The man whose signature appears on every Australian note, Reserve Bank governor Philip Lowe, has signalled he and his successors may soon be turning digital.
In an address to G20 central bankers, Dr Lowe has given his clearest indication yet that the next step in the evolution of money is about to take place and it will require people to update their leather purses and wallets to cards or phones.
Australian dollars may soon be available as a central bank digital currency.Credit:Louie Douvis
Central banks around the world are examining the concept of central bank digital currencies (CBDCs). They are digital versions of a national currency and financially backed by the country’s central bank.
The Bahamas has a CBDC called the Sand while China’s central bank is trialling the e-yuan. Athletes at this month’s Beijing Winter Olympics were able to use the virtual currency at sporting venues across the city.
While Australia’s payment system has undergone sweeping changes in recent years amid a boom in tap-and-go transactions and buy now, pay later services such as Afterpay, the RBA has moved slowly in the digital currency area. In December, it completed its Project Atom research into wholesale CBDCs, finding such a currency could improve efficiency and innovation across financial market transactions.
Dr Lowe said what societies used as money was shaped by technology. Silver and gold had given way to paper, to paper notes and now in Australia’s case to polymer notes, which all feature the signature of the RBA governor.
He said money changed as technology evolved and it appeared the next step was about to occur.
“We can’t be sure what the next innovation in money will be, but I think there’s a fair chance it will be a form of digital token that sits in a digital wallet or a digital device,” he said.
“If that’s what happens, it offers the potential for lower costs and for more flexible payments for people and I think it will be more inclusive.
“It’s hard to know where this is going to end but I think there are significant opportunities here.”
Dr Lowe, however, drew a distinction between digital tokens backed by a central bank and those that might be offered by the private sector.
A CBDC would operate like dollars and coins, where the money is backed by the bank and the government. It is often described as “fiat money” as it is not backed by a commodity such as gold but by a government’s control of the money supply and the ability to raise taxes.
Stablecoins, such as Tether or Facebook’s Diem, are private sector versions of a digital currency. The coin is backed by an asset such as gold, government debts or holdings of a real currency such as the US dollar.
These types of “private” money have existed in Australia. Until 1913, when the first Australian notes were produced, private money circulated in the country alongside British pounds and colonial government coins and notes.
Dr Lowe cautioned that private money had worked in the past until it didn’t, adding the failure of private money was “really bad for society”.
“History is littered with examples where private money worked really well for a time but then something happened, confidence is damaged and it all ends in disaster and financial crisis that hurts people,” he said.
Late last year, a Senate committee investigating the future of finance and technology in Australia recommended Treasury lead a policy review of the viability of a retail CBDC issued by the RBA. That recommendation has been formally adopted as federal government policy.
In evidence to a Senate committee last week, RBA assistant governor Michele Bullock noted that if the bank started issuing CBDCs, that did not necessarily mean the end of cash.
“This would be a decision not for the Reserve Bank but for the government, and it wouldn’t be replacing cash. That’s very clear,” she said.
Another concern is that if central banks set up CBDCs, this may make it easier for a bank run as people withdraw their deposits to hold a central bank digital currency.
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