Transcript of Question & Answer Session Panel participation at the Intersekt Festival 2022


I hope that everyone enjoyed their lunch and is ready for some more great content from our speakers. Our first session after lunch is all about CBDCs and stablecoins. I'm not going to lie. I had no idea what that meant, so I did some googling, and it stands for 'Central Bank Digital Currency, I'm pretty sure. Yes, thank you. I'm not sure if I'm the only one here who didn't know that. But, on our panel today to teach us all about it, we have Effie Dimitropoulos from Novatti, Nigel Dobson from ANZ Bank, Urszula McCormack from King & Wood Mallesons and Ellis Connolly from the Reserve Bank. And our moderator for this panel is Daniel Knight from K&L Gates. Welcome to our panel.

Daniel Knight

Thanks, everyone, for coming. I's great to be talking about these issues. What a difference 12 months makes. With so many of the sessions through the conference so far, I'm reminded just how much the sector has changed and evolved since the last Intersekt, and certainly no exception is when we're talking about CBDCs and stablecoins.

I think one of the themes that seems to emerge from the agenda is just how many sessions are focused on payments issues and on crypto issues, and this session I think sits uniquely at the crossroads of both and at a really interesting space too, in terms of innovation, regulation and sort of product evolution. And so we have that sort of spectrum represented on the panel here today. Keen to talk about all those issues. So I might start with you, Ellis. Can you just tell us who you are and of your interest in these issues?

Ellis Connolly

Absolutely. Thanks very much, Daniel. I'm the Head of Payments Policy at the Reserve Bank of Australia, and our mandate is to promote the efficiency, competitiveness and safety of Australia's payments system. And, as part of this, we have an interest in where we're going to end up, with a regulatory framework for stablecoins. We're also doing quite a lot of research on central bank digital currencies. We've got a very open mind on the way forward there, and our focus at the moment is on use cases for CBDCs in Australia.

Daniel Knight

Great. Okay, thank you. And, for my part, I'm a partner at K&L Gates. My practice is in financial services and fintech regulatory issues as well. So what's to dive into today? Ellis, we might start with you. So, the Reserve Bank obviously, like lots of other central banks around the world, is in the midst of CBDC research projects. Can you tell us where you're up to, what the thinking is at the moment, just how open your open mind is about CBDCs?

Ellis Connolly

Absolutely. Thanks very much, Daniel. Look, our open mind is very, very open on these issues in terms of the way forward for CBDCs. What I would say is that today we're not yet convinced that there's a public policy case to say, issue a retail central bank digital currency in Australia. The reason for that is pretty simple, we have a modern and pretty efficient payments system -people can make cheap, fast and safe payments in Australia. If people want to use a central bank digital currency, there's still pretty good access to cash. And there's plenty of innovation going on as well, if you think about the adoption of digital wallets and also all the great work going on in fast payments, using the NPP. So it's not clear yet that we need to add to that, a retail central bank digital currency.

The story is a bit different on the wholesale side. You could imagine, at some point in the future, there could be a wholesale CBDC that could assist with the settlement of tokenised assets, for instance. This isn't a world away from what the Reserve Bank already does with its real-time gross settlement system. We have exchange settlement balances, which financial institutions can use to settle wholesale transactions. So it's not a huge leap from that form of electronic money that's already out there to a wholesale CBDC.

But, in any case, we want to make sure that Australia is well positioned for the future here, so we've been doing quite a bit of research on central bank digital currencies over the past few years. Several of our projects have been focusing on proofs of concept to really explore technical and design issues around CBDCs. We're pivoting now to really answer that public policy question of whether there's a case for CBDCs by looking at potential use cases, and that's very much the focus of the research collaboration that we recently announced with the Digital Finance CRC to look at use cases for CBDCs in Australia.

The plan will be that we'll issue a pilot CBDC. So this is a step up from the proofs of concept that we've done so far, in that it would actually be an actual claim on the Reserve Bank. Our plan will be, over the next couple of months, to put out a white paper that describes the platform in a bit more detail, and then we'll put out an expression of interest to industry to find out what sort of use cases that you would like to test on this platform. We've got a very open mind, whether they're wholesale or retail use cases. But one thing we would ask is that we're particularly interested in use cases where you can't implement that easily just using the existing payments system. So we can really get at that question of: do we need a CBDC in Australia?

So we're really looking forward to engaging with you all. Feel free to come and have a chat to us over the next couple of days. You can also register your interest in the project on the website of the Digital Finance CRC.

Daniel Knight

Okay, thank you. Now, Ellis, we know that 'stablecoins' is an area of focus for regulators in Australia, how they might be regulated and when. Can you give us any insights of what you're seeing perhaps in your discussions with other regulators?

Ellis Connolly

Sure, yeah. Firstly, I'd just say, we do see potential for well-designed, well-regulated stablecoins to make a contribution to providing better services for Australian households and businesses, so we do see a future which could involve well-regulated stablecoins. But it's really important that we get the regulation of this right. There are potential consumer protection issues in particular, potentially, financial stability issues, if stablecoins were to be used very broadly. And the issues, we saw earlier in the year with the volatility in crypto markets, with the issues around algorithmic stablecoins. It's emphasised that there really is a need for a good regulatory framework in this space.

So we've been working with the other Council of Financial Regulators' agencies, particularly thinking about the stablecoins that could be used for payments, so these are the ones that have similar characteristics to currency or money. The philosophy we approach this with is one of 'same activity, same risk', it should have the same regulation. So, in that context, when we look at stablecoins, they're pretty similar in their functionality to stored-value facilities, so we think they should be regulated in a similar way.

The approach we have to stored-value facilities is really what we want to be able to achieve is a framework that can give consumers confidence that, if they purchase a stored-value facility, such as a stablecoin, they'll be able to extract their value from it at the other end. Ways this can be done is by having stablecoins backed with high-quality collateral, or they can be prudentially regulated in a way equivalent to the way that deposits are. This is what can help to provide consumers with that confidence.

In terms of the way forward, the Council of Financial Regulators thinks we should be incorporating the regulation of stablecoins for payments purposes in with stored-value facilities as part of the work that the government is doing in generating a licensing regime for payment service providers. And one of the big benefits of doing it as part of that licensing regime is that it should generate the potential for non-banks also to be able to issue stablecoins in future which consumers can rely on.

Daniel Knight

Great. Thanks, Ellis. And I guess that's another area where there's overlap between the work that Treasury is doing on payment service provider licensing as well as that separate project around token mapping. And so you've got this overlap, with stablecoins sort of sitting across both. So thank you for that perspective.