The Role of RITS in Supporting Settlement in a Tokenised Ecosystem 5. Access to central bank reserves for stablecoin issuers

The RBA provides eligible financial institutions with access to central bank reserves through ESAs held at the RBA. ESAs are primarily used by these entities to settle financial obligations between each other arising from their participation in payment systems and financial markets.²⁹ They may also be used to hold reserves and meet certain prudential liquidity requirements. ESAs do not operate like general commercial bank accounts. Rather, funds can be moved between ESAs through instructions submitted via feeder systems, batches or the LVSS, or input directly into RITS as RITS Cash Transfers (as described in Chapter 2). This requires participants to maintain the necessary technical, operational and liquidity arrangements to manage their settlements.

All authorised deposit-taking institutions (ADIs) licensed in Australia are eligible to apply to hold an ESA (though some choose not to do so because of the associated costs and operational requirements, using a settlement agent instead – see Chapter 2). While some non-ADI entities are eligible to apply to hold ESAs, non-ADI issuers of stablecoins, a form of tokenised private money explored in Project Acacia, are generally not. However, some stablecoin issuers and participants in Project Acacia expressed a preference for stablecoins to be partially or fully backed by central bank reserves to enhance their safety and credibility as settlement instruments in wholesale markets. Direct access to central bank reserves by stablecoin issuers in Australia is becoming a live policy issue as the Australian Government advances its proposed regulatory framework for tokenised stored value facilities (SVFs).³⁰

This chapter seeks feedback on the role that central bank reserves could play in supporting stablecoin arrangements, consistent with system-wide financial stability. This includes feedback on how such access might be used and the account structures, features and operational arrangements that would be most appropriate to support such access. While the discussion mostly focuses on ESAs, respondents are also invited to consider whether other account types or arrangements may be warranted. The feedback from this consultation will inform the RBA’s consideration of future access arrangements as part of its review of the ESA Policy to commence following the passage of the Government’s proposed regulatory framework. Decisions regarding access remain at the discretion of the RBA.

5.1 Findings from Project Acacia

Findings from Project Acacia revealed an interest in access to central bank reserves by stablecoin issuers. For example, non-ADI stablecoin issuer Forte explored an arrangement intended to approximate backing for its AUDF stablecoin by central bank reserves. Forte deposited funds with an ADI, which in turn maintained ESA balances equivalent to those funds under a private contractual arrangement between Forte and that ADI. However, such an arrangement would not provide a clear legal or operational separation between the assets backing the stablecoin and the ADI’s other ESA holdings. Project use cases led by Imperium Markets and NotCentralised explored an alternative model, whereby stablecoins were backed by the issuer’s holdings of pilot tokenised central bank reserves that were issued specifically for the purposes of the project.

5.2 The current ESA framework

The eligibility and application requirements for ESAs are set out in the RBA’s ESA Policy.³¹ Under the current policy, an applicant for an ESA must be an ADI, a provider of third-party (customer) payment services that needs to settle clearing obligations with other service providers, or a provider of certain financial market infrastructures.³² These criteria reflect the purpose of ESAs to enable interbank settlement to take place using central bank reserves. Given their role in the financial system and their prudential obligations, ADIs may also use their ESAs to hold balances as a form of high-quality liquid asset, as required under prudential liquidity standards. Access to central bank reserves is only provided to the ESA holder. Under the RITS Regulations, ESA holders act as principal, and not as agent or trustee or in any other capacity. Accordingly, end-customers of an ESA holder (e.g. a non-ADI issuer such as Forte) do not have a direct claim against the RBA in connection with the ESA.

In addition to meeting the basic eligibility criteria, ESA applicants that wish to operate their own ESA either for settlement or to hold reserves must meet a range of governance, operational, business continuity and liquidity requirements. These are designed to ensure that participation promotes the RBA’s objectives of ensuring that the settlement system remains efficient, reliable and secure.³³

ESA holders may be eligible to access the RBA’s standing facility to execute repurchase agreements (SF Repos), to assist them in meeting their settlement obligations as required, thereby supporting the orderly functioning of RITS. Access to this facility is subject to the RBA’s discretion. At a minimum, ESA holders wishing to enter into SF Repos would need to be subject to an appropriate level of regulation and be direct members of Austraclear.³⁴ In practice, this means that the SF Repos are typically not available to non-ADIs.

5.3 Account models

5.3.1 Account types

One approach to potentially providing stablecoin issuers with access to central bank reserves would be to extend existing ESA eligibility to include these entities, giving them a means of settlement as well as holding central bank reserves as a backing asset. Depending on the intended use of central bank reserves, however, alternative account models could also be considered. Some alternative account models in other jurisdictions include:

• Settlement only accounts. These accounts are designed primarily to support interbank settlement. Variations of this model are offered or under consideration in several jurisdictions, including the US Federal Reserve’s proposed payment account framework.³⁵ These accounts may restrict the balances that can be held overnight, and are not remunerated. They may also exclude access to central bank liquidity facilities. Settlement accounts would not be suitable for stablecoin issuers wishing to hold central bank reserves as backing assets but could be used for payment activity (e.g. relating to issuance). However, it is not clear that this model would offer functional advantages or lower participation requirements relative to existing ESAs.
• Reserve only accounts. These accounts are designed primarily to hold central bank reserves rather than to support direct participation in payment settlement. They could allow stablecoin issuers to hold backing reserves at the central bank while continuing to conduct payment, issuance, redemption and reserve-management activities through commercial banks or settlement agents.³⁶ Depending on their design, reserve accounts may only require limited operational connectivity and liquidity management capabilities.
• Omnibus accounts. Omnibus accounts enable a payment system operator or other intermediary to hold a pooled balance at the central bank on behalf of multiple participants (e.g. stablecoin issuers), while preserving participants’ beneficial interests in the underlying reserves. The BoE has introduced an omnibus account framework for payment system operators.³⁷ A notable example is the Fnality Payment System, which uses central bank reserves held in a BoE omnibus account to support the issuance and transfer of digital representations of those reserves for wholesale settlement purposes.

The RBA recognises that alongside the functional features of central bank accounts, whether or not balances are remunerated will be an important factor in the commercial viability of using them for holding stablecoin reserves, and that central banks around the world are considering different approaches to this issue.

5.3.2 Moving funds into and out of accounts

Regardless of the type of account held at the RBA, a stablecoin issuer would need a mechanism to move funds into and out of that account. For accounts held directly by the stablecoin issuer (e.g. an ESA, settlement-only account or reserve-only account), several options are available (see Chapter 2 and Appendix A for further detail):

• Direct participation in a payment system (e.g. HVCS, NPP, BECS or Austraclear). Stablecoin issuers could join one or more payment clearing systems and submit settlement instructions to RITS or the FSS. In the case of Austraclear, direct Austraclear participants may be able to use Austraclear cash transfers to move funds between their ESA and a commercial bank account held with a settlement agent.³⁸

  Direct participation in any of these systems may involve significant operational and compliance costs and, for some systems, participation is currently limited to ADIs. Access would require membership of the relevant payment clearing system and ongoing compliance with its eligibility and operating requirements. As a result, this option is likely to be more suitable where an issuer expects to process a high volume of transactions, such as frequent issuance and redemption activity, than where the primary objective is simply to hold reserves with only occasional transfers into or out of the account.

• Cash Transfers entered directly in RITS. While this is a relatively straightforward mechanism, its operational features mean it is not suited for regular use and would require arrangements with the issuer’s commercial bank, as the transfer does not include remittance information. Accordingly, this option is likely to only be suitable for infrequent transfers associated with reserve management, rather than routine payment activity.

For omnibus account arrangements, the BoE model would require a stablecoin issuer to hold an ESA or settlement account from which to fund the omnibus, so the considerations above would apply. However, if the stablecoin issuer were not required to hold a separate central bank account, it could instead be able to move funds to and from an omnibus account by instructing its commercial bank to make a transfer to the omnibus account operator. In this case, it would be the account operator that would be responsible for connecting to the relevant feeder system or batch stream and managing settlement activity through the account.