Australian Financial Review – James Eyers and Jessica Sier
The Reserve Bank of Australia says creating real-world financial assets in a “tokenised” form could unlock billions of dollars in annual savings for banks and other financial institutions by streamlining settlement processes and automating registries.
The RBA is in the early stages of planning for a project to assess how different forms of digital money, including “central bank digital currency” (CBDC) and bank-issued stablecoins, could support the development of tokenised asset markets in Australia.
A tokenised asset is a digital version of a physical one which allows it to be programmed and traded on blockchain platforms. This could provide an update to existing markets which use legacy financial infrastructure that is slow and expensive, or for new markets such as for carbon or biodiversity credits.
RBA assistant governor Brad Jones told The Australian Financial Review Cryptocurrency Summit the bank had made hypothetical estimates of the cost savings that could be delivered to Australian companies and financial institutions by real-world asset tokenisation.
It suggested potential savings of up to $13 billion per year for issuers in the Australian capital markets, including around $6 billion for equities, $4 billion for corporate debt, and $3 billion for government debt.
These could come from reducing the cost of capital and transaction costs. The calculations are based on a fraction of the benefits which emerged when trading went electronic, the RBA said.
Estimated cost savings for Australian financial markets sit in the range of $1 billion to $4 billion per year. These could be created by tighter bid-ask spreads, reflecting higher trading volumes as tokenised assets are made available to a wider range of investors. There could also be gains from “atomic” (instant) settlement, such as for cross-border payments without needing to rely on corresponding banks. Savings could also come from lower collateral requirements, and reduced costs relating to failed settlements.
“The numbers seem sufficiently large to us that, at a minimum, it’s worthy of further investigation,” Mr Jones said.
Commonwealth Bank managing director of blockchain and digital assets Sophie Gilder said the RBA’s estimates were “very aligned to what we’re seeing in terms of the potential for cost savings”. These would come from operational efficiencies and reduced levels of regulatory capital. “We’ll get more and more refined in terms of understanding what those cost savings actually are,” she said.
Risks and challenges
CBA is exploring use cases in debt capital markets. Ms Gilder said if digital currencies could be combined with tokenised assets to create instant settlement, that would produce some huge benefits.
David Lavecky, co-founder of Canvas Digital, said its focus was foreign exchange markets. It has been working alongside the RBA in one of its pilots to test a CBDC in Australia, known as the eAUD.
“In some cases, it may be quicker to take cash out of the ATM, get on a flight and take it to another country rather than using your regular bank accounts,” he said. “Using a CBDC presents an entirely new way of doing foreign exchange. We were able to show that an hour-long process went down to seconds and became atomically settled across blockchains.”
Mr Jones said in a world of tokenised real assets, the role of traditional financial intermediaries would evolve as market-making activity was reduced along with manual reconciliation of records.
He also pointed to various risks and challenges. One was regulatory uncertainty about compliance, such as who is accountable if smart contracts go awry and for anti-money laundering responsibilities.
Markets would need to be interoperable with traditional infrastructure for the foreseeable future to limit fragmentation between assets traded across different venues, Mr Jones said. Trades, and even orders, would need to be prefunded, which could increase liquidity requirements for market participants.
The CBDC project has highlighted opportunities for a wholesale CBDC to act as a complement to, rather than substitute for, new forms of privately issued digital money, such as tokenised bank deposits and asset-backed stablecoins.
“It is certainly plausible that stablecoins issued by well-regulated financial institutions and that are backed by high-quality assets (i.e. government securities and central bank reserves) could be widely used to settle tokenised transactions,” Mr Jones said.
“But it is more contestable whether this would be the case for stablecoins issued by institutions that currently sit outside the prudential regulatory perimeter, including non-bank financial institutions and technology companies.”
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