to Blockchain applications other than digital currencies, Richards recognized their potential applications in the settlement and security markets. His bank oversees clearing and settlement facilities, as well as licensing to operate such in Australia, so this was of particular interest to his organization.
In December of last year, RBA governor Glenn Stevens spoke to the Australian Financial Review backing blockchain technology and urging banks to figure out how it could be used to create broader efficiencies in the financial system.
"It is basically a distributed ledger as opposed to a centralised one, so in areas where you have no ledger it may be a cost-effective way of having one … In areas where you’ve got a centralised ledger, the question is whether the distributed way of doing it will end up being more efficient and cheaper."
- Glenn Stevens, RBA Governor
Australia appears to be bringing up the rear in terms of countries adopting some sort of digital currency. A few countries have openly and explicitly discussed the possibility of digital versions of their existing currency. For instance, Zhou Xiaochuan, People’s Bank of China Governor recently revealed that China is planning to issue its own digital currency as soon as possible but there is no timetable yet. England and Canada have both announced research into their own digital fiat as well.
“Digital currency can be converted freely but its convertibility will also be controlled. We think, therefore, as a legal tender, digital currency must be issued by the central bank. The issuance, circulation and transaction of digital currency will follow the same management principles of traditional currency.”
- Zhou Xiaochuan, People’s Bank of China Governor
The Bank of England often has encouraging sound bytes on the possibility of issuing their own digital currency. In his speech in September 2015 at the Portadown Chamber of Commerce, Northern Ireland, Bank of England Chief Economist Andrew Haldane statedthat “the distributed payment technology embodied in Bitcoin has real potential.” But on the subject of digital currency issuance, more answers were needed such as how it would work, what security and privacy risks would emerge, and how public and privately-issued monies would interact.
“Whether a variant of this technology could support central bank-issued digital currency is very much an open question. So too is whether the public would accept it as a substitute for paper currency. Central bank-issued digital currency raises big logistical and behavioural questions too.”
- Andrew G Haldane, Chief Economist, Bank of England
In November 2014 at Wilfrid Laurier University in Waterloo, Ontario, Senior Deputy Governor of Bank of Canada Carolyn Wilkins discussed in detail the use of Bitcoin, cryptocurrencies, and e-money in general. She also announced at the time that “the Bank is also undertaking research on the potential merits of issuing e-money.” In a more recent speech, in November 2015 at the Rotman School of Management and Munk School of Global Affairs, she revisited the topic of e-money and a cashless society, and concluded that the Bank will explore the impact of digital currencies, including Bitcoin, over the course of a three-year corporate plan.
“We’re responsible for the bank notes in your wallet. More work goes into them than might be evident: developing new security features, combating counterfeiting and researching new trends in electronic payments and digital currencies.”
– Carolyn Wilkins, Senior Deputy Governor of Bank of Canada
While wanting to learn from other countries issuing digital currencies first, to see what are possible and what are problematic, Richards believes that, given cybersecurity and cryptography risks, full-scale issuance of digital currency should be “some time away” for any country.
In an opening statement to the Senate Economics References Committee’s inquiry into Digital Currency, Richards and RBA Senior Manager of Payments Policy Department David Emery stated that the Bank is monitoring the developments in digital currencies. The Committee suggested that “many payment attributes of digital currencies are already available in the ‘traditional’ payments system” or there are plans to make new services available that will be facilitated by the NPP project. Therefore, the committee admitted that it is still unclear what will drive widespread use of digital currencies domestically, especially given the price volatility problems observed to date.
At this time the NPP is on schedule to begin deployment in late 2017, said Richards. However, if this conference were to reconvene in early 2018 at examining the subject again with the NPP fully running, he expects to see “significant new payment functionality in place,” including many new abilities that you mainly only hear while describing Bitcoin today.
In January, the Australian Securities Exchange (ASX) selected Blythe Masters’ Digital Asset Holdings to develop blockchain solutions for the Australian market with the initial focus on post-trade services such as clearing and settlement. The ASX then purchased a five percent equity stake in the New York-based company for A$14.9 million.
"Digital Asset is delighted to be selected to design the world’s first national scale post-trade solution utilizing Distributed Ledger Technology. The Australian equities market could benefit tremendously from this new technology and enable ASX to better serve existing clients and create new opportunities."
- Blythe Masters, Digital Asset CEO
This latest move follows the ASX’s announcement in February 2015, that it would replace or upgrade all of its main trading and post-trade platforms. “Digital Asset software is designed to materially improve post-trade processing efficiency, reducing costs, latency, errors, risk and capital requirements,” according to the company’s press release.
"Distributed Ledger Technology could provide a once in a generation opportunity to reduce cost, time and complexity in the post-trade environment of Australia’s equity market.”
- Elmer Funke Kupper, ASX Managing Director and CEO
RBA’s Richards welcomed the opportunity for RBA to work with the ASX, the Australian Securities and Investments Commission, and other relevant public sector organisations as they consider whether or not distributed ledger technology could be the best way to replace their ageing CHESS clearinghouse infrastructure.
“We think if we can get this right, we can get very close to real-time settlement,” Kupper told Fairfax Media at the January announcement. “You should be able to sell shares at your desk right now and walk to the nearest ATM to get your money. That is our mission. The moment we are able to do that, we remove a lot of risk from the system,"
Australia could one day have its own digital currency.
Checks written in Australia have fallen drastically last two decades.