As the payments system continues to evolve, the RBA’s Governor considers the pros and cons of a digital dollar.

At a recent address to the Australian Payment Summit, RBA Governor Dr Philip Lowe contemplated the possibility of a digital Australian dollar (eAUD). Yet to be fully understood is the form in which any eAUD could be issued, and how its exchange would be facilitated. While the RBA has expressed that it has no immediate plans to issue an electronic form of the Australian dollar, it is certainly on the radar. Dr Lowe presented a number of working hypotheses about the evolution of electronic payment systems.

Hypothesis 1: the increased shift to electronic payments.

Substantially, Australian households are turning away from cash payments, instead preferring to make payments electronically. A 2007 RBA survey reported that cash accounted for 70% of household transactions. The RBA’s calculations show that only nine years later in 2016, that number had nearly halved, falling to 37%. Cash is quickly being replaced by debit and credit card transactions, particularly since the emergence of contactless card payment. The RBA have also identified that, since 2005, the number of transactions using debit and credit cards has grown at an annual rate of 10% while ATM withdrawals are showing a downward trend, falling some 25% since 2008.

The adoption of electronic payments is directly related to the ability of any eAUD to be successfully implemented and used economy-wide. Undoubtedly these trends will continue in favour of using physical banknotes. The increasing availability of mobile payment apps, combined with more users embracing this technology, has widened the accessibility of electronic payment facilities. However, Dr Lowe indicated that physical banknotes are still extensively used by older Australians and those living in regional areas, signifying that full adoption of electronic payment is still very much a long-term ambition.

Hypothesis 2: banks will likely remain at the centre of the shift to electronic payments.

Australian banks have largely provided all the infrastructure that has made the aforementioned shift to electronic payments possible. This may partly be due to a smaller and more manageable population size in Australia relative to other countries. In China and Kenya, non-bank entities have entered the market and spearheaded the growth of electronic payments. Naturally, taking the growth of electronic payments into the hands of non-financial institutions raises some concerns about security and regulatory compliance. However, the RBA agrees that the Chinese and Kenyan examples are a lesson for Australian financial institutions.

A recent example of the RBA and financial institutions working to enhance electronic payment infrastructure includes the New Payments Platform (NPP), which involves instant settlement of funds and the ability to transact simply with a recipient’s email address or mobile phone number. The RBA states that a benefit of this cooperation is that the system is still subject to strong regulatory oversight and consumer protections while also involving the major banks.

Hypothesis 3: could electronic banknotes coexist with current electronic payment systems?

The RBA considers that, in principle, electronic banknotes or electronic cash could coexist alongside electronic account-to-account based payments in the same way physical polymer banknotes coexist with today’s electronic banking systems. The technology to enable this coexistence would need to be systematically rolled out on a large, economy-wide scale. To that effect, the technology is still in development. One method is the utilisation of distributed ledger technology integrated within electronic payment systems, which would involve an issuing authority that issues electronic currency in the form of files or tokens.

There are two key considerations under this hypothesis. The first is whether the RBA or another entity would issue electronic banknotes. The second is whether there is a public policy case for this approach.

To that first question, Dr Lowe highlights the volatile history of privately issued currency, especially in times of economic stress. The RBA therefore considers that, in the interests of stability, it would be better for electronic currency to be issued and backed by the central bank.

In answering the second question, Dr Lowe hypothesises that the utility of any eAUD is already significantly serviced by advances in current electronic payment systems without the need for electronic banknotes. For example, the aforementioned NPP largely satisfies customers’ desire to transact with instant transfers. Digital wallets have been integrated into the electronic payment systems. There may be limited, if any, tangible differences to customers if an eAUD is adopted.

Supplementary to these considerations is the ability of any system, eAUD or otherwise, to resist malicious attacks. Caution needs to be taken when allowing private issuance of electronic banknotes.

Hypothesis 4: exchange settlement accounts for all Australians.

The RBA has considered issuing every Australian with a personal exchange settlement account. These deposit accounts would facilitate low-cost electronic payments between individuals. Presently such settlement accounts facilitate the clearing process by providers of payment services, including third-party payment providers and non-bank authorised deposit-taking institutions.

However, the RBA is most reluctant about this hypothesis. It is unlikely to ever pursue it, according to Dr Lowe. This is due to doubts that it would satisfy any public interest test, in placing the RBA as a direct commercial competitor to the private banking sector. It would make the rest of the private banking sector prone to runs during financial instability. More broadly, it extends beyond the RBA’s mandate to settle interbank obligations between institutions.

Hypothesis 5: a new settlement system based on distributed ledger technology and central bank money.

The fifth and final hypothesis relies on the establishment of a specialised payment and settlement system facility, through which the RBA would issue Australian dollars in the form of electronic files or tokens (the previously described eAUD). Such distributed ledger technology, often referred to as blockchain, is typically secured by cryptography which protects information from illegitimate interference. The technology’s importance in securing and automating complex, multi-stage transactions, and protecting transacting parties, should not be underestimated.

The question of whether there is a good case for this approach is an open one. Further work is required to understand the potential efficiencies that blockchain offers and the change in risk that would flow from such a fundamental change to the financial system. The RBA continues to analyse the implementation of such a settlement system on a global scale, with other central banks, fintechs and financial institutions.

What does the future hold?

The RBA has a central role in navigating and shaping the rapidly changing electronic payments landscape in Australia. Key to its considerations is satisfying Australians’ increasing demands for electronic payments and smart payment technology, while working alongside existing financial institutions such as the major banks, all the while remaining mindful of the RBA’s mandate to contribute to the stability of Australia’s currency.

What remains to be seen is the extent to which the Australian use of electronic currencies, the blockchain and ledger technologies will be led by the RBA and banking institutions, or by non-financial institutions and non-bank entities.