Bitcoin may be the darling of speculative investors but its “spectacular volatility” makes it unsuitable as the basis of a national central bank digital currency (CBDC), according to a new CPA Australia analysis that highlights the intrinsic risks of mooted digital alternatives for cash.

Wildly fluctuating value has demonstrated the challenges of relying on Bitcoin as a stable financial instrument, with its value recently soaring to $60,000 after revelations Tesla had bought $1.9b worth of the cryptocurrency.

Such regular hyperinflation and -deflation – which could see consumers paying far higher effective prices for goods purchased using Bitcoin – complicates the case for the cryptocurrency to ever be widely used as a replacement for the dollar.

“Bitcoin’s price has been subject to spectacular volatility in recent years and this volatility has resulted in a lack of confidence in Bitcoin as a medium of exchange or as a store of value,” the report says, noting that these issues had “raised concerns among central banks as to the viability of cryptocurrencies as CBDCs”.

The smart-contract capabilities of the Ethereum blockchain and the more-centralised Ripple platform – whose XRP currency allows developers to decide when and how much currency is released – make them more suitable for the use in controlled financial ecosystems, the report says.

Recently flagged by the Banque de France as the possible basis for the digital Euro, Ripple recently began piloting a CBDC Private Ledger for central banks using “close to instantaneous” techniques that the organisation says makes it 61,000 times more efficient than public blockchains – and capable of handling tens of thousands of transactions per second.

No matter which distributed ledger technology gains traction, Australia is unlikely to see a full retail CBDC adopted any time soon “given the advanced level of digitisation of Australia’s financial sector”, CBA Australia concluded, noting that the Reserve Bank of Australia had already developed a proof-of-concept model for wholesale value transfers based on a “private, permissioned Ethereum network”.

That project, RBA assistant governor (financial system) Michele Bullock said when the proof-of-concept was announced in November, will help “explore the implications of a CBDC for efficiency, risk management and innovation” but notes that the use case for a CBDC remains “an open question”.

Control, and its downsides

That question won’t necessarily be answered with Bitcoin or CBDCs – which, RMIT University School of Economics, Finance and Marketing econometrician Ashton de Silva noted during a recent roundtable comparing global CBDC efforts, are competing with countries that have “very sophisticated digital payment systems… we need to keep that in our mind, that COVID hasn’t necessarily stimulated the investment or option of a CBDC.”

The degree to which various national banks are considering digital currencies is linked to their overall fiscal policy, the report noted, with the US Federal Reserve investigating potential use cases for CBDCs but “arguably resist[ing] CBDC adoption” because of the US dollar’s position as a stable global trade instrument.

“Central banks want to maintain control of their own,” De Silva said, “and whereas before they saw the CBDC not being part of that, now in response to what they’re seeing elsewhere outside of these jurisdictions, they see that there is a need to investigate this a little bit further… to actually maintain their control over currency.”

CBDCs could be a “gigantic flop” if they aren’t implemented correctly, two European economists argued in a recent analysis that warned that “if central banks want to develop a serious answer to the dynamic activities of global payment service providers, they must rethink their whole approach to CBDCs…. The key advantage of CBDC, its absolute safety, is irrelevant for retail payments.”

With China widely expected to be the first government offering a central bank-backed retail CBDC – which would provide a stable payment mechanism alongside existing near-ubiquitous mobile payments mechanisms – many observers and analysts are warning of the potential risks of jumping too far into digital, too soon.

Digital records of all transactions “give financial institutions and surveillance capabilities that have far-reaching consequences [and]… can lead to prejudice and discrimination,” ProPrivacy data privacy expert Ray Walsh recently noted.

With banks jumping onboard digital services and transactions – and closing branches to push customers towards digital services – older Australians say they are being left behind even as the country rockets towards a future where cash will comprise just 2.1 per cent of transactions.

Advocates warn of a cashless dystopia that exacerbates economic divides, racial issues, undocumented migrants and other vulnerable groups – and point to the experiences of citizens in Sweden and the UK, where rapid digitalisation has been countered with protective and compensatory measures to avoid pushing some people out of the financial system entirely.