Westpac sees "many potential advantages" with CBDCs

Westpac Group sees potential in central bank digital currencies (CBDCs), partly as they would be released by central banks and act as a form of electronic cash.

The bank released a report on Monday to create awareness of the digital assets space following interest from customers and clients.

Senior economist Jarek Kowcza said in the Westpac Wire post that the “boom and bust cycle in crypto” contains “many elements of a financial bubble driven by investor mania and irrationality”.

“But there are some key areas where innovation may continue,” Kowcza said.

“One that stands out is central bank digital currencies (CBDCs). As the name implies, these would be cryptocurrencies issued directly by central banks.

“One of their key advantages is that they could act as a form of electronic cash.”

He said CBDCs could tackle private cryptocurrency issues.

“Crypto transactions are inefficient, have high costs, slow transaction times, and are not widely accepted," he said.

Cryptocurrencies also “exhibit extreme price volatility and regular crashes, making them a poor store of value” while CBDCs or fiat currencies “are used to price goods and services.”

Kowcza pointed to the Reserve Bank (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) pilot project, which is exploring the use cases of a CBDC.

The year-long research eAUD project commenced this January and received over 140 submissions for possible use cases, with findings set to be released mid-2023.

Kowcza also said, “Australia already has a modern and efficient payments system” through the New Payments Platform (NPP), “replicating one of the key touted potential benefits of crypto”.  

'Revolutionary possibilities'

“Some of the more revolutionary possibilities lie in using CBDCs as a foundation on which to build a more efficient and interoperable digital domestic and global financial system,” Kowcza said.

He said the digital asset could create a stable and secure foundation from which “other innovations can be overlayed”, leading to better financial products and services, improved costs and less risk  

“We may even see uses no one has even thought of yet appear.

“It’s important to keep a cool head in an industry prone to hype and promises, most of which have yet to be delivered,” he added.

In an accompanying cryptocurrency special report part 2 [pdf], Westpac stated scalability is a “significant hurdle” while “volatility is extreme and environmental impacts remain significant”.

The report said while stablecoins, which are tied to a commodity or asset, were in introduced to “address challenges associated with the extreme volatility of digital currencies”, they also brought with them some challenges

“During the ‘crypto crash’ of 2022, the value of the then largest algorithmic stablecoin collapsed to near zero in the space of a few days," the report states.

This has not stopped progress in the space, however.

ANZ released its own A$DC stablecoin last year and NAB is moving forward with its own AUDN coin.

In July last year, Westpac launched a search for a principal architect for digital assets and cryptocurrency, indicating its own intention to step into the cryptocurrency and blockchain space, having earlier kept quiet on its ambitions.

Meanwhile, CBA believes mass market adoption of a CBDC in Australia is still “some years away”, given technology and regulation complexities. However it does remain in discussions with regulators regarding a cryptocurrency trading pilot.