“It’s hard to know where this is going to end but I think there are significant opportunities here.”
Dr Lowe,however,drew a distinction between digital tokens backed by a central bank and those that might be offered by the private sector.
A CBDC would operate like dollars and coins,where the money is backed by the bank and the government. It is often described as “fiat money” as it is not backed by a commodity such as gold but by a government’s control of the money supply and the ability to raise taxes.
Stablecoins,such as Tether or Facebook’s Diem,are private sector versions of a digital currency. The coin is backed by an asset such as gold,government debts or holdings of a real currency such as the US dollar.
These types of “private” money have existed in Australia. Until 1913,when the first Australian notes were produced,private money circulated in the country alongside British pounds and colonial government coins and notes.
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Dr Lowe cautioned that private money had worked in the past until it didn’t,adding the failure of private money was “really bad for society”.
“History is littered with examples where private money worked really well for a time but then something happened,confidence is damaged and it all ends in disaster and financial crisis that hurts people,” he said.
Late last year,a Senate committee investigating the future of finance and technology in Australia recommended Treasury lead a policy review of the viability of a retail CBDC issued by the RBA. That recommendation has been formally adopted as federal government policy.
In evidence to a Senate committee last week,RBA assistant governor Michele Bullock noted that if the bank started issuing CBDCs,that did not necessarily mean the end of cash.
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“This would be a decision not for the Reserve Bank but for the government,and it wouldn’t be replacing cash. That’s very clear,” she said.
Another concern is that if central banks set up CBDCs,this may make it easier for a bank run as people withdraw their deposits to hold a central bank digital currency.
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