The nature of money is changing. Australians are eschewing cash in favour of cards and electronic payments faster than anyone expected – could a government-backed digital dollar (eAUD) be the next step?

 
“I think it's an important hedge against the disruption of our existing payments system, of which the New Payments Platform (NPP) is the latest innovation,” says former FinTech Australia president and Reinventure co-founder Simon Cant.
 
“But there's always a risk when you're good at something that you get complacent about the next wave coming through and that's the biggest risk around blockchain generally, and the digital Australian dollar specifically.”
 
In late-2017, FinTech Australia lobbied the Reserve Bank of Australia and the Federal Treasury to consider launching a digital dollar, which would be pegged to the physical dollar, unlike other crypto-currencies such as Bitcoin and Ethereum.
 
The RBA has said it is open to the idea although a “convincing case for issuing Australian dollars on the blockchain for use with limited private systems has not yet been made” and there are complex operational and policy questions yet to be answered.
 Smart money
One of the key benefits of a government-backed crypto-currency is the possibilities created by the underpinning distributed ledger technology.
 
These could include lower costs and faster settlement times because all parties have direct access to the up-to-date and immutable distributed ledger that records transactions. It could also lead to widespread adoption of ‘programmable money’: information attached to a payment could automatically trigger real-world actions.
 
Nicolas Steiger, co-founder of foreign currency transfer firm FlashFX, says there is no limit to the possibilities but government endorsement remains the crucial first step.
 
“It would create trust for consumers and business. Then whatever token is produced and how it's used is completely open – we might use it in Ripple for value transfers but other businesses out there have a completely different use case and have a different blockchain.”

Developers need a stable crypto-currency if it is to be an effective means of payment. Bitcoin remains the most famous but the speculative mania which drove its value to unprecedented levels in 2017 reveals the problem.
 
FlashFX, which is licensed by ASIC, uses the blockchain-based Ripple platform to offer quick and low-cost FX transfers. However, those payments still need on-and-off ramps to established banking infrastructure.
 
Similarly AgriDigital, which manages the supply chain for grain growers, buyers and bulk handlers, has executed the world's first live settlement of a physical commodity using blockchain although the payment still had to be routed back to the existing payment system.
The RBA is placing much of its confidence in Australia’s domestic-focused NPP, which will allow 24/7 fast payments.

The power of an open system – but challenges still to be solved

Cant says people can see the power in an open innovation eco system offered by blockchain, which has attracted thousands of developers around the world, although there are still question marks around its ability to handle large volumes, privacy and identity. Ensuring that crypto-currencies are not used for terrorism financing or criminal activities and that Know Your Customer and anti-money laundering legislation is enforced are difficult issues.
 
“But people have seen with the internet the power of a very open protocol to foster innovation, to solve every problem that comes up, so there's a lot of faith that some of these really gnarly problems that do exist in the open blockchain ecosystem will be solved by these masses of people working on them.”
 
The RBA is placing much of its confidence in Australia’s domestic-focused NPP, which will allow 24/7 fast payments.
 
“Our current working hypothesis is that with the NPP there is likely to be little additional benefit from electronic banknotes,” RBA Governor Philip Lowe said at a recent payments conference. “This, of course, presupposes that the NPP provides low-cost efficient payments.”
 
The RBA has also suggested that if eAUD were launched, it should be issued by the RBA and distributed by financial institutions, just as physical banknotes are. This would solve the issue of multiple private institutions issuing their own eAUD versions, which could cause public confusion and reduce the network effect.
 
Multiple central banks around the world, including in Canada, Singapore and Sweden, are still considering launching their own official crypto-currencies. Cant says Australia needs a “need a dog in the race” and risks being left behind.
 
“In the same ways that some national currencies have become dominant for particular forms of trade I think the same sort of thing could happen in the blockchain ecosystem.”
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