RBA CBDC Submission #2
Earlier this week we shared the RBA CBDC (central bank digital currency) submission we put forth which we proposed as a joint program between ourselves, CANVAS, Zerocap and HSF (Herbert Smith Freehills). That was based on how we could use the CBDC as part of a next-gen commerce platform (see https://medium.com/notcentralised/rba-cbdc-submissions-d3f8563ad6c4) and we know there are many other submissions with interesting use cases for the RBA and the Digital CFRC to review (more details about this CBDC pilot are here: https://www.rba.gov.au/media-releases/2022/mr-22-31.html).
Given all the on-chain data available with public blockchains, it’s important to understand the power of the insights possible from a CBDC if it were to become widespread. In this article, we highlight our other submission which showcases our other proposal, to bring our analytics expertise together (along with others) to help the RBA with the insights that they can gain from a CBDC, and how this could improve efficiencies across the management of the economy.
ANALYTIC USE CASE
Apart from the other use cases we have submitted, there is a further important use case for a CBDC which we think applies to all of the pilot proposals that the public gives to the RBA. It relates to conventional measures of money aggregates as used by policymakers globally. Specifically, central banks use them to calibrate interest rate policy by assessing the degree of narrow and broad money in circulation, and the growth rates. Under the monetarist school of thought, the money supply influences inflation and thus central banks must keep “money” growth stable and in line with GDP.
M0 to M2 (given M3 has been retired) define different versions of “money”; from notes and coins to commercial bank reserves at the central bank, through to private sector money-market funds with daily liquidity. The distinctions are driven by risk levels in a sense, specifically technology risk, temporal risk and counterparty risk. This is relevant to CBDC usage, because a CBDC in effect collapses some of these aggregates into M0, due to its composability and transparency. If retail consumers can hold “money” in a central bank instrument form, why bother with a private sector form such as a bank account? The answer would primarily be a higher return being offered.
Importantly then, CBDC usage provides enhanced transparency of the money base for policymakers — where it is held, who is transacting with it, and how quickly it is circulating in the economy (velocity). At present, the compilation of the monetary aggregates relies in part on third-party reporting and data.
Given the nature of this project, the use case here would be to assist the RBA in its research data-gathering processes and create a dashboard that provides real-time insights and oversight of projects that sit within this project ecosystem.
The creation of this solution would be driven by NotCentralised, we would provide project management and analytics expertise for the proposed solution and utilise the tools of analytics providers (like Chainalysis) where possible to provide connectivity to the project ecosystem. Given firms like theirs are leading the way in terms of blockchain analytics platforms trusted by governments, exchanges and corporate institutions, it makes sense to work with tools they can provide.
NotCentralised
NotCentralised is a venture studio focusing on web3/blockchain projects. We perform various activities in the blockchain space ranging from raising capital, building smart contracts, and we have also created the Australian DeFi Association. We have a strong background in analytics given our pre-web3 careers and we also work on web3 analytics projects. Our team includes former quantitative analysts, heads of data analytics, and data science consultants which coupled with knowledge of on-chain workflows, gives us a unique perspective when it comes to providing blockchain analytics.
What is the primary reason CBDC is required for this use case? (and current payment infrastructure is not adequate)?
The use of CBDCs will drive increased transparency for the government regarding the flow of money supply across a potential future financial/commerce ecosystem. Current payment systems are less well-connected and rely on reporting by 3rd parties which adds friction in terms of time and costs to produce data. By moving these systems onto blockchain rails, we increase the ability to 1) automate the monitoring and triggering of any protections against adverse outcomes that may occur in the financial system and 2) increase the likelihood of successful deployment of capital to various industries because of the automated monitoring and insights gained from that.
Further, on the automation component, a CBDC would enable the RBA and other government departments to have real-time insights into various industries using the CBDC. Automation would occur with the creation of what would effectively be, a real-time dashboard that is fed from the movement of the CBDC across the examples in this pilot project and extrapolating how that would work across an entire economy.
Increasing the likelihood of successful capital deployment effectively means that where the government deploys industry funding, it is able to easily assess if that funding is driving successful outcomes or not and do so in real-time. This may be harder to assess during the pilot program, as it would depend on the use cases chosen, but a glimpse into this can be had from the insights created from this project.
