Australia is exploring a digital currency, or e-dollar, but its benefits appear small and privacy risks significant

Credit: Shutterstock

We’re used to thinking of money as bills and coins, the kind most of us carry in our wallets. But most of the money – in Australia it’s 96.3% – is digital, held by financial institutions and moved via bank transfers, debit cards and credit cards.

Late last year, Treasurer Josh Frydenberg promised to consult on the introduction of a third type of currency, a central bank digital currency, and asked the Treasury to take a position by the end of it. of 2022.

A central bank digital currency (CBDC) would be an “e-dollar”, each worth $1, but capable of being held digitally without being placed in a bank, such as on computers or in digital wallets on phones.

This could enable direct consumer-to-consumer and consumer-to-business payments without the intervention of financial institutions, and allow people who do not want to use banks to hold funds in a safer form than cash.

It could also prevent private companies – such as Facebook, which has offered something called Libre – from doing the same sort of thing.

For transactions, it would have a distinct advantage over so-called cryptocurrencies such as Bitcoin, whose values ​​fluctuate because they are not tied to a currency.

Many central banks are exploring the idea, but most say they are unlikely to issue a retail CBDC in the foreseeable future.

Australia’s Reserve is particularly unenthusiastic, saying there is “currently no strong public policy case for introducing a CBDC for retail purposes.”

While in much of the rest of the world the use of cash is declining, in Australia there are more banknotes in circulation as a proportion of the economy than at any time since the introduction of decimal currency in 1966 .

Most of the money seems to be used for storing money rather than executing transactions. But if Australians could ever be weaned off cash, the Reserve Bank would save money on the cost of printing and distributing cash, and also, most likely, fewer thefts.

But how the idea would work is unclear.

Australia is exploring a digital currency, or e-dollar, but its benefits appear small and privacy risks significant

Credit: RBA, ABS

Like bus and train maps

One model would be to produce a digital token almost exactly like cash. Like a banknote, it could be passed from person to person anonymously, with no central authority involved.

The bus and train cards used in some parts of Australia are like this – unless an owner chooses to register the property, there is no record of who used the card.

A downside is that, unlike cash, very large sums could be held on very small devices, which could be stolen or lost. A New Zealand study notes that cash is relatively bulky, “making it unlikely that consumers carry large amounts on their person or store large amounts at home”.

And it could facilitate illegal transactions. The current coalition government is so concerned about the use of cash for illegal transactions that it introduced legislation – never enacted – which would have banned the use of cash for payments over A$10,000.

Banks and other organizations are already required to report transactions of $10,000 or more to the Australian Transaction Reports and Analysis Center.

Or more like Bitcoin

An alternative, the one most commonly talked about as a consumer digital currency, would use blockchain technologies of the type used in Bitcoin and other cryptocurrencies to record and track ownership and verify transactions.

With blockchain, every transfer is recordable and hard to delete. The central bank (in Australia’s case, the Reserve Bank) would be able to track transactions.

It can be thought of as an account in a central bank, which could be used to transfer money to other accounts. In most models, the account would pay no interest.

And the central bank could limit transactions. Some, like the Deputy Governor of the Bank of England, Jon Cunliffe, see it as an advantage.

Australia is exploring a digital currency, or e-dollar, but its benefits appear small and privacy risks significant

Victoria’s Myki Cards do not need to register ownership. Credit: Shutterstock

He says it could be like “giving your kids pocket money, but programming the money so it can’t be used for candy.”

In his book The Future of Money, Cornell University economist Eswar Prasad warns of societies in which central bank digital currency becomes “an additional instrument of government control over citizens.”

China’s “programmable” e-money

China has become the first major economy to pilot a digital currency in 2020.

Consulting firm Oliver Wyman says the digital yuan will be “programmable” and could be configured to be used only for payments after “activation” when certain predefined conditions are met.

The Chinese government, but not other users, would have the ability to monitor transactions in real time, in what China calls “controlled anonymity”.

That’s not what the rest of the world seems to want. A survey of European consumers reveals that what they expect most from electronic money is privacy (43%) ahead of security (18%) and offline convenience (8%).

The United States continues to study the idea, pointing to the benefits, including getting quick payments to people in times of crisis (assuming electricity and internet connections are working) and providing services to people not banked.

Privacy is the roadblock

Privacy is not a concern in the other area, central banks are moving forward with digital currency projects – big money. Australia’s Reserve Bank is well advanced on Project Atom, which would allow financial institutions to move money between them more quickly.

At the retail level, much of the world is moving slowly. The Reserve Bank of Australia says that aside from the developed economies of Sweden and Canada, most of the economies pushing the idea are emerging, including the Bahamas, Cambodia, the Eastern Caribbean, India. Ecuador, Nigeria and Ukraine.

What would be the impact of a US “digital dollar”?

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Sylvia B. Polson