Speaking at a banking conference last week, Deputy RBA Governor Brad Jones said it remained unclear what purpose a central bank digital currency (CBDC) – effectively the digital equivalent of notes – would serve for Australia.

“In terms of monetary economics, the introduction of a general purpose CBDC would be revolutionary,” said Jones.

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

“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 notes that, like cash, could be held without interest and used to purchase goods and services.

The concept has become well known as the popularity of cryptocurrencies has grown, with countries including China testing their own CBDC.

Nigeria, on the other hand, has fully adopted a CBDC and is now restricting ATM withdrawals to push the country’s population to use its own digital currency.

Then there’s El Salvador that even went as far as making it Bitcoin legal tender — something the RBA said will never happen here.

Experts have warned that a retail CBDC at least fundamental restructuring the way our economy works by allowing ordinary Australians to completely bypass the banks.

Revolution in digital currency

Here’s the revolutionary part: a general purpose CBDC could make central banks like the RBA the intermediaries between people within an economy, rather than banks and payment 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 “displaces” other forms of money, vastly increasing the power of the central bank in the process; and another in which alternative forms of money – such as cryptocurrencies – proliferate as people grow more distrustful of traditional institutions and the current monetary system cannot keep up with the pace of change.

Jones also warned of currency substitution where locals stop using their own currency in favor of “a stablecoin or foreign CBDC”, which would “complicate conducting monetary policy and ensuring financial stability”.

A CBDC could prevent 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 this ill-fated cryptocurrency project Libra.

Facebook tried to use its massive user base to bypass traditional payment systems until regulators around the world stepped in to help knock it back down.

Libra was reportedly intended to solve some of the problems that Jones and the RBA recognize a CBDC could solve, namely a lack of access to banks and financial institutions, which are not problems Australians have.

“In Australia, a very small proportion of households do not have access to banking and payment services, and it is not clear how a CBDC would bring them into the fold,” said Jones.

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

More than 140 entries have been submitted for the RBA’s CBDC pilot program which will begin in earnest next year.