Project 1 : Retail CBDC Pilot
Overview:
Reserve Bank of Australia (RBA) in conjunction with Digital Finance Cooperative Research Centre (DFCRC) is doing a CBDC Pilot research project with an objective to explore innovative use cases and business models that could be supported by the issuance of a CBDC. It will also be an opportunity to further understand the technological, legal and regulatory considerations associated with a CBDC. The project commenced in July 2022 and is expected to be completed around the middle of 2023.
The variety of use cases considered covers a range of problems across different industries that could potentially be addressed by CBDC, including some that involve the use of CBDC for atomic settlement of transactions in tokenised assets. The process of validating use cases with industry participants, banking institutions, citizens, governments and regulators will feed knowledge into design considerations for a CBDC that could potentially play a role in a tokenised economy. It’s not just the use-cases but certain design models are also being tested.
Australia is focusing on both retail and wholesale CBDC.
Use-Cases:
1. Construction Supply Chain Payments
Problem: Disputes over scope of work, lack of payment visibility, delayed or missed payments and uncertainty over available liquidity.
Solution: A stable coin, backed by CBDC, provides collateral escrowed for payments to service providers, triggered only upon agreed milestone deliverables.
2. Corporate Bond Settlement
Problem: Corporate bonds currently settle on a T+2 basis
Solution: CBDC will be used as a means of exchange for purchase, coupon payments and sale to enable faster settlement(T+0). This would improve the efficiency of the corporate bond market by reducing settlement times, reducing counterparty risk and enabling atomic settlement of transactions.
3. Cross border Settlement
Problem: Delays in reporting can cause reconciliation challenges and expose clients to counterparty risk, particularly for non-bank financial institutions (NBFIs) who do not have direct access to central bank exchange settlement accounts.
Solution: Improve speed of settlement for the AUD component of FX transactions by settling CBDC to an individual custodial wallet. This mitigates counterparty risk as funds are held on chain in CBDC. CBDC as a settlement token with no counter-party risk offers clear, high trust reporting and faster on-off ramps into fiat or other value tokens.
4. GST Automation
Problem: Businesses collect GST from their customers and claim credits quarterly which results in a payment either to or from the Australian Tax Office (ATO).
Solution: This use case proposes programming the business rules of GST collection and disbursement and using CBDC to automate the collection and payment of GST.
5. Interoperable CBDC for Trusted Web3 Commerce
Problem: In order to participate in Web3 commerce, people would shift towards buying crypto currencies.
Solution: The use case proposed will allow the holder of eAUD to purchase an NFT listed on the Ethereum public blockchain. This would enable consumers to participate in crypto ecosystems using eAUD.
6.) Livestock Auction
Problem: Onsite livestock auctions require sufficient stock for an entire transport and incur high costs: two transport journeys, feed, auction yard fees and labour costs. Financial settlement occurs separately creating risk.
Solution: An online auction platform with programmable CBDC payment enables settlement directly between buyer and seller with no counter-party risk.
7.) Nature based Asset Trading
Problem: Longer settlement time and counterparty risks are some tangible problems when trading nature-based assets (e.g., carbon credits, biodiversity credits)
Solution: Tokenised real-world, nature-based assets (e.g., carbon credits, biodiversity credits) and tokenised currencies (e.g., CBDC, commercial bank-issued stablecoins) can be used to deliver real-time settlement and reduced counterparty risk.
8.) Offline payments
Problem: Unbanked population, communities that lack the means to connect online and major outages
Solution: Offline CBDC payments via smart cards that can be loaded with funds and can be used across Merchants.
9.) Stablecoin Proof of Reserve
Problem: General population has low confidence in Stablecoins. Current methods rely on third party accreditation that is not verifiable at the token level.
Solution: Issuing an Australian dollar stablecoin with 1:1 backing by a Central Bank Digital Currency (CBDC) that is independently verifiable by the customer would ensure better public trust of the system and wide usage.
10.) Superannuation Payments
Problem: Improving the efficiency and effectiveness of employers with regards to superannuation contributions.
Solution: The members of HESTA and CBUS and the SMSF will have their voluntary contributions credited to their account sooner with CBDC than if the contributions were made by a traditional payment method.
11.) Tokenised Invoices
Problem: Supply chain finance has traditionally been a paper-intensive process, resulting in human-error, delays in payment and liquidity issues for businesses.
Solution: This use case explores and evaluates issuing and paying invoices on-chain to improve transparency and efficiency. Tokenised invoices become tradable assets that can be paid immediately, resold, split or merged. Business can sell invoices at a discount for payment prior to payment terms.
12.) Tokenised FX Settlement
Problem: Currently, cross-border payments are not supported 24×7/365 by traditional services like SWIFT. This restricts flexibility leading to transfer delays and higher costs.
Solution: The use of eAUD in FX trading and Remittances can enable frictionless, 24×7 trading and global movement of foreign currencies, dramatically increasing speed and reducing risks and costs over traditional FX networks.
13.) Tokenised HQLA Securities Trading
Problem: Improve the efficiency, transparency and accessibility of Wholesale debt capital markets and money markets for both issuers and investors
Solution: Market adoption of distributed ledger technology will allow for atomic settlement using CBDC.
Design Considerations:
The idea is not to validate the choice of technology. Any eventual CBDC could be blockchain-based or centralised.
1.) CBDC is a real digital claim on the Reserve Bank.
2.) The eAUD platform is a private, permissioned Ethereum (Quorum) implementation. The eAUD ledger will operate as a centralised platform, under the management and oversight of the RBA. Approved use case providers will be able to access and interact with the eAUD platform via specified APIs and ERC-20 smart contract interface functions.
3.) eAUD Holding Structures — Three different structures for holding eAUD may be supported –
- A direct liability of the RBA to the eAUD end user, represented by an individual holding of eAUD on the CBDC ledger by an end user, where the end user also has control of the private key to access their holdings.
- Direct liability of RBA to end user, with individual holdings on the CBDC ledger by end users, controlled by a use case provider on behalf of the end users.
- Direct liability of RBA to a use case provider, who holds a commingled pool of eAUD on behalf of end users. End users have an indirect claim on the eAUD.
4.) Three types of CBDC Custodial models —
1. Non Custodial CBDC holdings — User holds the key to the wallet, no intermediary, Holders KYC details are linked to CBDC holdings on the CBDC ledger
2. Custodial Holdings with intermediary — Intermediary controls the key to the holdings, Holders KYC details are linked to CBDC holdings on the CBDC ledger
3. Custodial Holdings with pooled ownership — CBDC holdings are held in a pool by an intermediary, with the aggregate holdings controlled by the intermediary’s keys on the CBDC ledger
Individual users buy CBDC by exchanging their FIAT currencies.
5.) CBDC Distribution
For the said Pilot, ANZ is the authorised sole distributor for CBDC undertaking KYC/CDD. Users will request CBDC from ANZ by depositing fiat AUD into a nominated ANZ bank account. ANZ will deposit fiat AUD into a nominated RBA bank account and request the issuance of CBDC to a users ANZ ledger address that has undergone KYC/CDD.
Source:
Project 2 : International Settlements using multi-CBDC – Project Dunbar
Focus Area:
Wholesale payments between banks (interbank payments)
Overview:
Project Dunbar explores how a common platform for multiple central bank digital currencies (multi-CBDCs) could enable cheaper, faster and safer cross-border payments. The project is a collaboration between the Bank for International Settlements (BIS) Innovation Hub Singapore Centre, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore and the South African Reserve Bank.
Motivations:
- ) Address current inefficiencies in the cross-border payments — slow, opaque and expensive transfers because of fragmented networks across the countries.
- ) A common platform for international settlements using CBDCs could potentially improve cross-border payments.
- ) Explore the potential benefits and opportunities of a multi-CBDC platform, understand the critical obstacles and challenges to implementing such a platform, develop design approaches to address them, and prove the viability of the concept through the building and testing of technical prototypes.
- ) Explore the governance model and the processes involved in making the overall system work
Figure below describes all the elements addressed in the project study –
Financial institutions involved:
BIS Innovation Hub
Reserve Bank of Australia
Bank Negara Malaysia
Monetary Authority of Singapore
South African Reserve Bank
Banque de France
Magyar Nemzeti Bank
Technology and Design partners:
Accenture
R3
Partior
DBS Bank
J.P. Morgan
Temasek
Design considerations:
The chosen design model involves a jointly operated mCBDC payment system hosting multiple CBDCs. All FX settlements would be PvP by default, rather than requiring routing or settlement instructions through a specific entity acting as an interface. Trading venues could also be integrated into an mCBDC system, to reduce complexity, fragmentation and concentration.
In a shared multi-CBDC platform, every central bank involved can issue its own CBDC using their respective domestic currency. By doing so, commercial banks participating in the system can directly hold these CBDCs, granting them access to foreign currencies without relying on correspondent bank accounts. Since all participating banks have the potential to hold various CBDCs directly, they can engage in transactions with one another using the respective currencies involved.
Technical Solutions:
Two different solution approaches were tried out. Technology provider R3 built a prototype with Corda as a distributed ledger while technology provider Partior built a prototype with Quorum as a distributed ledger. Both prototypes were developed in a cloud infrastructure, with R3’s deployed on Azure cloud and Partior’s deployed on Amazon Web Services (AWS).
This phase of the project focused only on transactions within a multi-CBDC platform. Further development and testing of technical connectivity and integration with existent payment systems and external systems have to be explored, together with the business perspective of supporting other commercial use cases and applications.
To enable global payments across all jurisdictions and currencies, a regional multi-CBDC platform will need to connect with other national or regional multi-CBDC platforms. This would require global standards to be enforced for seamless interoperability.
Conclusion:
This phase of the project successfully developed working prototypes on Corda and Quorum platforms and demonstrated practicable solutions, achieving its aim of proving that the concept of multi-CBDCs was technically viable. The prototypes validated the design approaches taken to resolve three critical sets of challenges relating to access, jurisdictional boundaries and governance.
Project Dunbar, being one of the first technical experiments in the emerging field of multi-CBDCs, dedicated equal attention to problem identification and resolution. As a result, the project concluded with a number of unanswered questions, exceeding the number that existed prior to its initiation. Throughout the process, various open questions and challenges were identified and grouped into categories encompassing policy, business, and technology. Additionally, key milestones and subsequent steps were determined.
In an ideal world, you would have a single global settlement platform that transacts with all central banks and commercial banks in a seamless manner. Considering the collaboration, complexity and the dedication required to build such a standardised system, it’s almost an impossible feat to achieve. Each jurisdiction has their own unique requirements and scale at which they operate. A more probable solution is to implement it as a series of regional platforms rather than as a single global platform. This leads to considerations around how it may be possible to connect these individual regional platforms to realise synergies such that participants transact directly across jurisdictions, including via the lower-volume corridors.
Source:
https://www.bis.org/about/bisih/topics/cbdc/dunbar.htm
Project 3: Researching a Wholesale CBDC for Syndicated Lending – Project Atom
Focus Area:
Exploring a Wholesale CBDC for Syndicated Lending
Overview:
Project Atom was a collaborative research project undertaken in 2020–21 between the Reserve Bank of Australia (RBA), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Perpetual and ConsenSys, with additional input from King & Wood Mallesons (KWM).
The project involved the development of a proof-of-concept (POC) for the issuance of a tokenised form of CBDC that could be used by wholesale market participants for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform.
Motivations:
The project was aimed to examine the potential use and implications of a wholesale form of CBDC to answer the following questions:
- How access to a tokenised CBDC could be extended to a wider range of wholesale market participants, including those that would not ordinarily have access to ESAs at the RBA?
- What could be the potential benefits of integrating tokenised CBDC with a digital asset in the form of a tokenised syndicated loan on interoperable DLT platforms?
- Whether an enterprise-grade version of the Ethereum blockchain platform could address some of the technical limitations of the public version in implementing a CBDC?
- Can there be a possibility of using non-DLT payment systems to settle transactions on a DLT platform?
- Explore the implications of atomic DvP settlement on syndicated loans.
- How the digitisation of back-office functions related to the origination and servicing of those facilities affect the efficiency and risk?
Financial institutions involved:
- Reserve Bank of Australia (RBA)
- Commonwealth Bank of Australia (CBA)
- National Australia Bank (NAB)
Technology, Law and Design partners:
- King & Wood Mallesons (KWM)
- Perpetual
- ConsenSys
Design considerations:
Design included two interlinked components:
- A CBDC Utility, which manages the issuance, transfer and redemption of a wholesale CBDC.
- A Tokenised Syndicated Loan Platform (TSL Platform), which manages the issuance, drawdown, novation and repayment of a tokenised syndicated loan.
Both components resided on a private and permissioned blockchain network built on Hyperledger Besu, an enterprise-grade Ethereum client.
A two-tier model was considered for issuing CBDC, in which CBDC is issued by the RBA to ESA holders, which in turn can facilitate the acquisition of CBDC by their sponsored wholesale market participants.
The RBA, CBA, NAB and Perpetual were each assigned a node on the network that holds a copy of the ledger.
Despite every node containing a record of all ledger transactions, specific privacy measures were implemented to limit the visibility and accessibility of transactions for individual participants. For example, each ESA holder can only view transactions it is a party to in the TSL Platform.
The CBDC Utility and the TSL Platform are designed to be interoperable. This enables atomic DvP settlement of transactions in the tokenised syndicated loan, with the change in ownership/status of the loan (delivery) occurring simultaneously with the transfer of the CBDC (payment).
Scalabality and performance aspects were out of scope for the POC.
Technical Solution:
The figure below provides a summary of the features of the two types of tokens and the corresponding components.
The CBDC Utility and the TSL Platform share a private and permissioned blockchain network built on Hyperledger Besu, an open source enterprise-grade Ethereum client. The two components are interoperable through smart contracts and API integrations.
Loan token is configured as an ERC 1400 token, which is an Ethereum token standard commonly used to represent financial instruments.
Conclusion:
The project successfully examined the potential use and implications of a wholesale form of tokenised CBDC that can be used by wholesale market participants for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform.
The POC demonstrated significant efficiency gains and risk reduction from replacing the highly manual and paper-based processes still used in the back office operations. Tokenisation includes the possibility of fractionalising these loans to make them available to a broader investor base, thereby enhancing liquidity in the market.
The 2 tier-model mitigates the intermediation risk of commercial banks in the financial system. The presence of a tokenized version of currency on a distributed ledger technology (DLT) platform can also stimulate the advancement of DLT in transforming additional assets and business processes into digital form.
Source:
Reserve Bank of Australia[2021] – https://www.rba.gov.au/payments-and-infrastructure/central-bank-digital-currency/pdf/project-atom-report_2021-12.pdf