Westpac and Commonwealth Bank have used a digital version of the Australian dollar backed by the Reserve Bank to trade and pay for real certificates of deposit, which are debt instruments issued by each bank.
The deal is a world-first between mainstream regulated banks using a “central bank digital currency”, or CBDC, and market securities. It also points to the initial benefits of CBDCs in interbank markets, where banks do business with each other.
Imperium Markets hosted the trades last week on its marketplace. Imperium’s was one of 14 pilots using the RBA CBDC, announced in March, with the Digital Finance Co-operative Research Centre. It was the only pilot involving the money market.
Banks say the tests, which were completed last Thursday, point to new blockchain-based trading systems, which run on decentralised ledgers, improving liquidity and creating efficiencies in payments, reconciliation and clearing – which still rely on manual processes. Yet banks will proceed cautiously given the need for new regulation and novel technology risks.
Imperium said the tests illustrated the benefits of operating a single market infrastructure covering trading, payment, custody and the broader management of securities. This could also help improve the efficiency of the bond market.
Currently, large parts of the debt markets still operate on a workflow of phone calls, emails and spreadsheets, using manual processes that create operational risks and a lack of data for regulators to scrutinise.
CBDCs can help eliminate settlement risk, through a process known as “atomic settlement”. This allows a payment and the transfer of title for a security to be exchanged at precisely the same time.
This promises to reduce the amount of capital that banks – and, ultimately, central clearing houses – need to hold against failures in the settlement process, freeing up money for lending.
Historic shift
Last week’s tests also showed two different blockchain systems could work together, and potentially created new standards to allow them to connect: a private version of the Ethereum blockchain that is running the RBA’s CBDC; and a separate blockchain, known as R3 Corda, used by Imperium.
The pilot’s CBDC – often called the eAUD – was withdrawn from circulation after the trials finished last week.
While other global central banks are experimenting with CBDCs, most involve dummy deals. This was historic because the RBA’s CBDC represented a real claim on the central bank and made Australia one of the most progressive jurisdictions in the world testing this new form of money.
Regulators provided various waivers for the banks and Imperium, an ASIC-regulated debt marketplace, to participate in the trials. They are now on notice that changes to regulations and oversight will need to happen if the RBA decides to pursue a permanent CBDC in wholesale markets.
The RBA will report on the pilot project in about September.
Ellis Connolly, head of payments policy at the RBA, said the trials were a “very valuable project” that pointed to the settlement of digitised assets as a key potential use case for a CBDC in Australia.
“We think the project opens some avenues for further research and exploration with industry, particularly on the use of central bank digital currencies for things such as the settlement of tokenised assets,” he told a Senate committee exploring the regulatory settings for crypto on Tuesday.
“We very much maintain an open mind on the possibility and case for a central bank digital currency [to] emerge in the future.”
The committee heard that the lack of regulation in the digital asset area is holding back innovation.
Westpac director of group strategy and transformation Eugene Zaid said last week’s trials enabled the bank to “take securities, with real market value, and issue, trade, and settle them for real money in near real-time”.
Westpac chief technology officer David Walker said: “A major advantage is the ability to instantly access cash for wholesale investors, which they can’t today as it currently takes hours to days. This will allow them to better manage intraday liquidity, creating greater operational efficiency, while also providing transparency for regulators.”
Imperium Markets chief executive Stu Burns, who worked for a decade at Westpac and Commonwealth Bank, said: “We were encouraged to see the banks put projects together in this wholesale market and the trials have shown the technology works and the use case works. The role of clearing will change in the digital world, as we move towards a single market infrastructure, where trading, payment, writing to custody and serving the asset happens on one infrastructure.”
Andreas Furche, CEO of the DFCRC, said the Imperium and bank trials made it clear that CBDC would be useful to improve interbank trading and settlement.
“The use cases can be most impactful when banks are dealing with each other. Improving that infrastructure has the highest economic impact,” he said.
The technology may end up reducing the need for trading desks to provide market liquidity, by encouraging more asset managers to trade and settle trades directly with each other, Dr Furche added.
Mr Burns encouraged the RBA to “take these learnings and keep going”.
“This is an industry that does a lot of talking, and not always doing. But we hope the RBA can keep this going, and the onus on us to continue to collaborate,” he said.
