The imminent introduction of a digital Australian dollar will significantly affect the market. Find out what a retail e-AUD would mean for lawyers and other stakeholders, write Professor Heng Wang and Professor Deborah Healey, in collaboration with Unisearch.
On 20 October 2021, the Senate select committee on Australia as a technology and financial centre recommended that Treasury lead a policy review of the viability of a retail central bank digital currency (CBDC) in Australia.
The possible digital Australian dollar will be a game changer for businesses, consumers and the legal profession, for reasons including the development of new payment gateways, the infrastructure required, data security, and potential change in various regulations.
CBDC is the digital version of fiat money issued by the central bank (such as cash). For the Australian dollar, CBDC could run as a digital form e-AUD. This is the same with other currencies such as a digital euro or e-CNY, as noted by Law Gazette.
There are two types of CBDC, wholesale and retail, with different functions. Wholesale CBDC is only available to a limited range of users, like commercial banks, to settle trades in the financial sector. The Reserve Bank of Australia (RBA) has been working with lenders, including the Commonwealth Bank and National Australia Bank on Project Atom, which uses wholesale CBDC for settlements related to a tokenised financial asset.
In contrast, businesses and general consumers can use retail CBDC. The RBA has stated that there is no public policy case to issue a retail e-AUD, given that Australia already has an electronic payment system that provides digital payment services. However, the possibility of a retail e-AUD cannot be excluded, for reasons which include the need to enhance confidence in the national currency and currency competition in the digital age among CBDCs, stable coins and cryptocurrencies (e.g., bitcoin). Major commercial banks may also consider, as Nine Publishing recently articulated, creating CBDC digital versions of AUD for retail markets in the future.
So, what would a retail e-AUD mean for lawyers and other stakeholders?
CBDC brings opportunities and challenges. It has a centralised governance structure led by the central bank, which privately issued cryptocurrencies do not have. Opportunities include lower costs for financial services like payments, enhanced efficiency in the verification and settlement of transactions, the avoidance of possible virus transmission through cash, and expedited stimulus payments through CBDC.
Practically, CBDC can be used to conduct electronic transactions, including payments, and can be downloaded onto mobile phone digital wallets. These transactions can be settled in a much shorter time than a credit card. New financial instruments, including equities, bonds, derivatives and other assets, can be denominated in CBDC.
Challenges include the set-up costs of new financial and currency infrastructure (such as the equipment and technology to accept CBDC), cyber security, reduced bank deposits due to the shift to CBDC, and exacerbated bank runs in the time of crisis. Implications include:
- Infrastructure and distribution: CBDC (like a possible e-AUD) is likely to be used for payments and settlements. This would affect banking, payments, digital assets and investments (infrastructure and distribution). For example, commercial banks, payment service providers, telecommunication companies, and financial services providers would distribute retail CBDC to the public.
- Reduced reliance on cash: It is reasonable to expect that retail CBDC may gradually replace cash. In the course of doing business, firms may also face foreign and international digital currencies like CBDCs, stable coins and cryptocurrencies. There could be issues like evolving business practices relating to CBDC in an increasingly cashless society.
- Interoperability challenges: More broadly, CBDCs will affect the structure of the financial and monetary system. The compatibility between CBDCs and existing infrastructure, including banking infrastructure, raises issues around the interoperability between CBDC systems and existing payment systems, cyber security, and privacy protection.
- New financial ecosystem: The e-AUD, particularly a retail e-AUD, will likely lead to a new financial ecosystem. As a fiat currency, CBDC may be applied to wide-ranging digital platforms. Thus, CBDC is more than a payment instrument. In the future, CBDC could even deploy smart contracts that are self-executing. As computer programs, smart contracts automatically execute tasks (such as payment) according to preset criteria (such as meeting certain conditions of a contract between a buyer and a seller). Smart contracts are significant as they may be widely used in various contexts (e.g., trade, financial transactions) and cannot be stopped as self-executing computer programs.
- Data use: The use of data is a key concern. CBDC will likely generate a huge amount of data, including customer identity data and transaction data, which is not the case with cash. This will impact data regulation (whether and how CBDC-related data may be shared), data protection, data security, data concentration and data flow. These implications are likely to arise domestically and internationally, given the possible international use of CBDC (such as when cross-border payments are conducted).
- Competition law: An e-AUD would have profound implications for competition law as e-AUD affects the relationship between existing businesses and new stakeholders in the CBDC ecosystem, such as big tech firms. As such, competition issues will arise.
- New regulations: New regulations will likely be implemented to address issues, including the e-AUD holder’s digital identity, anti-fraud measures, privacy protection, anti-money laundering and counter-terrorism financing requirements, the possible limit on the holding of CBDC, security standards and the connection among different institutions in the CBDC system. For instance, it involves how the existing rules apply to smart contracts and how to deal with the possible bugs in codes used in smart contracts. Other issues include how to regulate the international use of CBDC.
- Decentralised finance: CBDC is likely to have profound implications for the financial and legal sectors, as a retail CBDC is fiat currency issued by the central bank. It is thus legal tender that would be widely used, for example, in payment of debts, and therefore will affect nearly everyone in society. CBDC will require infrastructure, technology and regulation. CBDC will likely lead to an evolution of the payment and financial ecosystem with a new landscape for regulation. CBDC is likely to adopt a centralised governance model led by the central bank. It will also be important to see how CBDC affects decentralised finance (e.g., bitcoin).
We encourage lawyers to prepare for these significant changes by becoming more well-versed in the subject area (which may include obtaining external advice). Particular issues for consideration include whether and how to use CBDC as a payment instrument, how to address legal issues involved in CBDC (such as data regulation and flow, consumer protection, foreign exchange), and how CBDC may impact technical standards and business practices.
Professor Heng Wang is a Unisearch expert, professor and director of UNSW Law & Justice’s Herbert Smith Freehills China International Business and Economic Law (CIBEL) Centre. He is also a co-director of the Tsinghua-UNSW Joint Research Centre for International Commercial and Economic Law (JCICEL). Professor Deborah Healey is as Unisearch expert, professor at UNSW Law and a director of the Herbert Smith Freehills China International Business and Economic Law Centre.