Regulation of Central
Bank Digital Currencies
Simeon Lawson
HDR Student @ QUT
Cash
❑ Direct claim on central bank – bearer asset
❑ Reserve Bank of Australia (RBA)
Commercial bank deposits
❑ Record on your commercial bank’s balance sheet, until settlement occurs
❑ “…deposits represent a liability for the financial intermediary, which has an
obligation to repay the depositor in full.” - Doherty, Jackman & Perry
❑ Deposit insurance - up to $250,000 in a licensed Australian bank is protected by
the Australian government
Commercial bank reserves & settlement
❑ Settlement of the balance sheet, occurring regularly
❑ Funds moving between financial institutions
Aristotle’s Commodity Theory of
Money
❑ Unit of account
❑ Medium of exchange
❑ Store of value
Legal Tender
❑ Issued, supported and distributed by the
state
❑ Afforded specific crucial, legislated
functions
❑ Settlement of debt
❑ Taxation
❑ Income
❑ Common unit of account within society
(purchasing power)
❑ Monopoly
Prone to evolve and should, as necessary
More on history and function of money in Australia, I
recommend: “Money in the Australian Economy” by Emma
Doherty, Ben Jackman and Emily Perry - [Link]
Reserve Bank Act 1959 -
Section 10(2): ‘RBA Charter’
“It is the duty of the Reserve Bank Board, within the limits of its
powers, to ensure that the monetary and banking policy of the Bank
is directed to the greatest advantage of the people of Australia and
that the powers of the Bank… are exercised in such a manner as, in
the opinion of the Reserve Bank Board, will best contribute to:
a) the stability of the currency of Australia;
b) the maintenance of full employment in Australia; and
c) the economic prosperity and welfare of the people of Australia.”
Reserve Bank Act 1959 -
Section 10B
“Functions of Payments System Board
3. It is the duty of the Payments System Board to ensure, within the limits of
its powers, that:
a) the Bank’s payments system policy is directed to the greatest advantage of the
people of Australia; and
b) the powers of the Bank… are exercised in a way that, in the Board’s opinion, will
best contribute to:
i. controlling risk in the financial system; and
ii. promoting the efficiency of the payments system; and
iii. promoting competition in the market for payment services, consistent with the overall
stability of the financial system; and
c) the powers and functions of the Bank… are exercised in a way that, in the Board’s
opinion, will best contribute to the overall stability of the financial system.”
How does cryptocurrency differ
from legal tender?
• Some academics and analysts believe the only
characteristic separating cryptocurrency from
potential legal tender is legal recognition.
• Of the 3 functions of money, cryptocurrency only
intentionally fulfils medium of exchange but legal
recognition would create store of value and unit of
account.
• Contested premise
Australia’s ‘patchwork quilt’
❑ Australian Securities and Investments Commission (ASIC)
❑ Not considered a ‘financial product’
❑ Recognized as a legitimate form of currency, in relation to ICOs.
❑ Consumer protection regulation can apply – under relevant Australian Consumer Law (ACL) provisions, such as the
general prohibition of misleading or deceptive conduct in s18.
❑ Australian Taxation Office (ATO)
❑ GST does not apply
❑ Capital Gains Tax is applicable
❑ ATO believes cryptocurrency should be recognised as property.
❑ Only classed as income if your business accepts it as payment for goods and services.
❑ Reserve Bank of Australia’s (RBA)
❑ Bitcoin and similar cryptocurrencies fit within the definition of a payment system.
❑ AUSTRAC
❑ Digital currency exchanges are now listed as applicable providers
❑ Required to adhere to anti-money laundering/counterterrorism financing (AML/CTF) regulations.
❑ Having to regulate intermediaries, as they cannot regulate issuer or centralised institution in the context of Bitcoin.
❑ Lack of regulation hindering broader adoption.
Governments’ CBDC Motivating Factors
❑ Dependent on individual circumstances
❑ Several main themes, with differing levels of intensity:
Efficiency gains
Monetary Sovereignty
Decline in Cash Use
Financial Stability
CBDC Characteristics
❑ Issuer
(central bank or private),
❑ Form
(digital or physical),
❑ Accessibility
(retail or wholesale)
❑ Storage
(token or account)
Source: Bank of International Settlements
RBA Announcement of CBDC
Proof-of-Concept Development
“The development of a proof-of-concept
(POC) for the issuance of a tokenised form
of CBDC that can be used by wholesale
market participants for the funding,
settlement, and repayment of a tokenised
syndicated loan on an Ethereum-based DLT
platform.
The POC will be used to explore the
implications of ‘atomic’
delivery-versus-payment settlement on a
DLT platform as well as other potential
programmability and automation features
of tokenised CBDC and financial assets.”
Design, Design, Design
❑ Substantial trade-off between mechanisms that empower individuals,
and the central bank/government.
❑ Privacy/Traceability
❑ Cash-like?
❑ Strike a balance between consumer privacy and AML/CTF
❑ Interest-bearing
❑ Zero lower bound
❑ Accessibility
❑ Online/Offline
❑ 24/7
❑ Regional and rural locations with low connectivity
❑ Security
❑ Future proof?
❑ Cross-border capability
❑ Remittances
❑ Global exchange
Further Reading
❑Bank for International Settlements
(BIS)
❑Official Monetary and Financial
Institutions Forum (OMFIF)
❑ Digital Monetary Institute (DMI)