RBA Jones: Fincl Stability, MonPol Implementation Among Key Drawbacks of Retail CBDC
- Published on
- 18 Sep 2024, 09:21 AM
--RBA remains of view retail CBDC challenges outweigh benefits
--But will continue to examine issues related to retail CBDC
--Principal focus now is wholesale CBDC, other digital money forms
By Sophia Rodrigues
(Sydney, September 18, 2024) – The Reserve Bank of Australia sees higher borrowing costs, bank runs and challenges in monetary policy transmission and implementation as three key drawbacks of a retail CBDC (Central Bank Digital Currency) in Australia.
Still, it remains committed to examining these issues, including a public engagement on retail CBDC and assessing the merits and design issues. And if a public policy case ever emerged in favour of issuing a retail CBDC, the government would be the ultimate decision authority and almost certainly require legislative change.
The update on CBDC, both wholesale and retail, was provided by Assistant Governor Brad Jones in a speech in Melbourne Wednesday titled, “Financial Innovation and the Future of CBDC in Australia.”
In the speech, Jones announced that the RBA is making a strategic commitment to prioritise its work agenda on wholesale digital monetary and infrastructure, including wholesale CBDC. The RBA is publicly committing to a three-year applied research program on the future of digital money in Australia.
On retail CBDC, the RBA remains of the view that the potential benefits “appear modest and uncertain” relative to the challenges it would introduce, Jones said.
Among the main drawbacks is a rise in bank funding costs as banks might have to offer higher deposit rates if households prefer placing their liquid assets in a retail CBDC.
“And while central banks might consider offsetting a tightening in financial conditions with looser monetary policy, the idea that central banks should furnish banks with cheap loans as compensation for losing low-cost household deposits is more objectionable – it would raise a litany of other issues, moral hazard among them,” Jones said.
A more significant concern is the risk of bank runs or that a retail CBDC would amplify its effects.
Jones said research by RBA staff showed that if Australian households simultaneously transferred A$5,000 from their deposit account into a retail CBDC and if there were no offsetting actions from banks or the central bank, it would reduce banks’ liquidity buffers by 40-60% and put them close to minimum internal thresholds.
Significant uptake of retail CBDC would also affect monetary policy transmission as the RBA would then need to conduct a large program of open market operations which could disrupt functioning in key markets.
“Separately, monetary policy transmission could be affected by disintermediation of the banking system, given its key role in setting the interest rates that influence saving and investment decisions,” Jones said.
These challenges with respect to financial stability and monetary policy implementation is the main reason the RBA has yet to see a strong public policy case emerge for issuing a retail CBDC.
But it will continue to examine the issues and will publish a follow-up paper in 2027, Jones said.
For now, the principal focus of the RBA’s work program is the role wholesale CBDC and other forms of digital money and infrastructure upgrades could play in enhancing the functioning of wholesale markets.
--Contact: Sophia@centralbankintel.com