Ethereum becomes the central bank's top choice? RBA begins testing central bank digital currency on Ethereum network

The Reserve Bank of Australia (RBA) recently revealed that the bank simulated the results of using the Central Bank Digital Currency (CBDC) in a wholesale payment system based on the Ethereum network.

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RBA investigates possibility of central bank digital currency

Recently, the RBA revealed that it had decided to simulate the use of CBDC in a wholesale payment system. Their plan is to see if the system for settling customer payments between banks can operate on a licensed Ethereum-based network.

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As we all know, many central banks have recently started experimenting with digital currencies, hoping to build a working system that can mitigate the effects of Facebook Libra. But while Libra is facing regulatory issues, central banks are pushing ahead with their own plans.

They still don't believe that cryptocurrencies like Bitcoin can provide a true alternative to traditional currencies, but they do see the value of moving to digital currencies.

As central banks in China, Sweden, Turkey and many other countries are developing their CBDCs, the RBA reveals that it is also conducting experiments to understand how CBDCs affect modern payment settlement systems.

Pros and cons of developing CBDC

According to a recent submission to the Senate Financial Technology Task Force, the Reserve Bank of Australia revealed that its goal is to simulate the role and impact of central bank digital currencies in a system that will allow financial institutions to settle payments between customers. In short, the bank wanted to know what would happen if the CBDC were provided to a commercial bank, which would provide their exchange settlement account balance.

In this way, banks will be able to exchange tokens and fulfill various obligations, and even redeem them through the central bank. If the system proves to work, it can even ensure the role of banks in the future cashless society.

So far, the bank does not seem to believe that CBDC is really needed in the settlement system. But if they were to be used, they would bring certain advantages, as the bank found. For example, they will reduce payment costs and increase speed. Payments will be made 24/7 in real time without the need for an external payment system.

As these systems now work, financial institutions need to exchange instructions with each other throughout the day, which takes more time and increases costs.

Switching to CBDC will also make "atomic" transactions easier to execute, although there are drawbacks, such as these systems either performing all parts of the transaction or not performing the transaction. Moving to a central bank digital currency can also enable suppliers to reduce settlement risks, use smart contracts to create new programmable currencies, and more.

Even so, Tony Richards, head of the Reserve Bank's payments policy unit, still believes there are many disadvantages. He also pointed out that creating a CBDC just to find out whether users are satisfied with existing electronic payment services may put the bank at risk.

He concluded,

If the central bank's digital currency is a huge success, it could lead to a fundamental change in the structure of the financial system.

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