Westpac says RBA-issued digital currency would boost blockchain
Westpac Banking Corp, National Australia Bank, Macquarie Group and nine other international members of the R3 consortium have completed a trial of blockchain technology which saw funds transferred between banks across borders using Ripple’s cryptocurrency XRP.
The tests confirm cross-border payments is shaping up as one of the initial use cases for blockchain in financial services and point to a future where money is transferred directly and instantly without the need for overnight clearing and settlement by central banks.
The project was designed to help banks unlock liquidity and reduce the costs of international banking. Using Ripple’s distributed ledger, the dozen banks converted domestic currency into XRP and sent this across Ripple’s network in seconds, before a bank at the receiving end transferred the XRP into their own currency. This removed the need for so-called “nostro accounts”, which have traditionally provided the liquidity for cross-border payments and refer to local bank accounts which banks hold all over the world. But this process ties up precious capital.
Mike Baldwin, the head of transactional solutions, global transactional solutions and client experience at Westpac’s institutional bank, said the latest R3 tests are encouraging and the technology is working. But the use of blockchain for cross-border payments will not be adopted at scale until central banks issue digital versions of their own fiat currencies, he said. This would allow banks to transfer value on a distributed ledger using a currency backed by a central bank rather than having to rely on cryptocurrencies like Ripple’s XRP or bitcoin, which remain volatile.
“We would not want to use a cryptocurrency in real life as there is too much risk. We want something backed by reserve banks,” he said.
“If we had a currency created by the RBA – a digital Aussie dollar – that existed on a shared ledger, you don’t need the RBA in the middle saying it has credited one bank and debited another. The transaction is done between two banks directly. And we would only need to hold a fraction in digital currency of the millions of dollars held in nostro accounts all over the world right now.”
The Bank of England, Bank of Canada and Peoples Bank of China are all exploring digital versions of their currency.
To read more please click on the link below…