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Fintech Fridays 12/08: CBDCs

Welcome back to Fintech Fridays. In this edition, we look at the growing use cases for Central Bank Digital Currencies and whether they will be adopted by Australia in the future.

A central bank digital currency (CBDC) is a digital representation of a country’s existing fiat currency. As opposed to cryptocurrencies, which are decentralized, CBDCs are issued and regulated by a nation’s monetary authority, and their issuing of new currency is variable, unlike many cryptocurrencies which have a fixed lifetime supply. While the idea of digital currency and transferring funds digitally is nothing new, CBDCs enable this process almost instantaneously, with digital funds no longer taking days to transfer. With this in mind, several countries are researching the potential viability of CBDCs, with China testing a digital yuan, and India’s central bank announcing it would introduce a digital rupee by the end of 2023.

Advantages and Disadvantages

The movement towards CBDCs by central banks has largely been driven by the increasing use of cryptocurrencies, with the rationale being that CBDCs allow users the benefits of cryptocurrencies, such as their efficient payment speeds and lower digital transaction costs, without the weakness of their not being universally accepted as a means of exchange.

Another perceived argument for CBDCs is their ability to address the risks the widespread adoption of cryptocurrencies poses in nullifying the potency of monetary policy. This danger exists where as cryptocurrency become widely used as a means of exchange, the supply of money becomes increasingly less controlled by central banks (as countries’ fiat currencies are used less, and fixed-supply cryptocurrencies more), meaning monetary policy is less effective and central banks are ill equipped to impact economic activity. CBDCs, however, avert some of this risk, by allowing people to access the advantages of cryptocurrencies through nations’ existing, centrally controlled currencies, meaning the control of monetary supply remains with the banking sector.

As a stable store of wealth, CBDCs also offer greater predictability to users than cryptocurrencies, through their value being directly tied to that of a nation’s fiat currency. This is opposed to cryptocurrencies, which are largely quite speculative and whose value is determined by volatile market sentiment, and makes CBDCs potentially more viable as widespread digital currency systems.

While CBDCs offer several important advantages, there are also numerous drawbacks. CBDCs allow central banks to have extensive insights into consumers’ transactions, due to each CBDC transaction taking place through their system, meaning they could access large amounts of data on CBDC users which poses numerous privacy issues. A further disadvantage of CBDCs is their potential to destabilize the banking sector, with transfers between commercial bank accounts being significantly reduced as they now take place through new CBDC accounts created by central banks. This substantially lower activity between consumers and commercial banks could cause several to collapse or be severely impacted, having unprecedented effects on savings and investments.

Application to Australia

Recently, the RBA published a report into the potential use of CBDCs in Australia. Comparing the report to previous sentiment, the RBA continues to remain skeptical about its application to high income countries, but have perhaps become less pessimistic about its potential applications.

For example, in 2021, the RBA’s head of payments, Ellis Connoly said that the “Reserve Bank staff have not been convinced to date that a strong policy case has emerged in Australia for a CBDC. The primary reason has been that Australia’s existing electronic payments system already provides households and businesses with a wide range of safe, convenient and low cost payment services.” This sentiment seems to be reflected around the world, with existing use cases the CBDC being solely in low income countries such as the Bahamas and Nigeria.

A further concern for the RBA is the stability of the financial system, as this change would have significant implications for the banking sector, as described above. There are also environmental concerns associated with cryptocurrency, which we have discussed in previous articles, that have yet to be overcome.

However, the RBA governor has not ruled out the possibility, particularly in the event of a “lower-cost solution… than provided by the existing [payments] technologies.” Furthermore, there is an increasing focus on the RBA’s payment based research towards CBDCs. This should give some hope to crypto enthusiasts that the technology may become widely applicable, although maybe not in the form they had originally intended.


There are certainly some advantages and appeal to using CBDCs globally and in Australia. However, the drawbacks must also be considered, and with a relatively strong payments system already there is yet to be a significant benefit that warrants a widespread adoption of the technology in Australia, or other high income countries for that matter. Nevertheless, it will continue to be an important and promising area of research and it is likely that use cases will continue to grow in the next decade.

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The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.

References and Further Reading

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