08 December 2021

Report from Project Atom – Australia’s wholesale CBDC experiment – released

This article was written by Hannah Glass

Project Atom is Australia’s collaborative proof of concept investigating potential opportunities presented by issuing a digital form of central bank money on distributed ledger (DLT) to wholesale market participants, and the management of a syndicated facility agreement (SFA) through a DLT platform. This research lays the groundwork to explore the technological and legal architecture needed for central bank digital currency (CBDC) payments to contribute to the digital economy. 

The Project Atom Report is the result of collaboration between the Reserve Bank of Australia (RBA), the Commonwealth Bank of Australia, National Australia Bank, Perpetual and ConsenSys, with input from King & Wood Mallesons. The Report details the research undertaken and key insights. 

Through examining both the CBDC and its use, Project Atom demonstrates the potential to improve operational efficiency, risk management and innovation in finance.

This alert sets out:

  • What is a central bank digital currency?
  • Why is Project Atom different to other CBDCs?
  • What did we learn?
  • Where to from here?

The Report can be found here and media release here.

What is a central bank digital currency?

Most of our money exists digitally in accounts with a commercial bank and is accessed through digital means, such as cards and internet banking. Central banks, such as the RBA, provide digital money to commercial banks in the form of exchange settlement accounts. 

A CBDC would be a new digital form of money issued by, and a direct liability of, a central bank which exists on a DLT. It can be retail, meaning universally acceptable, or wholesale, where it is only available to a more limited number of participants (such as large corporates and financial institutions) for wholesale payment and settlement.

What is Project Atom?

Project Atom experimented with the issuance of CBDC available to wholesale market participants and its use to settle a SFA managed through a DLT Platform (SFA Platform).

Project Atom focussed on the following 3 key areas:

  • What happens if parties, other than commercial banks access a tokenised CBDC?
  • What are the potential benefits of integrating tokenised CBDC with a digital asset in the form of a tokenised SFA on interoperable DLT platforms?
  • Could an enterprise-grade DLT be a viable solution for a wholesale CBDC and a SFA?

Why is Project Atom different?

Project Atom differs from other CBDC projects as it considered a wholesale CBDC, the SFA Platform, and the use of CBDC as a means of exchange to settle a complex financing arrangement. 

Other CBDC projects have considered a retail CBDC, a CBDC for payments between central banks or a CBDC for payments between commercial banks. Under the proposed model, a wholesale market participant could be sponsored by their commercial bank to receive access to CBDC. Although not everyone could access this form of money, it would significantly increase the number of people who could make a claim on the central bank. 

The SFA Platform was also a point of difference as it explored how DLT can transform a highly manual, paper-based process into an efficient digital process which reduces operational risk. 

Further, by examining both the CBDC and the SFA Platform together, Project Atom explored how interoperable DLT platforms can be used to enable instant settlement, drawdown and novation of a loan. 

What does this mean?

Project Atom demonstrated the technological feasibility of a DLT based CBDC and SFA. 

It provides valuable insight into a wholesale CBDC and its potential to facilitate immediate (‘atomic’) settlement of transactions on DLT platforms. From a technological perspective, transaction finality, efficiency, security and privacy may all be achieved through an enterprise grade DLT platform with appropriate controls and access requirements.

In relation to the SFA, Project Atom demonstrated significant efficiency gains related to digitisation of back-office functions associated with the SFA. 

On the other hand, Project Atom also identified the possibility of achieving these outcomes through existing platforms and systems.  However this was qualified by an acknowledgement that existing systems may present additional risks which are not apparent when using a DLT platform.  It may be necessary to comparatively analyse the benefits and risks of a DLT and other platforms for both CBDC and SFA.

Where to from here?

Before a CBDC can be adopted or a SFA managed using DLT, it will be necessary to develop and test technological requirements beyond the DLT system, build a functioning legal architecture to give effect to the system and examine key policy questions.

Further development

For a CBDC to become a reality, further exploration of functional and non-functional technological, and legal requirements is required. For example, consider each of the following:

  • technological and legal issues related to access to and operation of nodes which record transactions in and balances of CBDC;
  • the legal architecture which will ensure that CBDC is money; and
  • additional technological features including integration with existing systems, such as RITS, and non-functional requirements, such as scalability and cybersecurity.

So too is significant work required for the SFA to be fully managed through the SFA Platform. For example, the SFA was not entered into on the SFA Platform nor can all lifecycle events be fully managed through the SFA Platform. 

Outstanding policy questions

From a broader policy perspective, Project Atom raised a number of important questions including:

  • Who would be eligible to receive CBDC?
  • How can CBDC be used following issuance?
  • What is the nature of the relationship between a commercial bank and a sponsored participant?
  • What impact might this have on commercial bank deposits and what broader implications may it have on financial intermediation and stability?

Before a CBDC could be adopted, each of these should be addressed.

Conclusion

Project Atom demonstrated that providing wholesale market participants access to CBDC gives rise to a number of benefits, including efficiency gains in settling large transactions. This may be valuable in the development the digital economy. 

However, significant work remains before a CBDC can be adopted, including to ensure that it is resilient, transparent, efficient, and legally effective. Project Atom provides a solid foundation for future examination of a CBDC, and exploration of management of SFA and other financial instruments using a DLT Platform.

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