While many central banks around the world are designing and testing CBDCs, the RBA has said that Australia has no need for a cryptocurrency issuance.
September 17, 2020 | AtoZ Markets – According to a local news report, the Reserve Bank of Australia (RBA) has taken a skeptical and cautious step toward Central Bank Digital Currencies (CBDCs) as well as private-sector stablecoins.
According to the RBA, there is currently a strong policy case for issuing a CBDC in Australia due to the success of the country’s efficient, real-time New Payments Platform. Moreover, while there is a broad decline in the use of cash for transactions, Australians are not letting go of banknotes as quickly as other citizens, as for example, are the Swedes.
Australians’ demand for cash spikes
Per the report, the demand for cash actually rose significantly amid the COVID-19 pandemic. As a result, the RBA has pledged to continue to provide access to banknotes “for as long as Australians wish to keep using them.”
The central bank’s paper analyzed the initiatives underway in three of the most proactive countries in CBDC development — Sweden, Canada, and China.
Regarding Sweden, the RBA noted that the decline in cash use there has already been precipitous for several years. This has spurred the Riksbank to develop and test a potential e-krona.
Related article: Sweden on its Way to Become First Cashless Country
Meanwhile, the Bank of Canada (BoC), has been warming up for the potential issuance of a retail CBDC as and when it becomes desirable. Canada pictures two situations that could make CBDC issuance advantageous — a decline in the use of cash for everyday transactions, or threats to monetary policy from the circulation of a private-sector digital currency.
For its part, the RBA stressed the uncertain horizon for prospective currencies such as Facebook’s Libra, noting that it remains to be seen whether the currency will “gain regulatory approval and become operational.”
In China’s case, the RBA has reasoned that the drive behind the country’s CBDC is connected to the domestic prevalence of private-sector e-money wallet providers, such as Alipay and WeChat Pay.
Why is the RBA reluctant to issue a CBDC?
From the RBA’s perspective, a CBDC could have negative impacts on the country, including higher funding costs for commercial banks.
At the moment, banks derive about 60% of their funding from deposits, two-thirds of which comes from at-call deposits. Thus, loss of deposit funding could push commercial banks to rely on funding from equity and capital markets to a greater extent.
“The loss of deposit funding and greater reliance on other funding sources could result in some increase in banks’ cost of funds and result in a reduction in the size of their balance sheets and in the amount of financial intermediation,” the payment paper noted.
Moreover, a CBDC could increase the likelihood of a run on the banking system in case of financial stress. RBA claimed that “in the presence of a CBDC, a run on the banking system as a whole would become feasible; if depositors had concerns about the entire financial system, they could seek to make large-scale transfers of commercial bank deposits into CBDC.”
The RBA, however, admitted that this threat would be mitigated by the existing protection offered by Australia’s financial claims scheme for household deposits.
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