The RBA has been secretly working on an all-digital version of the Australian dollar – but it may not release it to the public at all

  • Australia's central bank, the Reserve Bank of Australia (RBA), has let slip it's been working on its own digital currency.

  • In its submission to a Senate commission, the RBA said its innovation lab is working on a digital currency denominated in dollars.

  • However, while recognising the advantages such a project would have, it remains adamant that for now it has no intentions of releasing it to the public, instead seeing it as a currency to possibly be used between Australian banks.

  • Visit Business Insider Australia’s homepage for more stories.

Is the Australian dollar going digital?

While central banks around the world remain highly sceptical of cryptocurrencies being used in lieu of fiat – read: traditional currency – Australia's has quietly revealed it is looking into its own.

"The Bank established a small in-house Innovation Lab as a way to strengthen engagement with, and understanding of, new and emerging technologies that are relevant to its policy and operational responsibilities," it wrote in a newly-released submission to the Senate committee on financial and regulatory tech.

"The Innovation Lab is being used to explore whether there is a role for a digital Australian dollar – that is, an Australian central bank digital currency (CBDC) – in the context of the Bank’s responsibilities for issuing the currency and overseeing the payments system."

In other words, while the RBA is doubtful highly-volatile cryptocurrencies like bitcoin will be used for shopping, it does want to design its own wholly-digital token of the Australian dollar. While the value of a cryptocurrency isn't tied to any real asset and can thus fluctuate wildly, the RBA-administered currency would track the AUD.

"A CBDC, possibly issued on a blockchain platform, would be a digital version of money which is a liability of the central bank rather than a commercial bank. Similar to cash and commercial bank deposits, a CBDC would be denominated in the sovereign currency and convertible at par with other forms of money," it said.

It's not the only central bank considering such a project, with the US Federal Reserve exploring its own version of the USD.

If and when the RBA does develop an Australian one though, don't expect to buy your morning coffee with it.

Its current proposal is for it to only be used by it and commercial banks, to transfer money between them and settle balances. The RBA says this is the work the Innovation Lab has been completing, and it intends on spending the remainder of 2020 working on it, potentially bringing in outside partners to make it a reality.

While that might be something of a killjoy for crypto-fans, the submission does signal the RBA hasn't ruled out cryptocurrency entirely for individual use. It lends credence to the idea it could release its currency to the public.

The RBA recognises the potential advantages of an Australian dollar digital token

According to the RBA, its digital currency would make payments and transfers instantaneous and independent of external payment systems, preventing major disruptions.

Take the one experienced last year for example when ATMs and EFTPOS machines stopped working for an afternoon. A CBDC would effectively circumvent these occasionally faulty systems, preventing panic at the cash register.

Another advantage is that it would allow what finance nerds call 'atomic transactions'. In layman's terms, this means a transaction either happens seamlessly or it doesn't. For example, if you buy something it means money only moves when a good or service is delivered, preventing one party from being left empty-handed.

Finally, it could remove the need for so much regulatory oversight with the RBA to set the rules for the digital currency.

"This refers to the ability to attach conditions to how money can be spent or transferred, which could be automatically executed, without the need for a trusted third party," it said.

The RBA is acutely aware of the possible risks

With one of the central bank's main responsibilities being to maintain financial stability, it's also seriously concerned by the risks a digital currency could create. For example, the threat of a crash could see people moving out of bank deposits and disrupting the ability of banks to function.

"If it was easy to switch from commercial bank deposits it is possible that a CBDC could facilitate bank runs at such times," it said.

"In the event that there was significant ongoing demand by households for CBDC, the implication would be that there would be a fall in commercial bank deposits and a reduction in the availability of funds for lending to households and businesses."

Overall, though the RBA concludes there simply isn't a sufficient appetite or use for it yet.

For now, cash remains king.

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