CBDC – The Future of Digital Coins
A digital currency that can be used to buy goods and services. The best known example is Bitcoin, which was created in 2009 by a mysterious figure called Satoshi Nakamoto. It has since grown in popularity and is worth trillions of dollars. While many consumers and investors see potential in cryptocurrencies, they can also be used for illicit activities such as money laundering and sanctions evasion. For these reasons, some governments are considering introducing their own digital cash.
Cryptocurrencies can be centralized, where there is one point of control (usually a bank), or decentralized, where the money supply is predetermined or agreed democratically. Digital coins are often stored in online wallets, which require Internet connections and robust security to protect them from hackers. The cost of a transaction in a cryptocurrency is often cheaper than those in other currencies because digital coins cut out the middlemen who seek economic rent by processing payments.
Moreover, the digital provenance of cryptocurrencies makes them particularly susceptible to hacking. Consequently, they can be lost or stolen and are prone to wild price fluctuations that reflect investor whims. This can undermine their use as a store of value.
In addition, large variations in the prices of cryptocurrencies mean that their purchasing power is not maintained over time, reducing their usefulness as a medium of exchange. By contrast, fiat currencies are typically backed by the full faith and credit of governments and central banks, which can limit their supply.
Nonetheless, digital currencies can offer other benefits. For example, they can help reduce costs by eliminating the need to carry physical cash around with you, or by cutting out fees charged by intermediaries such as banks and payment systems. They can also be used to make instant, secure and private payments, especially when combined with a digital identity system such as biometrics or a mobile phone number.
Finally, cryptocurrencies can support financial inclusion by providing a new route to finance for the world’s 1.6 billion unbanked people. But they need to be widely accepted as a means of payment, and there are concerns about their volatility, which can put off buyers and sellers.
The RBA is open to the idea of a CBDC, but it would need to be based on the existing infrastructure of the Reserve Bank, and have the same features as Australia’s efficient, fast and convenient electronic payments system. In particular, the RBA needs to be confident that a CBDC will have broad public policy and consumer acceptance. This will require careful work to understand the risks and opportunities, including those related to digital money’s interaction with other forms of payment. We will continue to keep the public informed as our research progresses.