The Reserve Bank of Australia (RBA) remains sceptical about the need to introduce a fully digital dollar as it looks to begin an eAUD trial early next year.

In a speech to a banking conference last week, Assistant RBA Governor Brad Jones said it remained unclear exactly what purpose a central bank digital currency (CBDC) – effectively the digital equivalent of banknotes – would serve for Australia.

“As far as monetary economics goes, the introduction of a general purpose CBDC would be revolutionary,” Jones said.

“For centuries, physical cash has been the only source of central bank-issued money to which households and non-financial firms have had access. Prior to crossing this Rubicon, a strong public interest case would first need to emerge.

“On balance, we have yet to see that case made in Australia.”

A general purpose, or ‘retail’, CBDC would act as a standalone digital equivalent of banknotes that, like cash, could be held without accruing interest and be used to purchase goods and services.

The concept has come into prominence as the popularity of cryptocurrencies has grown, with countries including China trialling their own CBDC.

Nigeria on the other hand has fully adopted a CBDC and is now limiting cash withdrawals in order to nudge the country’s population into using the native digital currency.

Then there's El Salvador which went as far as making Bitcoin legal tender – something the RBA said will never happen here.

Experts have warned a retail CBDC would, at the very least, fundamentally restructure the way our economy works by letting everyday Australians bypass banks entirely.

Digital currency revolution

This is the revolutionary part: a general purpose CBDC could make central banks like the RBA the intermediary between people within an economy, rather than banks and payments platforms.

In his speech last week, Jones presented two extreme versions of currency in the future: one in which the RBA steps in with a CBDC and “crowds out” other forms of money, vastly increasing the central bank’s power in the process; and another in which alternate forms of money – like cryptocurrencies – proliferate as people become more distrusting of traditional institutions and the current monetary system fails to keep up with the pace of change.

Jones also warned of currency substitution in which the local population stops using its native currency in favour of “a stablecoin or foreign CBDC” which would “complicate the conduct of monetary policy and the safeguarding of financial stability”.

A CBDC could ward off this scenario – but again, the RBA doesn’t think it’s a likely problem in Australia.

Currency substitution was a very real concern when Facebook announced its ill-fated cryptocurrency project Libra.

Facebook was trying to leverage its immense number of users to bypass traditional payments systems until regulators around the world helped knock it back down.

Libra was purportedly meant to solve some of the problems Jones and the RBA recognises a CBDC could solve – namely a lack of access to banks and financial institutions, which aren’t issues Australians have.

“In Australia, a very small proportion of households are without access to banking and payment services, and it is not obvious how a CBDC would bring them into the fold,” Jones said.

He concluded by suggesting that the RBA will facilitate a “more evolutionary than revolutionary” approach to digital currencies.

More than 140 submissions were made to the RBA’s CBDC pilot program will begin in earnest next year.