Recently, the Reserve Bank of Australia (RBA) considered a pilot for central bank digital currencies (CBDCs) and underwent a research project called Project Acacia. The intent of the project was to look into the adoption of a future digital currency along with the relevant technological infrastructure and how it may help shape the form of Australian wholesale tokenised asset markets. It also aimed to see if CBDCs can improve the efficiency and resilience of wholesale payments and also of cross-border payments and settlements. This has also prompted the question of how CBDCs may be reportable and whether it would also potentially be used as collateral, simplifying the issues and processes around the exchange of margin between financial counterparties trading OTC derivatives.
What are CBDCs?
There are various definitions online for what a CBDC is. According to the Organisation for Economic Cooperation and Development (OECD), under the crypto-asset reporting framework (CARF) and common reporting standard (CRS) provisions, it is ‘any digital Fiat Currency issued by a Central Bank.’ (For more information on CARF please see our article here.)
A CBDC is essentially a form of crypto-currency, although a non-traditional kind. Most cryptocurrencies rely on cryptography and a distributed ledger technology (DLT) to record ownership and transactions on a digital ledger. Such a record is distributed and synced across several nodes (i.e. computers) instead of a central party being relied upon to do these functions. The main difference between CBDCs and traditional cryptocurrencies is that CBDCs have their own unit of currency and are issued and backed by a central bank.
Would CBDCs be reportable under Trade Reporting?
No, CBDCs currently are not reportable under the trade reporting regimes. However, CBDCs are reportable under the updates made to the CRS used globally.
Will CBDCs be used as collateral in Australia?
Possibly. ISDA has issued a response to the RBA providing support for a CBDC and also explained that having the ability to use non-cash assets as collateral would lead to more efficient collateral management. Although there have been global margin regulations that prompted the exchange of margin between counterparties, the underlying collateral management systems and processes are still heavily manual. ISDA explained that in essence, in relation to collateral:
- • there will be greater automation and data standardisation will lead towards efficiency, reduce collateral risk and costs for financial market participants; and
- the use of DLT can help with:
- real-time and instantaneous asset transfers without costly or complex connections between multiple intermediaries – this will also reduce settlement risk..
- address issues with non-cash collateral by allowing for a direct pledge or transfer of certain assets without having to convert to cash – this also reduces volatility during market stress.
Although there is no clear answer yet as to whether CBDCs would be used as collateral in Australia, if it is brought into use into the Australian financial system, given the overall benefits in having a CBDC (and summarised below), TRAction is of the view that CBDCs are also likely to be used in the case of exchanging collateral or margin. There would be a logical connection in allowing for CBDCs to also be exchangeable between market participants instead of relying on cash or other securities under their OTC derivative agreements.
How can TRAction assist?
If you need assistance reporting your crypto and digital assets trading or would be interested in getting detail on how TRAction can assist with your trade reporting in general, please get in touch with us.
