The CBDC Pilot Report
Reviewing the recent report on the Australian Central Bank Digital Currency Pilot (Pilot) run by the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC), my mind goes to two statements. The first from Shakespeare and the second from the political scientist Arthur Bentley.
As a general rule and in the context of Macbeth contemplating a significant decision, Shakespeare portrays Macbeth seeking third-party opinions before deciding whether or not to kill Duncan, in order to become king. Shakespeare writes:
…I have bought Golden opinions from all sorts of people[.] - Macbeth, Scene 1, Act 10
Arthur Bentley, while talking specifically about the epistemological study of politics, helpfully summarises why relative limits on inquiries into things do not always make sense:
Ought we not draw a distinction in advance between politics and other sorts of social activity so that we can have our field of study defined and delimited at the outset? The answer is no. Many a child making paper toys has used his scissors too confidently and cut himself off from the materials he needs. We shall plunge into any phenomena belonging to the roughly recognised field of government. If any of these things lead us to interesting paths we shall follow them, heedless of definition. - Arthur. F. Bentley, The Process of Government (1908), p 199
In essence, it is good to ask questions, to a lot of people, and end up with either an answer you did or didn’t expect or that gives you more useful information - like has been done with the CBDC Pilot. It is correct to solicit widely regarding questions we consider about how to design society, even when replacing good (or current) kings.
The Pilot’s focus was to engage deliberately with the Australian industry to explore use cases for a CBDC. It was rather limited in scale, with 14 industry participants. The four use case categories that emerged surrounded markets, digital money, smarter payments, and inclusion and resilience in the digital economy.
Separate from the discrete analysis of what was covered by the Pilot, the inquiry enlivens a broader debate about whether the Government (or statutory bodies) should be further endowed with managing economic interactions while driving fiscal and monetary policy. It probably doesn’t hurt, at least to some degree. Private industry is wonderful at innovation, and the Government is good at making capital available at times of need, although it does need to be rate-limited in its oversight of technicalities (or simply, leave the market be for a while until it understands better and engages with studies like these). This could be by implementing a broader sandbox environment, with legislative exemptions and allowances for innovation, affording the market further time to ferment deeper use cases.
The various use cases covered in the project highlighted a range of areas where tokenised money could add value to the Australian economy and Australia’s contribution to the global economy, including by facilitating programmable payments, atomic settlement in tokenised asset markets and offline payments. The project also canvassed opportunities for a CBDC to support the development of new forms of privately-issued digital money (including tokenised bank deposits or CBDC-backed stablecoins) which could address some of the business needs identified in the use case submissions. In this sense, a CBDC could be viewed as an enabling complement to, rather than a substitute for, private sector innovation.
The result of the CBDC Pilot is CBDC’s are useful across most of the modalities tested. Now we need to consider whether it makes our markets more purposeful, reliant, resilient, and complementary to the human experience. The findings seem to be yes, it can make both new and existing markets more efficient and have some ancillary benefits associated with increasing access to the digital economy across our society.
The use cases examined in the project suggested that broad access to a CBDC could support (directly and indirectly) the creation of new or more efficient markets.
Interestingly, most industry participants preferred that pilot CBDC balances and transactions were private, while a few valued the benefits of transparency that came from the DLT implementation (e.g. to allow independent verification of financial capacity or reserve backing of stablecoins).
What was Tested
Taking only select examples from the Pilot, the below use cases were tested.
Imperium Market’s pilot project tested two banks that were paired to trade tokenised debt securities. These trades were settled using a pilot version of the CBDC based on an atomic settlement model. Imperium Markets facilitated the trade by ensuring that payment was made at the same time as the delivery of the securities, a process known as delivery versus payment (DvP). They used the 'allowance' feature on the pilot CBDC platform, which works similarly to a one-time direct debit for a specific amount, authorised by the end users. Imperium Markets did not need to handle or store the pilot CBDC during the transaction. This meant that the end users weren't exposed to any counterparty risk, shifting the legislative substrate as we know it.
The potential for limiting the number of custody swaps when exchanging assets until all criteria are met is good for business. Dropping assets between isolated systems of intermediaries seems to be becoming less relevant. Industrialised trust, through robust systems (whether blockchain, CBDC-backed assets in a uniform environment, or otherwise) could impact capital structures in the same way interest rates do (a lot).
Clearing and settlement in the traditional markets is generally T+2. That is a lot of relatively latent capital, where complex actors may layer and disperse this production risk, but most can not. Closing that gap redistributes capital quicker to market participants rather than market intermediaries. Economies need to move, and participants drive capital transfers in such disparate and increasingly discrete ways, that mixed market economies will benefit from greater availability of dry powder. Intermediaries that simply hand money around, due to lack of a fulsome alternative, aren’t the end state of our economic system. Remember, at one point, Feudalism seemed self-evident.
The GST Automation Pilot use explored by the Commonwealth Bank of Australia and Intuit showcased automated GST collection and payment using a pilot CBDC, initiated by merchants through an in-app invoice. The GST was auto-calculated and directed to an account for the ATO, while the rest was simultaneously paid to the merchant. This demonstrates the CBDC's potential to enhance GST collection efficiency, reduce businesses' compliance tasks, and possibly eliminate the need for Business Activity Statements.
Making tax interactions seamless and compliance makes sense. This, and similar innovations, would be efficiency multipliers in the market, reducing administrative overheads for tax compliance and enabling a redistribution of resources.
Wrapping the CBDC, to re-issue a CBDC onto a third-party platform (in most instances in the Pilot, participants were using a private and permissioned Layer 2) outside the immediate Ethereum base layer ecosystem will likely become less relevant once Chainlink’s cross-chain interoperability (CCIP), or something similar, becomes ubiquitous.
In the tokenised invoices use case, a wholesale car dealer issued a tokenised invoice, which was partly sold to a financier for optimised working capital. When due, the buyer settled the invoice with a stablecoin backed by Pilot CBDC, auto-calculating and simultaneously disbursing payments to both the supplier and financier. Using a DLT platform with features like Chainlink's CCIP can enhance supply chain finance transparency, efficiency, and reduce errors and counterparty risks.
Novatti lead a pilot illustrating the use of pilot CBDC to back the issuance of a stablecoin on a public DLT platform. The CBDC was 'escrowed' in a hash time locked contract, ensuring the stablecoin's value was verifiably backed. The wrapped stablecoin had usage restrictions for approved end users for the purposes of the Pilot.
Wrapping a CBDC will likely be the norm, as it allows fluid movement of tokens across ecosystems, which enhances interoperability and liquidity (and therefore capital efficiency). Chainlink’s CCIP, once fully realised, may limit the requirement for this to be as ubiquitous as the Pilot would suggest. But we will see.
Legal and Regulatory Findings
During the Pilot, which was structured as a contractual claim on the RBA involving real customers, participants had to meet all legal and regulatory standards before implementing their use cases. Regulatory bodies ASIC and AUSTRAC facilitated this, even providing several exemptions due to the research-based nature of the project. However, this process highlighted certain uncertainties regarding how CBDCs and new business models that use them would fit into existing legal and regulatory frameworks. The Pilot CBDC was launched as a contractual obligation of the RBA, rather than being rooted in a legislative context. Further complexities arose from the Pilot CBDC's utilisation in tokenised digital asset settlements, with confusion surrounding the regulatory status of these digital assets.
In many instances there was uncertainty around the legal and regulatory treatment of the digital assets, in particular whether they were regulated ‘financial products’ under the Corporations Act 2001. This had implications for the regulatory status of the use cases. - Pilot CBDC Report, page 7
Aside from the underlying financial services, including Chapter 7 of the Corporations Act 2001 (Cth), considerations, rather than the contractual protections offered under the Pilot, it is likely that, among other things, legislative amendments would be required to include customer-held CBDC redress rights under the Financial Claims Scheme administered by APRA.
Importantly, almost all Pilot CBDC use cases seemed to work and be more efficient than solutions available today. Moving past the practical applications of the technology, we move to the deeper layer of appropriate regulation and changes required to see the use cases enshrined or empowered by law.
Government is (or should be) reflective of the aggregate actions and views of the constituents empowering it, giving appropriate weight to expert opinions when establishing frameworks to govern how we interact, create, adapt, and live. Emphasising the importance of broad inquiry and consultation, the overarching lesson from the Pilot is that while digital innovations like CBDCs promise enhanced efficiency and functionality, their real-world application requires careful consideration of existing frameworks, potential disruptions, and the broader impact on society.