Apologies for the blatant click bait headline, but the idea that the RBA would be offering anything in the way of monetary reform is just so outlandish that we were confident that you would spot the joke in an instant.
The instigation for the click bait is a new RBA paper entitled Retail Central Bank Digital Currency: Design Considerations, Rationales and Implications, in which the RBA ponders “digital” options for monetary reform including a Central Bank Digital Currency (CBDC). But, as one might have expected, the conclusions of our notoriously timid RBA are little more than “please move along folks there is nothing to see…the private banks are doing a super job”.
Sadly, when it comes to ensuring that the business models of the Australian private banks are buttressed with endless taxpayer support and privileges and they remain unquestionably profitable, relaxed and comfortable, the RBA works night and day. But when to comes to advancing real monetary reform and the public interest, the RBA makes a paralytically drunk sloth look like Usain Bolt.
In the paper the RBA move quickly to make it clear that the one “digital” monetary reform that really matters and would make a difference – ending the private banks monopoly over deposit accounts at the RBA – is not on the table.
The Reserve Bank also issues digital money in the form of balances in Exchange Settlement Accounts (ESAs) that banks and a few other types of entities can hold, in exchange for providing the Reserve Bank with government securities or other high-quality assets. Banks can use their ESA balances to make payments to other ESA holders, including to settle transactions between their customers. They do so by instructing the Reserve Bank, which keeps the official ledger of account balances, to debit their ESA and credit the ESA of the intended recipient. Currently, however, individuals do not have direct access to central bank digital money. If they want to hold central bank money (i.e. a form of money that is issued directly by the Reserve Bank), individuals need to hold banknotes.https://www.rba.gov.au/publications/bulletin/2020/sep/retail-central-bank-digital-currency-design-considerations-rationales-and-implications.html
One short anaemic paragraph in a 17 page paper to consider and then ignore the Central Bank Digital Currency that ALREADY exists and access to which could easily be extended to those members of the Australian public who wish to use it.
Why not discuss the central bank digital currency (CBDC) that already exists?
The answer to that is straight forward and has been examined on numerous occasions by the Glass Pyramid. It boils down to nothing more than that the business model of the private banks DEPENDS on retaining a monopoly over deposit accounts at the RBA and deposit accounts at the RBA are fundamentally a CBDC. A private bank monopoly over CBDC is essential to giving the private banks an effective license to create new money when they extend credit (make loans). If they were to lose that monopoly they must lose their money creation powers (or Australia would quickly make Weimar look like a sound money regime) (See here for further discussion).
Keep in mind that losing their money creation powers would not be the end of the banks. They would just be different and have to work harder and they don’t like that idea one little bit.
If there is one thing that the RBA (and quite a few others – especially the financial press) hate talking about in public it is how the Australian banking system depends on denying the Australian public access to 100% risk free deposit accounts at the RBA and giving our grubby, corrupted and bonus hunting banks a monopoly on the Central Bank Digital Currency (CBDC) that already exists.
They understand how talking about an immensely profitable and much abused monopoly for the private banks is likely to attract the attention of the general public and assorted trouble makers interested in outlandlish concepts like democracy and the public interest. The horror, The horror.
When the banks have a monopoly over risk free and perfectly safe deposit accounts at the RBA, everyone else, individuals and non-bank organisations, who want the convenience of operating a “digital” bank account is forced to enter into a business relationship with a private bank and thereby give the banks oodles of private information……which they eagerly use to peddle you as many debt products and other dubious services as possible.
So when it comes to the existing and very digital deposit accounts at the RBA there is a just the briefest of mentions in the Research Paper and no doubt a prayer that no one connects the dots (except, of course, the eagle eye operatives at the Glass Pyramid).
However, the last two sentences of the short quote above are still intriguing and oddly teasing
“Currently, however, individuals do not have direct access to central bank digital money. If they want to hold central bank money (i.e. a form of money that is issued directly by the Reserve Bank), individuals need to hold banknotes.”
Currently? What does that mean? Is someone in the RBA working on something like a MyRBA deposit account for individuals (and approved organisations)? Be still my beating heart…... When will the plans be unveiled?
It is worth noting that the last sentence makes the point that the Glass Pyramid has made on numerous occasions. Giving individuals access to deposit accounts at the RBA amounts to nothing more than giving them access to a more convenient alternative to banknotes (and coins) which are the only existing permitted ways individuals can directly deal with central bank liabilities.
What about the rest of the paper?
Having dodged the critical issue of giving the general public access to “digital” deposit accounts at the RBA, the paper meanders on for 17 pages discussing the various pros and cons of giving the general public some way of dealing with central bank liabilities other than in the form of banknotes or coins. The paper traverses the following issues:
- What roles for the central bank and the private sector? – The RBA notes that it depends on what structure is desired. – See the MyRBA approach of using MyRBA accounts and a CBI account for each private bank.
- Account-based or token-based? This section was interesting and may relate to the curious reference to “Currently” above. “Because the balance in a retail CBDC account would be a claim on the central bank, this model can be thought of as the equivalent of every citizen being offered a deposit account with the central bank, even though the central bank might not be responsible for user-facing and account-servicing functions.” See this quick guide to MyRBA for a detailed discussion of deposit accounts for the general public at the RBA.
- Decisions regarding in-person, online and offline usability. The paper discusses the possible features of a digital currency.
- Would a CBDC bear interest? Maybe, it depends, notes the RBA paper. Note that MyRBA deposit accounts at the RBA will pay no interest.
- What degree of privacy would apply and who could hold CBDC? The paper makes the dubious claim that forcing the general public to use a private bank account provides a high degree of privacy. Hmmm – all that product cross selling and the Banking Royal Commission must be just a figment of our imaginations. What protects privacy are laws that protect privacy.
- Would a CBDC use blockchain or distributed ledger technology? The RBA concludes that this is probably not necessary. MyRBA does not require either of those technologies as it is involves nothing more than a system of digital deposit accounts at the RBA and they already exist.
- Would cash be withdrawn? Maybe if everyone was using a CBDC. MyRBA allows one hundred monetary flowers to bloom and involves preserving both the private banks right to create private money AND notes and coins issued by the RBA.
- Why Introduce a Retail CBDC? This is where the RBA paper works hard to polish the brown prairie nugget that is the existing private Bank monopoly on CBDC by making the case that a retail CBDC would just be lots of work for the RBA.
- Responding to the decline of cash? RBA claims it can make the private bank monopoly on CBDC work better so that folks don’t miss real cash at all.
- Responding to the emergence of stablecoins and cryptocurrencies? – The RBA are not very worried about this as those private DC are fiddly to use and no match for the bank monopoly on CBDC.
- Providing stimulus for payments innovation? The RBA believes they can innovate a bit and still keep the private banks happy without taking away their monopoly on CBDC.
- What Effects Could a CBDC Have on the Financial System and Financial Stability? See below for full extract. The RBA seem quite concerned about the risks if the banks lose their monopoly on CBDC but seem to assume that taking away the free lunch for private bankers is the same as financial system instability. The MyRBA policy would increase stability and reduce much of the regulatory complexity and expense involved in the ever present risk of a dodgy bank exploding before our eyes.
- What Effects Could a CBDC Have on Monetary Policy? The RBA thinks not much. But then they have failed to discuss the real CBDC option of giving every Australian access to a MyRBA account.
- How Much Demand Could There Be for a CBDC? The RBA believes the public are quite happy to have no alternative to using private banks for digital bank accounts. But then how would they know as the RBA refuses to properly discuss the alternatives.
- What Are Other Central Banks Doing? The RBA notes that Canada and Sweden are sniffing around the CBDC alternatives but believes monetary reform is really something only the poor folk think about. Most likely because developing country Central Banks do not have rich powerful private bank parasites to protect.
- Where to from Here? – RBA promises to look interested (chortle) but essentially do nothing as they believe the public are quite happy clutching their grubby banknotes and coins and the banks can be trusted to not abuse their monopoly ……too excessively.
Unsurprisingly, as the various CBDC “options and issues” discussed by the RBA are generally inferior to simply giving the public direct access to deposit accounts at the RBA (the CBDC that already exists), the RBA concludes that it is best we just ignore the wonderful world of CBDC, leave them to some other central banks to experiment with and in the meantime leave the private banks running the show.
However, at various points in the RBA paper the real issue, of preserving and protecting the sacred monopoly and privileges of the private banks, does bubble through. The following extract from the RBA paper makes it clear what the key reason is for denying the general public access to a MyRBA deposit account.
It is nothing more than ensuring that the dodgy and highly leveraged banks get to continue to control the savings of the general public and continue to hold the Australian economy hostage.
What Effects Could a CBDC Have on the Financial System and Financial Stability?
What Effects Could a CBDC Have on the Financial System and Financial Stability?
If a CBDC were to be introduced and adopted widely, it could represent a significant change to the structure of the financial system. While some of the demand for CBDC might come from switching out of cash, there might also be switching out of bank deposits. In the extreme, many households and businesses might decide they no longer wished to use deposit accounts at commercial banks (though, as discussed earlier, banks might well still provide some payment and account-servicing functions for the CBDC). These end users would instead keep their liquid funds in CBDC and use those to make payments.
Currently, commercial banks source about 60 per cent of their funding from deposits, with about two-thirds of that being at-call deposits. If banks were to experience an outflow of deposits, they would have to fund more of their lending in capital markets or from equity. The loss of deposit funding and greater reliance on other funding sources could result in some increase in banks’ cost of funds and result in a reduction in the size of their balance sheets and in the amount of financial intermediation. Of course, this would depend on any changes to the structure of the central bank’s assets resulting from the increase in its balance sheet, for example, whether it invested in government securities as opposed to lending funds back to banks or buying their securities.
Furthermore, the existence of a CBDC could raise challenges during times of stress in financial markets. Currently, if households or businesses become wary about their deposits in a particular bank, they are able to withdraw their funds by a transfer to an account at another bank (or by withdrawing cash at branches or ATMs). However, currently it is not really feasible for depositors to seek to withdraw deposits en masse from the banking system as there are practical limits to what can be withdrawn via ATMs and branches. However, in the presence of a CBDC, a run on the banking system as a whole would become feasible; if depositors had concerns about the entire financial system, they could seek to make large-scale transfers of commercial bank deposits into CBDC.
Of course, this bank-run scenario is highly unlikely. In Australia, the FCS is likely to provide a significant level of assurance to households (though not necessarily to businesses). Furthermore, the Reserve Bank is able to provide liquidity, with appropriate collateral, to solvent but illiquid ADIs. Nevertheless, it does point to a possible risk from the introduction of a CBDC. One control that has been proposed would be to place limits on the amount of CBDC that could be held by any individual.
The RBA assumes that taking away the free lunch and privileges for private bankers is the same as financial system instability. The RBA seems to think that the current model where Australia’s deregulated private banks spend their time blowing unproductive asset price bubbles is in the national interest.
The MyRBA policy would increase stability and reduce much of the regulatory complexity and expense involved in the ever present risk of a dodgy bank exploding before our eyes. Most importantly the MyRBA CBDC proposal would constitute a massive step forward in ending the asset price bubble blowing operating model of the Australian private banks.
The following points are a quick summary of the key “take-aways” from the RBA Research Paper.
- There is already a well developed system of Central Bank Digital Currency (CBDC) in Australia and it is the digital deposit accounts at the RBA.
- Currently the private banks have a monopoly over the Australian CBDC.
- The RBA loves the private banks having a monopoly over Australian CBDC.
- The RBA is not keen on doing ANYTHING to end the monopoly of the private banks over CBDC in Australia.
- The RBA clearly believes that what is good for the private banks is good for Australia.
- The RBA Research Department should produce a 17 page paper on the following topic. “WHY maintaining a private bank monopoly over Central Bank Digital Currency (RBA deposit accounts) is an undemocratic and barbaric relic of the 19th century and WHY the introduction of MyRBA deposit accounts at the RBA for any Australian who wants one is a critical reform that will help Australia develop a more productive economy with fewer banker fertilised unproductive, speculative and rent seeking tumours”