The Australian central bank digital currency pilot, to be called eAUD, will run on a private blockchain network called Quorum, which is based on Ethereum, and will allow for the development of smart contracts and application program interfaces.
eAUD will use the ERC-20 industry standard for fungible tokens on Ethereum, which supports the transfer of tokens from one account to another and calculation of token balances for each account and the total for the network.
The Reserve Bank and the Digital Finance Cooperative Research Centres yesterday released a white paper outlining their objectives for their CBDC pilot and the approach they will take.
eAUD will be a general purpose CBDC issued as a liability of the Reserve Bank for use in the “real world applications” of the pilot. eAUD will be denominated in Australian dollars and the smallest denomination will be one cent.
No interest will be paid by the RBA on any holdings of eAUD and only Australian registered entities and Australian resident individuals may hold it.
eAUD will be able to be held in a “custodial wallet” provided by pilot participants (“use case providers”) or “non-custodial wallets” held directly by the end user.
The purpose of the project is to explore innovative use cases and business models that could be supported by the issuance of a CBDC. It will delve into the technological, legal and regulatory considerations associated with a CBDC.
The RBA and DFCRC will focus on the economic benefits, if any, of a CBDC, the emerging business models or use cases a CBDC might support, and the risks involved.
A number of use cases submitted by industry participants will be selected for operation within the pilot infrastructure. The RBA and DFCRC are looking for ideas from financial institutions, fintechs, public sector agencies and technology providers.
As to the use of Quorum as the platform, the white paper says: “The choice of technology for this project does not reflect any view that any eventual CBDC would be blockchain-based or that Ethereum would necessarily be an appropriate choice for a production system.
“It was chosen as a widely used and well understood platform that would facilitate participation in the project by a wide range of entities.”
The RBA makes clear in the white paper that it is going into the pilot having reported in 2020 that there was “not yet” a compelling case for the issuance of a retail CBDC in Australia. This is based on the existence of an efficient retail payments network and the government guarantee of retail deposits.
It has been involved in a couple of previous trials that suggested asset tokenisation could improve the efficiency, risk management and innovation of wholesale financial market transactions, and reduce the cost and time taken to process cross-border transactions.
Like other central banks, the RBA currently issues two types of money - physical cash and electronic central bank deposits, also known as reserves or settlement balances, which are accessible to financial institutions.
The third type of money is private money, principally available through electronic bank deposits. Central banks support commercial bank money by allowing banks to settle interbank payments using central bank money, enabling convertibility between commercial and central bank money through banknote provision, and offering contingent liquidity through a lender of last resort function.
Markets where CBDC trials have shown most promise include those where financial inclusion (access to banking services) is low and where the use of cash is in an advanced state of decline. Neither of these conditions applies in Australia.