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The potential and pitfalls of CBDCs
As Australia considers the possibility of introducing central bank digital currencies, a partner at a national law firm outlines the potential advantages and challenges associated with this emerging technology.
Grace Robbie
Speaking on a recent episode of The Lawyers Weekly Show, Liam Hennessy, a former partner at Clyde & Co, delved into the intriguing advantages and challenges of central bank digital currencies (CBDCs) as Australia begins to navigate this evolving financial landscape.
In the same episode, he highlighted several key obstacles that legal professionals and service providers encounter as CBDCs gain prominence.
Hennessy articulated that one of the most compelling benefits of CBDCs is their ability to reduce transaction costs by eliminating the need for a complex network of institutions that typically partake in transaction fees.
“There is great potential for them for a number of different factors. One, the transaction costs are much less when you’re using CBDCs.
“Generally speaking, there is a spaghetti of institutions between the Reserve Bank of Australia and yourself. Removing those institutions keeps costs down in terms of the people taking a clip of the ticket on the way through; we can transfer money faster,” he said.
Another area where CBDCs can make a significant difference, Hennessy revealed, lies in their potential to address the challenges faced by the unbanked or underbanked population. With CBDCs, he pointed out that individuals in these regions would no longer face exclusion from the financial system.
“Two, there’s social equality issues. Much of our population in rural areas are debanked. They don’t have the right documents to get access to a bank, or there aren’t bank branches in their area.
“With CBDCs, all they need to do is have an internet connection, and if there’s a natural disaster in their area, then the government can shift that value to them, and then they can buy food, medicine, so on and so forth,” he said.
For Hennessy, the most intriguing feature of CBDCs is their programmability, as they can be designed with tailored restrictions or incentives that influence user behaviours and financial transactions.
“Finally, and probably most interestingly, is the fact that if I give you a $50 note and, say, [you] use it to buy booze and cigarettes on Friday night in the Ivy. I really can’t police that. If you do that, that’s on you.
“But with the CBDCs, I can program it such that if you went out and tried to buy those booze and cigarettes at the Ivy tonight, it would be blocked,” he said.
He went on: “That is where the real interestingness comes in with CBDCs because I can not only program them to do certain things in terms of how you spend your money. I can say which countries you can spend your money in. I can make it worth more for particular segments of society and so forth.”
Despite their considerable promise to enhance the financial landscape in Australia, Hennessy also expressed that notable hurdles need careful consideration.
“Some of the key issues, though, for a CBDC are things like how it will affect deposits from traditional banks. We don’t want to disrupt them. How will we integrate it within our society? There are cyber security risks that are potentially there. How do we use this with anti-money laundering and KYC, and how do we update our regulations for it?” he said.
