eAUD: The RBA's Digital Currency

The Reserve Bank of Australia (RBA) recently announced the 14 “use cases” that it plans to explore in partnership with the Digital Finance Cooperative Research Centre (DFCRC) for a central bank digital currency (CBDC).

The results are likely to be illuminating for all concerned, including investors with exposure to the crypto and digital money landscape.

The 14 use cases and the chosen partners for the pilot program are:

Source: https://www.rba.gov.au/media-releases/2023/mr-23-06.html

The chosen partners comprise an interesting mix of established financial institutions, payment networks, newer Fintech players and intermediaries exploring use cases as diverse as money transfer, construction payments, web3 commerce and livestock auctions.

The research project aims to develop an understanding of the “technological, legal and regulatory considerations associated with a CBDC”, and has a wide scope to encourage “ideation and innovation” by the participants. The pilot is expected to occur during the first quarter of 2023 with pilot results around mid-year.

The RBA and DFCRC previously released a white paper outlining the objectives and approach for the research program including the pilot.

The pilot CBDC is called “eAUD” and has the following features:

• It is denominated in Australian dollars with one cent being the smallest unit,
• it is a liability (aka “claim”) on the RBA who will determine the amount of eAUD on issue,
• earns no interest,
• it is only available to Australian residents who are invited to participate and pass a know-your-customer (KYC) check; and
• it is to be held in a custodial wallet provided by the use case provider or non-custodial wallet provided by the end-user.

The DFDRC is supporting the eAUD platform using a private, permissioned Ethereum-based implementation. Unlike decentralised permissionless blockchain implementations such as Bitcoin, eAUD is centralised and permissioned by the RBA.

The RBA’s role in the pilot is to “mint, issue, redeem and burn” eAUD and approve roles and responsibilities of the participants. The use case providers will perform all of the other roles to support the pilot including transaction processing, supporting the ERC-20 functions (ERC-20 being an industry standard for managing tokens on the Ethereum blockchain), performing the KYC functions and administering the end-users.

The RBA says that the choice of an Ethereum-based platform for eAUD doesn’t imply that any formal rollout of an official CBDC would be based on Ethereum or even a distributed ledger technology (DLT). Use case providers may also choose their own preferred technologies which may or may not also be based on DLT when interacting with eAUD.

The pilot also considers 3 different holding structures for eAUD:

1. The RBA holds eAUD as a direct liability to the end-user who secures their claim to the eAUD by possessing the private key to the holding.
2. The RBA holds eAUD as a direct liability to the end-user who secures their claim to the eAUD by allowing a use case provider to possess the private key to the holding on the end-user’s behalf.
3. The RBA holds the eAUD as an indirect liability to the end-user via a pool of eAUD whose claim is held by a use case provider (via possession of the private key) on behalf of multiple end-users.

Only in the first structure does the end-user actually control access to the eAUD themselves. In the second and third structures, a use case provider controls the private key. In the third case, the end-user does not even have a direct claim as the claim itself is held by the use case provider.

Key CBDC attributes

A CBDC is a token that is a claim on the central bank to exchange the token for fiat currency. The central bank is the minter, issuer, and redeemer of the digital token even if intermediaries provide services involving the CBDC. This is equivalent to the RBA being the issuer of fiat currency, with banks and other authorised intermediaries providing financial services to customers (aka end-users).

A CBDC takes advantage of DLT features such as transparency, immutability, instant settlement, and the ability to leverage smart contracts to support real-world use cases without the price volatility associated with privately issued / market traded tokens such as Bitcoin and Ethereum.

The construction industry example is a case-in-point. A CBDC-backed stablecoin will be used to deposit into a smart contract associated with the completion of stages of a construction project. The parties can agree on a payment schedule which is transparent and enforced by the smart contract based on the project milestones.

Using a stablecoin backed one-to-one using a CBDC eliminates the price volatility that would likely occur with a token like Bitcoin or Ether and retains the advantages of DLT when applied to the use case.

As the CBDC is backed by the central bank, there is (virtually) no risk associated with issuer default, assuming of course that the central bank in question can be trusted! Bitcoin proponents especially highlight the risk of centrally-issued sovereign money due to the tendency for central banks to debase their own fiat currency through monetary expansion (aka money printing).

Given the potential for innovation in digital finance and the emerging “tokenised economy”, the RBA’s eAUD pilot is an intriguing experiment featuring a mix of use case providers who are putting their money where their mouths are by committing their time and energy to the exercise. The key word is “experiment”, as the pilot objective is to explore several use cases without any preconceived views as to the merit of any use case, or the technologies used.