If you’ve been reading the financial news headlines over the past six months, it’s likely you’ve encountered the acronym CBDC.
When it comes to dissecting the official explanations of financial concepts and their accompanying acronyms, it can take time to wade through the reams of academic information, intertwined with complex concepts and industry jargon, delivered in the form of dense whitepapers, government publications and reports.
That’s why we’ve broken it down into much simpler terms.
What is a Central Bank Digital Currency (CBDC)?
A Central Bank Digital Currency (CBDC) is, just as it sounds, a digital currency controlled by a central bank. The CBDC, if implemented, will essentially operate as a digital form of cash. In financial jargon, this will be referred to as a ‘digital fiat currency’.
Fiat currency describes money that is “legal tender”
To understand fiat currency, we must first look at “legal tender”. Cash in the form of banknotes is classified as legal tender according to the Reserve Bank Act 1959, and in the form of coins under the Currency Act 1965.
Another form of legal tender is called the ‘Fiat’ system of money. This is capital that is not backed by the value of physical commodities (e.g., gold) but instead is guaranteed by the issuing government.
| Central Bank Digital Currency (CBDC) | Cryptocurrency (e.g., Bitcoin) |
Legislated Value | Legislated value | No legislated value |
Intrinsic Value | Equivalent to physical cash | No intrinsic value |
Regulation | Regulated by the central bank | No regulation |
Unit of account | Digital Fiat Currency | Individual (e.g., Bitcoin) |
Source: RBA Digital Currencies
The main difference between CBDC and cryptocurrency is that CBDC is legislated by the government issuing the currency with centralised governance, and cryptocurrency has no legislated or intrinsic value, as it derives its value from the markets in which it is sold or traded.
For example, if the digital currency was launched in Australia, this would be issued by the Reserve Bank of Australia (RBA). The RBA is Australia’s central bank, and therefore any digital currency launched by the RBA will have the same value as other forms of money (such as cash or electronic deposits).
This kind of digital currency would have legal tender status, have an intrinsic value linked to the Australian dollar, and would be regulated by the government and the central bank.
Cryptocurrencies on the other hand are digital tokens, not digital currency tied to a government or central bank, with no legislated or intrinsic value.
These digital tokens operate in a similar fashion to stocks, in that they are only worth what the market is willing to pay for them, and this value can vary based on market volatility and investor sentiment.
What is the Australian Reserve Bank digital currency?
Australian households and non-financial businesses currently only have access to central bank-issued money in the form of physical cash. However, thanks to the new CBDC Pilot ‘eAUD’ Program led by the Digital Finance Centre for Cooperative Research (DFCRC) Australians could see the launch of a new retail CBDC (Reserve Bank digital currency) before 2030.
The RBA’s Pilot ‘eAUD’ Program launched in late 2022, invited submissions from industry experts to explore the use cases of CBDC across various financial sectors and markets.
Led by the DFCRC, a $180 million research program for the emerging digital finance sector, the pilot program selected 15 use cases to test the validity of a CBDC in various transactional trials. The currency is a real liability to the RBA, which means it is a true form of debt, and as such these tests are crucial to the success of the pilot, and the potential future of digital currency in Australia.
Australian Bond Exchange performs first near real-time bond settlement in CBDC
This week, ABE successfully completed the first near real-time settlement of a corporate bond trade, using Australian Bond Exchange’s expertise and proprietary settlement technology and the purpose-built “RBA CBDC Wallet” production environment.
Australian Bond Exchange was chosen by the RBA as one of 15 use cases in the DFCRC Pilot Program, as the use case for conducting real-time CBDC corporate bond settlements.
The current T+2 Settlement process (a waiting time of two business days from trade to settlement) can cause significant confusion for banks, regulators and financial advisers trying to keep a clean record of thousands of security trades, when multiple buy and sell trades occur on the same day, from the same source.
Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.