Speech Panel Participation at the ASIC Annual Forum

Well, congratulations, everyone. You’ve come to the Crypto Panel Institutional Tokenisation. This is not a Bitcoin panel per se but more about the underlying technology, especially blockchain and the scope, for tokenisation or digital representation of tangible or intangible assets that promises to make financial markets and trading faster, cheaper and more transparent in large part by atomising, as they say, or collapsing the settlement into the real-time transaction. The RBA is clearly pushing the boat out on this, suggesting that it offers billions of dollars of saving and new vistas of innovation, but there’s also a bit of frustration around the place that - whether government is moving fast enough to provide the legislative backing for all of this and whether regulators have enough resources to provide the proper regulatory comfort. Now, we’ve got a heavy duty panel here. I’ll go from my far left. Ross Buckley, Scienta Professor and an ARC Laureate fellow at UNSW where he leads a seven-year project into the regulation of the data revolution. He’s on the payment system Board of the RBA and chairs ASIC’s Digital Finance Advisory Panel, but speaks here in his personal capacity. His joint research on FinTech - this is pretty good - and RegTech has been downloaded from the social science research network more often than any other scholar worldwide and he’s been featured in the Economist, The New York Times and the BBC. Next to Ross, Sophie Gilder is the Managing Director of Blockchain and Digital Assets at the CBA. Previously she established the Blockchain and AI Centres of Excellence at the CBA and was the Founding Member of x15ventures where she managed a portfolio of FinTech ventures. She’s got a background in investment banking and capital markets across Europe and Australia as part of - as a start-up founder and adviser. Brad Jones, Assistant Governor, Financial System of the Reserve Bank of Australia. Brad oversees the RBA’s work on financial stability and payments policy, including central bank digital currency. He’s previously been head of the RBA’s International Department and Economic and Analysis Department and previously an Adviser at the International Monetary Fund at Washington and Deutsche Bank in London and Hong Kong. And then, finally, Rhys Bollen leads ASIC’s Digital Assets Team overseeing crypto and digital assets. Previously he’s been a Senior Executive Leader of ASIC’s Market Supervision Team, Banking and Insurance Team and Investment Manager’s Team. He’s got more than 20 years’ experience as a Regulator, academic and public policy practitioner and a PhD in financial services regulation. So I’ve spent some time on that but it is a pretty impressive group of panellists we’ve got to discuss this today. Now, I did say this wasn’t about Bitcoin. I said that. But it is impossible to ignore the fall out from the US election. The Mooch, Anthony Scaramucci predicted that Bitcoin bros could decide the US election in favour of Trump, backed by libertarian tech dudes such as Elon Musk. And during the campaign the Bitcoin price seemed to track the fortunes of Trump and now it’s exploded into, I think, US $90,000 or so. How are we supposed to make sense of this and what are the implications for the broader regulation of this space, including the wholesale blockchain-based applications we’re talking today? Who wants to dive in first on that? Well, if no-one does I’ll pick Brad.

I think a lot of the - well, Bitcoin is obviously capturing a lot of attention at present. At the bank we’ve always viewed Bitcoin, not as a currency at all, it’s a speculative asset. We think it meets a lot of the criteria of a speculative asset so they’re more so then a form of money but I think where the bigger questions lie is around the regulatory stars for digital assets in the United States because unlike some other countries the US has chosen not to advance a sweeping enabling legislation in most of the digital asset space. There’s been a couple of attempts. One was an attempt by the Republicans, another had bipartisan support but both of those attempts didn’t get through Congress. And so I think a lot of the excitement at the moment is around legislation starting to really get moving. It’s an open question as to whether that happens but I think that’s, sort of, sitting behind the background to the - if I can call it the side show that is Bitcoin.

Yes. And so - and, Ross, you’ve got on one hand your Elon Musk libertarian thing but then Trump seems to not like the big platforms as well. What would your take be on that?

It was just a play for votes, Michael. I mean, a strategic Bitcoin reserve makes zero sense. Right. A strategic oil reserve makes sense because you need oil for things. You only need Bitcoin if you’re evading money laundering laws or engaging in criminal activity. It has no use case, except it’s a speculative asset with a completely tightly defined volume in the world, so that’s why it’s going up because people believe in it, but it hasn’t got a use case. So there’s no sense for a strategic reserve. It was just a way to try and get the votes from people who love it. It wasn’t anything more than that.

And where do you think they were to lead, in terms of where - no doubt there will be a very different person running the FTC.

There will be a very different person running the SEC. I think Gary Gensler has accepted that. And - well, I think it’s tricky because the technology behind Bitcoin is why we’re here today. The institutionalisation of real world assets. The technology is really important. But the important thing to differentiate is the technology which will, in may view, reshape the economy over the next 20 years as tokens - you know, digital tokens convey all sorts of information. Interact with some art contracts. Allow all sorts of things we’ve never done before. And this particular application of this technology, which just happens to be the first application but it won’t prove to be a very important one.

Righteo. Well, maybe, Rhys, we’ll move on into our subject. Coming from ASIC, you’ll have a particular perspective on this, and particularly for those not completely on top of this area, like myself, could you spend a moment or two bringing people up to speed as to the basics of what we’re talking about and what ASIC’s interest in it is.

Yeah. Thanks, Michael. And as Ross said, Bitcoin, obviously one of the first. Still makes up maybe half of the market cap of crypto and digital assets generally but that’s a really wide group and digital finance is of great interest to us because there are many useful applications across the corp arts of the financial service ecosystem around savings and investment, around mobilising capital, around improving payments, around improving risk management. So the application of this technology is broad and we can see many and varied uses and we want to see how we can contribute to that. We want to make sure that we, at our end, aren’t putting any unnecessary barriers or obstacles in the way of using these innovations in a positive way to make payments cheaper and faster to our allocation of capital and include more people in the investment cycle and things like that. So we’re interested in what our contribution is to that more broadly and we’re interested in that really wide range of digital assets and digital finance, not just the ones that are on the news a bit more often.

And putting it in really simple terms, you know really bringing it all down, what are we talking about here?

So today’s session we wanted to focus on the institutional side of tokenisation, which is how we can use this technology to facilitate assets on a modern platform, which is a blockchain or DLT-based platform. Whether it’s financial assets like bonds or whether it’s physical assets, like real estate and commodities, and then look at how the system can facilitate efficient settlement as well, which is - Brad will want to comment on, I’m sure - but whether that’s stable coins, whether that’s deposit tokens, whether that’s central bank digital currency. So those two sides are a new and potentially really powerful piece of financial market infrastructure.

Right. And, Ross, just when you get it down to basics, anything you’d like to add on what it is we’re talking about?

Well, where we’re eventually going, I think, is this is atomic settlement where you have the token that represents the asset and you have a token that represents digital money on the same blockchain and one will move only in response to the other. So when the trade happens the title will exchange for the money. Once you do that you’ve merged our market’s licensing regime into our clearing and settlement regime is one. So this is a big challenge to regulation because our regulation is all based on those two functions trading clearing and settlement three days later, being different things. The technology will mean they’ll be the one thing, so we need a complete rewrite of our regulations to capture the benefit. And sadly, for government, we sort of need that before we’re going to get the innovation because it’s not reasonable to expect businesses to spend fortunes on this if they’re going into the existing regulatory regime which won’t realise any benefits for them.

Well - and we’ll move on to that, you know, what is the government response and then we’ll also move on in a moment to you, Sophie, with the commercial opportunities but I’ll move to get us going because we do have a new development here from Brad. Now, you set this whole area alight at the Financial Review’s crypto event last year when you said, first, that creating real world financial assets and tokenised form could unlock billions of dollars in annual savings by streamlining transactions. And, second, that the RBA was in the early stages of planning for a project to assess how forms of digital money, including central bank digital currency and bank issued stable coins could support the development of tokenised asset markets in Australia and now you’ve just released a new discussion paper around this Project Acacia. And just a quote from my quick reading of the Project Acacia Report you’ve put out you’re asking, "What roles and central bank and privately issued forms of digital money could play in supporting the development of wholesale tokenised asset markets with a particular focus on transaction settlement and related processes", and you say that the RBA is open to testing the issuance of pilot central bank digital currency directly on to one or more third party tokenised asset platforms operated by - in the lingo used - used case proponents. Can you bring us up to speed on what you’re actually proposing here?

Yeah, sure. Before I get into the specifics of the new project that we’ve just put out to the public inviting expressions of interest, it’s helpful to take a quick step back about where this push around tokenisation sits in the historical landscape. For the best part of a couple of hundred years, up until around the 1970s, trading was principally paper-based - trading and settlement was principally paper-based, labour intensive and there was a huge gap between trade execution and settlement. Around the 70s, 80s, that ushered in the second era, if you like, the electronic era where you saw closer alignment of trade execution and settlement. We went from five or 10 - 30 days down to, like, three or four days and some of the paper-based componentry of the ecosystem melted away. What we’re talking about in tokenisation, the way that I think of it conceptually, is it’s probably the third, sort of, epoch, if you like. It’s the third regime and it’s distinguished from the electronic era because there are - first of all, tokens not just confer ownership. They confer lots of rich information that doesn’t currently exist and the types of functions that tokens can perform are not available in our current forms of money and the way that assets are currently exchanged. So the programmability feature is a key one. Programmability via smart contracts on different types of ledger technology.

So programmability to do what, for example, like -

So conditional activity, for instance.

I pay my bill every month.

A good example would be - let’s take the cross-border use case because this is cross-border is to us one of the two killer apps, right, for tokenisation. One could be if you’re an exporter or an importer you’ve got - there’s an exchange of goods and there’s an exchange of money and currently those two processes are happening independently on different technology. Tokenisation opens the prospect that, say, at different points of goods being shipped around the world across the Pacific, once certain conditions are met, let’s say the containership in which your goods have been transported into port, you know, in North America, that would then automatically release a fraction of the total payment. Right. So you have that conditionality programmed into the token. So that’s one component. The other component is the one that Ross mentioned which would be transformative, it’s this concept of atomic settlement. Which is where you have a transfer of asset, title, and money instantaneously conditionally. They both have to happen concurrently. Right now - well, for the better part of the last few decades we’ve lived in a, sort of, T+2 world. So there’s been this gap between trade execution and settlement and tokenisation offers the promise, in theory, of bringing those two components together on the same ledger and hence you don’t have your capital tied up for a few days. Waiting for that transaction to settle reduces potentially operational and counterparty risk. It potentially cuts through, as Ross mentioned, there’s no more clearing in this world. It cuts through some layers of compliance costs and intermediary. So that’s all the potential. There’s some challenges, and I come back to the challenges because, you know, this is not a, sort of, a slam dunk. There are some big issues that we need to get our arms around but that’s the promise. All right. On the Project Acacia specifically we have a very open mind about what forms of digital money and settlement mechanisms are going to be required to best unleash the potential of tokenisation while managing the risk. There are three possibilities on the monetary side. One possibility is institutions like Sophie’s issue tokenised bank deposits. That’s one possibility. But that becomes the settlement agent in the settlement asset in these digital asset transactions. Another possibility is stable coins. The final is central bank digital currency, wholesale central bank digital currency, and that’s the space where we, and frankly almost every other central bank that I speak to are really leaning into, and the reasoning that the Reserve Bank is leaning into this space and many other of our peer central banks are running similar pilots to Acacia is because we all recognise if these markets do fulfil their potential and they grow and they become very, very large, there’s a core principle in the financial market infrastructure of international standards which says that wherever possible, where practicable, settlement in systemically important markets should occur in central bank money because it is the ultimate safe asset. So if these markets really grow, there’s potentially going to have to be a role for central bank money and that’s why we’re looking at this issue through the lens of whether there’s a role or not for wholesale CBDC in this ecosystem.

And so the specific point that you’re saying here though is the next phase of Project Acacia is that you’re open to testing pilot central bank digital currency on to a third party tokenised asset platform. So what’s the import of that?

Yeah. There’s lots of different ways this could occur. I think our general expectation is that if the policy case ever stacked up, the issuing of CBDC made sense. Our default setting would be on our own ledger. But the idea of the pilot we want to explore here is precisely to test different types of options here. To run a different sort of horse race. Throw lots of different horses in the horse race and to do effectively a compare and contrast exercise. In our last pilot we issued CBDC on to our own platform. This time around we’re going to look at a different version and just see, sort of, what we learn from that. It’s not a direction or a signal about the likely direction of travel. It’s really just to better understand how different types of ledger arrangements could work because one thing we do know is for quite a period of time even if this tokenisation market really takes off, different ledgers are going to have to interact with one another for a long period of time. And so we’re just really viewing this as another opportunity to learn.

Thank you. Now, Sophie, CBA has been exploring potential stable coin projects since at least 2016, I think, and presumably to produce a cryptocurrency pegged to the US dollar or the Australian dollar, if I’ve got this right, along with tokenisation of bank deposits via blockchain networks. Tell me if that’s wrong. And what benefits - where are you up to with all of this and what benefits potentially do you see flowing from all of that?

Sure. So we started exploring the uses of blockchain technology back in 2016 because we thought this could be both an opportunity and potentially and a threat, and the best way to understand it was to actively experiment, see what it could do. We have two areas of active exploration. One of them is in digital currencies, and that’s digital currencies across the entire realm from how might a CBDC operate to a deposit token, you can think of that as a tokenised version of the bank liabilities that exist today, in terms of our liability that sits behind a deposit. So it’s a new form factor for something we know very well, which is commercial bank money, which is about 90% of the economy. We think that that’s really important to have functional parity with a CBDC, should it come along. And then stable coins as an extremely flexible method of payment but with a lot of unknowns yet, as to how we can fit it within our regulatory requirements. So across that spectrum of different types of payments we’ve looked at all of them to compare and contrast and continue to do so. Where are we at? We’ve learnt a lot. We’ve - the technology has evolved significantly in that time. So what you can do now today versus what you could do back in 2016 is markedly different. On the asset side, because money is only half of what we look at, we’ve also tokenised both tradable assets, so for example bonds, capital markets is, I think, right for tokenisation, and in addition to that newer asset classes where there’s not an established market place today which could leap frog to this newer technology. So they would be things lie biodiversity certificates or nature positive assets. So both the established and the new are really interesting to us from a tokenisation perspective. But you might be saying, well, what’s the main aim of tokenisation? Why are you looking at this? We can already do all of these things. If you look at assets and money today they are static instruments sitting on separate siloed ledgers which can’t interact with each other, unless we do a lot of manual interaction or build a lot of technology to stitch it together which doesn’t always work and certainly can’t achieve true atomic settlement, for example. So we envisage a future with tokenisation, and this is some time away, but we’re - both your tokenised assets and your tokenised money become active agents. By that I mean they are programmable, as Brad said, so you can have an if this, then that, statement embedded in them. So they can have conditional actions. They are dynamic, as in they listen for events and can respond to them. They are composable. So by that I mean think of them as Lego blocks that you can put together so that you can create new types of financial instruments that you couldn’t possibly do today. So we think all of those aspects are really, really interesting. But we are still learning. The technology is still evolving. And the regulation is still evolving. So we’ve come a long way but there’s still a lot of issues to solve.

So that’s a lot of learning and a lot of exploring. When are we going to get some - you know, a little more action out of it all?

So there’s three things that we look at before we would think to launch a product. The very first thing is their customer demand. So we will always start with the customer. Is there an unmet need? Can we do something better that we’re not doing today? In what ways could this improve people’s lives? That can be hard to tell with a completely new asset class because if we went back 17 years, I don’t think I was sitting there going, I really need my phone to have a really good camera and to be able to watch short-form videos. I would never have said that. I would have said, that’s bonkers. Why do I want to watch a video on my phone? This is a little bit like that. If I don’t have these instruments out there today, a lot of it is theoretical. It’s really tough to write a business case around theoretical things. I’ve tried many times. So you don’t necessarily have the proof points on the customer but you have to, I guess, develop a hypothesis and then prove it out, which is really what we’re doing, in terms of that customer piece. Then there’s the technology piece. Is it ready? And when we implement products we typically think they will be at significant scale. So can it handle the through put that we need? Is it going to be sufficiently reliable? And are we comfortable with the security? A lot of factors to consider there. It’s evolved significantly over time. We’re getting there. It does depend on the use cases as to whether we believe the technology is ready. Cost is always something we will look at and the cost dynamics of this technology, completely different to other technology that we use. So that’s another factor that we have to include. And then, of course, there’s regulation. Where does this fit in the existing regulation? So we start with what the rules are today. And then if it doesn’t fit, how might it be treated? So looking forward to additional regulation and clarity in this space which is coming.

Okay. Well, we’ll get into that pretty quickly. We’ll say that, like the other panels, we will go to questions from the floor pretty soon so think about your questions and you can do it on the app and it will show up here on the display or you can put your hand up and I think Patrick will bring the microphone around. Just a sort of stupid question, Sophie, if I may. When I transfer money on a Commonwealth Bank account from my account into somebody else’s, isn’t that instantaneous at the moment?

Yes, if you’re using NPP it should be within 17 seconds. This is a wonderful thing about Australia. Our domestic payments are excellent. And it feels like it’s instant and even feels like it’s peer-to-peer. You feel like it’s going straight from person to person. Behind the scenes there’s a lot of infrastructure that has to be built to make that happen and it’s not programmable. It also doesn’t interact with another asset you might want it to interact with. So, yes, we’ve got really good domestic payments, no question there, which is one of the reasons why we never think that the primary use case for deposit tokens or stable coins is domestic payments. There’s not a problem to solve there. We’re looking for additional utility or efficiency or risk management or embedded compliance. We’re looking for something much more than just getting value from A to B.

Okay. Ross.

Well, the critical thing, to follow on from what Sophie said, which I agree entirety with, is to get the efficiency we’ve got to get the digital money on to the same ledger as the asset. Right. At the moment we’ve got a world class new payments platform and then we can build a world class asset transfer platform but they’re parallel. As Sophie said you’ve got to link them up. It’s when you get them on the same ledger that you get all these, sort of, efficiencies and that’s got to be where CBA is driving for.

Or we solve interoperability.

Yeah.

I remember when I could only use my card in the ATM of the bank that issued my card. The banks figured interoperability out eventually and may well here as well.

So, Sophie, you mentioned, you know, some of the obstacles to taking the next step, regulatory uncertainty around stable coins and deposit tokens. What exactly has held you back and what needs to happen at a regulatory or legislative level?

Well, for a start regulation is only one factor that we consider. So I can’t say regulatory on a stand-alone basis has held us up for these innovations. Customer demand, very hard to prove. Benefits at scale, very hard to prove. Lots of question marks about the technologies. There’s a whole line of things that we’re still answering questions on. On the regulatory front the first thing we do when we’re thinking about a new product is look at the existing legislation and try to work out how it would be treated within that. It’s a really tough thing to write legislation that’s timeless. So there will be a whole lot of - exactly. So there’s a whole lot of expressions within legislation which don’t quite fit with this technology, and that’s not a criticism of those that were writing it 20 or 40 years ago, it’s just that’s always how legislation works. That’s one challenge. Another challenge is the English language is infinitely interpretable. So we can go to lots of super smart lawyers and say, how should this be treated? And if we go to three lawyers we will get three different opinions and we’ll listen very carefully to them and then we’re left with a business decision of, are we comfortable? Are we sufficiently confident that we now how this applies? Often the answer is no. So we like clarity and we’re looking forward to additional clarity coming to the market. That’s not to say that every single area lacks clarity because sometimes the existing legislation covers what we’re doing but we need all of those other factors that I mentioned before it’s ready for launch.

So is it right that parts of the Corporation Act that were written - that are relevant here were written before the internet?

No, but before crypto and digital assets.

Yes.

I mean, timeless legislation would be a good goal. It was written 20, 25 years ago but it was written quite broadly so it was written to be as technology neutral as they could and as broad as they could so we are ahead of some jurisdictions. We’re not debating legislation that was written 60 or 80 or 100 years ago. Our legislation says a financial product is something used to make an investment. Something used to make payments or something used to manage financial risk. And digital assets is a broad category but quite a few digital assets clearly meet that definition. So there are institutions that have tokenised money market funds live at the moment. That’s clearly a financial product. A tokenised bank deposit, pretty confident that’s a financial product. So there are some digital and crypto assets that are quite clearly a financial product. We’ve got some more guidance coming shortly which will give as much of that additional guidance clarity, certainty, as we can, but the product set is evolving so that will be an iterative process. Like that will be an ongoing conversation that we’ll need to have.

Okay. So when you get down to the hard question, and maybe the ASIC bureaucrat can’t answer so maybe the central bank representative can’t answer this and I’m not sure, maybe the Commonwealth Bank person can or can’t answer this, but after - we might leave it to Ross then - after being led - set up, I think, by Andrew Bragg under the previous Coalition government, the current government has been promising for more than a year to prioritise legislation to provide clear rules around digital assets and the sort of market trading. We’re talking about the keep up jurisdictions where this is a real - you know, this is their core industry, you know, such as Singapore and parts of Europe. What’s going on here? Does anyone want to answer that question? Ross, can I throw that to you?

Don’t ask me to explain Canberra, Michael. Lord, you thought you got a hospital pass. I mean, I think one of the problems we have is there are competitive jurisdictions like Singapore and Hong Kong, this is their business. You are right. You know, especially Singapore. This is their business. And London, to a big degree as well. For us, at least in our minds, our business is still digging stuff out of the ground and sending it overseas and, you know, for instance, London has done this DSS, Digital Securities Sandbox, which is a really interesting idea where companies can go in - a sandbox is a series of relaxations from current regulation and they can enter this sandbox and they can trial exactly these sorts of things and make them available to the public and test the market, all the problems Sophie was talking about. We don’t have any similar thing to help CBA here. Right. CBA hasn’t got a safe space it can walk into. London has now got that. The EU has got that. Hong Kong and Singapore has it. Less clear on exactly the details in Hong Kong and Singapore but the details in London and the EU are very clear. We need that sort of thing to assist, you know, regulatory learnings. To assist, you know, industry learnings but it’s hard to get it up on the - you know, I mean, on the agenda. I know we’ve been waiting more than a year for changes to our payments system regulation in this country but I noticed when there was an issue about the international student caps, which affect me quite a lot in my other job.

That happened pretty quickly.

Fourty-eight hours they could produce new legislation. It’s like I’m sitting there on the Payment Systems Board thinking, guys, I’ve been waiting for 12 months and you can do this in 48 hours.

Yeah. Some political movers. Any questions from the - yes. Okay. Well, we’ll do these two just here together and then I’ll go to the screen, and please if you can identify yourself and your institution.

Judith Fox from the Stockbrokers and Investment Advisers Association. So ASX tried with the first iteration of chest replacement to use distributed ledger technology and there were latency issues, that was part of the challenge and why it was sort of shut down, and now we’re looking at something, probably not till 2029. The US has moved to T+1 and atomic settlement is the, sort of, goal after that. We haven’t seen inside the black box of TCS and FinClear has been awarded a licence to test it, sort of, its distributed ledger technology, but are there risks if we can’t move quickly enough to keep up with Singapore and Hong Kong and, sort of, other jurisdictions? You know, you’ve said it’s not sort of a priority. How do we make this a more urgent thing because certainly on equity markets there’s the real possibility of being left behind.

Yes. You’ve summarised it extremely well. That’s the risk that, you know, capital doesn’t invest in these innovations in Australia because the environment is not conducive enough and it moves overseas.

Well, can I ask the panel, does the apparent debacle of blockchain at ASX cast a pull over commercial entities wanting to invest in this? Because not only do you have - spend a hell of a lot of money on it but you’ve got the corporate regulator down your - you know, down the back of your neck for stuffing it up and so forth.

I’d say the right idea at the wrong time is the wrong idea. You know, it was way too early. And as Sophie commented, how much the technology has changed in those - since 2016. Well, the blockchain debacle started in about 2016 at ASX. So it shouldn’t. It absolutely shouldn’t cast a pull.

Thank you. Paul Franklin from ASIC. I’m leading the program to redevelop ASIC’s registers, including the company’s register and licensing register that, sort of, establish the existence of either a company or a licence. I’m interested in your thoughts on whether there are factors that we should build into the design of registers as we’re planning future stages that would in any way facilitate or make it easier to innovate in these markets.

I mean, there’s a connection to digital ID. So clearly needing to identify yourself in these systems is crucial and there’s a lot of work going at a government level but also identifying your connection to a legal entity and your ability to speak on behalf of that legal entity. So confirming I am who I say I am but also I am a director, I am a secretary, I have the ability to bind this organisation or speak for this organisation. There’s definitely a connection there to work on the register.

Okay. One at the back there.

Hi there. It’s James S from the Fin Review. Brad, you were just talking about that interesting example of programmable money with the ship arriving in a port and being able to, sort of, do a payment simultaneously when, you know, goods are delivered. Just with that in mind and thinking about the types of use cases you might be wanting to explore in this second phase of project - a case here. Like, what are you sort of thinking are the practical types of examples that, you know, you might entertain in this second phase? Like, I know you’ve called for people to submit into it, presuming some of the same companies that were involved in the first phase might do so. You know, you had like atomic settlement of bank certificates of deposit that were being done by imperial markets. There was an interesting one with farm gate which involved cattle trading at the same time as sort of payments in stockyards and soft commodities. And then you’ve obviously got like a lot of international applications, like money market funds and the like from big players like Vanguard and BlackRock that are already in markets. I mean, are they the types of things you want to explore in phase two, so we can just get a bit of a tangible feel about, you know, what markets we’re talking about here?

So for those who are not familiar, the banks stood up with our partners at the DFCRC. The first pilot around 18 months ago so - and at that time we were, unlike most central banks at the time, we were not prescriptive about what the universe of potential use cases was. What that meant was in practical terms it could be some sort of retail application or it could have been any number of wholesale applications. What we’ve done in this new project is shrunk this sort of universe that we really want to focus on to wholesale cases, wholesale use cases. That is in wholesale financial markets and also in cross-border. We’ve done a lot of work over a period of time that’s led us to the point - and, you know, I spoke about this a little while ago on the morning that we released our joint stocktake paper with Treasury, which basically said, look, at the end of the day Australia has a fast payment system that is efficient, resilient and low cost by global standards. Sophie used the characterisation, there’s no big problem to solve there. And so that is sort of some of the subtext for why we’re focusing really on the wholesale use cases. We are again though, we’re not going to be overly prescriptive about where in the wholesale universe, is it just the bond market, for instance, or is it some other part of the - of wholesale financial markets where we think the opportunities are largest. What would we say is that we see potential in existing markets, existing wholesale markets, the capital markets. If you really push me I would say that inefficiencies in wholesale markets, the lack of transparency is most pronounced in our fixed income markets, including in our term deposit markets which are a critical market for bank funding, but also on the cross-border side. There are all sorts of frictions that are built in to cross-border payments, such that the average Australian trying to transmit money around the world is wearing a cost in the order of about 5% and it takes multiple days and we don’t think that’s good enough. So it’s cross-border payments and wholesale financial markets where we see the biggest scope for uplift, in terms of efficiency and resiliency and so that’s where, sort of, Project Acacia is really going to dive into. And I’m pleased to say that we’ve got representatives on the steering committee for this project, including Rhys, so we have a representative from ASIC. We have a representative from APRA and also from the Treasury because a big part of what we want to learn out of this next project is where are the regulatory frictions. Let’s push up to the limit. Test them. And that information can help inform, sort of, future decisions in Canberra about where regulatory adjustments might be required.

I’ll take a question from over this side of the - maybe from - on this side and while we’re getting to it I’ll ask one from the screen here. Jeffrey Gordon of CLS, this is from David Tai, recently warned of an impending financial crisis in a crypto linked financial system. He argues that tokenisation presents systemic risk without the obvious resolution mechanisms, ie stable coins without an LOLR. And who wants to take that one on.

Well, that must be a central banking question.

I’m happy to take that.

And then maybe Ross.

So let me start with the current state of play is that the crypto ecosystem, and this is a view that the Financial Stability Board have come to and we would agree, today the crypto ecosystem is largely self-referential. Right. It’s not plugged in hardwired into the traditional financial system. A big part of that is because the traditional financial institutions have been - particularly in the United States, but not only there, have been very reluctant to engage with this ecosystem for fear of setting off regulatory trip wires. So this has been a bit of a side show that’s happened on the side. Not to downplay for a moment the consumer protection issues where people have lost money on crypto exchanges. But from a global financial stability perspective, which is what this question is getting at, that market is not big enough yet. But let me segue to what the future might hold. There is one plausible scenario where the benefits of tokenisation as people start to really lean into this space do start to become more evident, these markets grow and grow and become systemically important. If that were to occur, that would absolutely attract our attention, for the reason I mentioned at the outset, where the principles for financial market infrastructure, the global standard says that if you’ve got a market that’s systemically important, ideally settlement in that market should occur in the ultimate safe asset in the world, which is central bank money, that is then the use case for a wholesale CBDC. So that’s the financial stability imperative in this tokenised world, not acting as a lender of last resort to stable coin issuers, per se.

I agree. I think this is a really good question because it proves precisely why central banks around the world are so interested in central bank digital currency because the efficiency gains of getting the asset title and the money on the same ledger means that stable coins will step into this space and will do this if central banks aren’t doing it and there will be systemic wobbliness from stable - potentially from stable coins doing it. We’re just better off if central banks are in that space.

And perhaps a related question, and maybe Sophie when you’ve been doing your explanations, has the CBA thought about what happens when the blockchain fails or gets hit by power outage and wipes things or by cyber attack, et cetera, et cetera, et cetera. What are you thinking about? How you’d rescue your money or respond to claims by other people and all of that.

So security and resilience is something that we’ll look at for any technology, so that’s not unique to blockchain, but some of the risks are different. So electricity, that’s a hard one to solve and I think that will impact a lot of systems beyond blockchain. One of the interesting things about blockchain, in terms of its underlying structure, is that it runs across many nodes and effectively you have a clone of the ledger in many, many places. So you can think of them as warm back-ups. So as many nodes as you have, provided you’ve got electricity, can’t solve that one, they are still running and they have recorded who owns what. That is very different to the systems that we have today where we typically have the main critical system. So, for example, a bank ledger which might sit behind high walls, in security speak, and will have hot back-ups to ensure that we can get through any interruptions, but probably not as many as a widely distributed system. So arguably the fundamental way that blockchain works where you’ve got a clone of the ledger in every single node is actually a very resilient structure, but there’s other security risks that we have to think about. It’s very different to a traditional ledger which records who owns what. And one of those reasons is the cryptography is unlock by a private key. So the way that you do key management, in terms of who can own and control those assets, is something that we focus very heavily on. We have a view that, just in the way that most of us in this room will have forgotten a password at some stage, a lot of people lose their private keys to their digital assets. So we think that whilst the original intent of the blockchain inventor was that you have agency, in terms of controlling your assets, in the real world that doesn’t work so well. We’re human. We forget things and you need - I believe the vast majority of people and lots of institutions actually need a service that addresses that. So digital custody is something that we focus on very, very intently because it’s a different set of risk factors to keep these assets secure. It’s not necessarily that it’s less secure, it just looks different.

We’ll go to our question now.

Good afternoon, my name is Ryan Thomas from the Treasury. I just preface by saying I’m a little bit sceptical about all this tokenisation. I feel that we’re assigning a lot of benefits to something that’s not very concrete yet and, you know, talking about, you know, atomic settlement such when we’ve just discussed scams and dealing with how do we reverse those sort of transactions. I think taking into the example of the cross-border trade that was touted today, is tokenisation really necessary over, say, improving the existing electronic settlement system that exists? I mean, how can we ensure the interoperability of an Australian solution versus, say, a Chinese or American or even private sector one? And, finally, how would anti-money laundering or sanction rules be applied when we’re dealing with the transfer of assets and money at such a rapid pace? Thank you.

I’m happy to take that. I’m really glad that you raised that question because we have - most of this discussion has been about the potential benefits and that’s a reasonable conversation to have but it’s an incomplete conversation. We do need to address, or at least acknowledge, some of the very material issues that need to be addressed if tokenisation is really to take hold. The language I sort of use around this is we need to do more work to understand if some of the potential benefits of tokenisation stand up to closer scrutiny. And the issues - I think there’s four or five issues there frankly. One is the issue of liquidity fragmentation. You could have different - you could have trading volumes, the same amount of trading being fragmented across different types of platforms, new and old. You could have interoperability problems. As it stands, it’s very unlikely that we’re going to move straight to a world, this sort of utopia and unified ledger where all the world’s assets and money are on this sort of single ledger. New ledgers are going to have to interact with old ledgers. Old ledgers for a while, until we’ve got faith that the new ledgers are robust and resilient. There’s also a big issue around the liquidity needs. If we’re talking about atomic settlement, that sounds great because you move away from the world of T+2 where you’ve basically lost your capital for a couple of days, on which you could have been doing stuff with. The problem is you have to pre-fund then all your trades. I post that capital in advance and so there’s some issues there that need to be unpacked. There’s also some legal issues. Some uncertainty around smart contracts and, for instance, if IML, CTC, CFT obligations are not met because there was an error in the code, you know, who is going to wear that risk? There’s quite a laundry list of issues we still need to get our arms around. So I would just want to leave everyone with a message that we are very alive to the possibilities of tokenisation and the role that different forms of money could play there. At the same time we’re not being Pollyanna’ish about this and we are running a ruler over these other issues and we will be for some time yet.

Thanks. Andrew Cornell from Capital Brief. Just on where we stand with the regulatory regime in Australia and the danger of it delaying innovation. So am I right in, maybe for Rhys and Sophie, first of all we need this guidance note from ASIC, which was coming out with more detail. Then we need the actual legislation to go through. Then I know the EU has put in a range of very precise definitions relevant to the digital tokenised world, do we also need that?

I’m happy to start. So as I said we have some quite broad concepts of financial product that covers quite a bit of crypto and digital assets today. People want some more guidance and clarity on that and that is coming. So we do have jurisdiction over any digital assets and crypto assets that are financial products. As you know there is a proposal that is currently live that the government is working on to include a broader range of digital assets under a digital asset facility and that will be trading platforms under a really wide range of digital assets, not just financial product digital assets. Most similar jurisdictions have gone through some process where, what is a financial product is regulated by the regulator of the day and then - so we talked about Singapore, we talked about Hong Kong, we just mentioned Europe, they’ve all had a version of that. So in the European regime financial product-based digital assets are caught under Milford, their traditional financial services regime. And then they’ve added some more recent changes. The UK is still working through some proposed changes. We heard earlier that the US has various legislative proposals. So we are in a similar boat to a number of other peer jurisdictions. We’re dealing with that part that is clearly within our regime and then over time, we like other jurisdictions, will add to that.

Yeah. Jackson Hewitt from the Nightly. Brad, just to take it back a bit to that Pollyanna’ish kind of question. We’ve seen obviously with Trump being elected, we’ve seen central banks like China starting to buy gold a lot more. You know, a lot more sort of effort into bricks-type currencies. Do you see a world where there’s a way in a debase US currency or US sanctions or tariff wars or trade wars where crypto is going to be used more and more by central banks as a way of not having to buy US treasuries, for example, and what would that mean for the system? And then a broader question to the panel, I’ve been through a few hype cycles on tech in my time covering - in journalism. How does this dovetail into all the investment we’ve been seeing into artificial intelligence?

I can give a very short answer to your first question, no. I don’t know one central bank - I’ve not been part of any global discussion about central banks, seriously, or even as a thought experiment contemplating moving reserves into a cryptocurrency. That’s just a - we don’t think about it, cryptocurrencies like Bitcoin as a currency, as a form of money, certainly not a reserve asset. We don’t think it would have any role in, you know, central bank reserve holdings. I’ll leave Sophie to tackle the second piece.

What I do want to say about central bank digital currency is I really support all the work the RBA is doing on this because I think China will drive us there. Right. China is years ahead on the ECNC of any other country in the world. They started working on this in 2014. The obvious thing for China to do at some point is to release its central bank digital currency for offshore use and to mandate it to buy Chinese exports. To say, if you want to buy this stuff from China you will pay for it this way. It’s free. It works instantaneously. It’s reliable but you’re going to use it. And at that point it’s incumbent upon the Australian Government to provide Australians with an alternative, I think, you know, because otherwise China will push it and they’re a long way ahead. So it’s really important the RBA and other arms of government are working so hard on this, I think.

Sophie, did you want to add to that and did you want to answer … question from over there.

So many options.

Yes.

Maybe I’ll just add the AI one, there is a parallel theme in building on blockchain tokenisation and AI in terms of both of them could potentially drive productivity at a very sort of broad level. But they’re very, very different technologies, if we’re talking gen AI versus blockchain. Blockchain actually sits in the background. You can think of it as a background technology. You don’t actually see it. What it can do is very interesting but it’s really, really different to gen AI, for example, used as a productivity tool by individuals. So they’re really very different types of technologies. The outcome that they have in common may be enhanced productivity. There some overlap. For example, there’s some consensus mechanisms on blockchain driven by AI, but that just shows the breadth of application of AI. So I see them as both very interesting outcomes could be very positive but we have to watch the downside risks on both of them.

Yes, sir.

Each cycle of a new technology or a new asset class or a new concept, you can see the hype cycle. We’ve been active around green washing for that reason. We’ve been active - you know, we do … concerns from time to time about AI washing. We may see concerns around blockchain washing at some point as well. So people over promising more than they’ve got the right to promise. Yep, that would be of interest.

Okay. We’ll go down to here. But while we’re waiting can I ask you, Brad, because we’ve probably only got a couple of questions left. You’re talking about exchange settlement funds at the RBA being brought into this or opened up in some way or - and the creation of new forms of private money. Thinking, well, why would a central bank want to do that. And does this have any implications for the effectiveness of central bank monetary policy given the central role that exchange settlement accounts play in this.

Yeah. So for everyone’s background the RBA, like most central banks, has been issuing electronic money actually for decades. Most central banks refer to them as reserves, we call them exchange settlement balances in Australia. They play a really important role in supporting our policy objectives in financial stability around monetary policy. We are examining the role for a wholesale CBDC in part to support our policy objectives around promoting monetary stability and financial system stability. So that’s - there’s the innovation positive externality that’s behind some of this but we’re also coming at it from a stability perspective. You know, what forms of money might need to evolve in the future, in order to best maintain financial stability. So that’s - yeah. That’s a big part of our thinking. It’s quite possible, I would say even likely, that if a wholesale CBDC, if you do start to see those circulated, issued around the world, and no-one’s done it yet, right, everyone’s still in the pilot phase, that that process begins with more or less the same types of institutions that already have a reserve account, an exchange settlement account. So my personal view is that would be the prudent way to begin. You’re talking about large institutions who are prudentially, mostly prudentially regulated, and those small number that are not prudentially regulated that have an account with the central bank still have to meet certain governance and risk management, sort of, hurdles. So I could imagine a world where access actually doesn’t open up. We stay with a, more or less, current access regime where we set a very high bar for any financial institution to have an account with the Reserve Bank, other central banks would do the same, and that would be the starting point. Whether you opened up access more widely, I think, would be a live discussion and it’s a discussion that all central banks are going to have to lean into at some point but I doubt it would be the starting point.

Okay. Now, I’ll break the rules and take just one more, if we can answer this quickly because we’ll - I can see everybody is starting to move out of the other session.

Hama Armond from ASIC. I’m just curious to see. So interoperability seems to be one of the key components to access the efficiency out of tokenisation. What are you seeing, in terms of people trying to actually facilitate that, perhaps China is making efforts or other central banks.

I think it’s interesting what the Monetary Authority of Singapore is doing, in terms of trying to bring together and get commercial organisations to collaborate because that will drive commercialisation, so getting out of the pilot phase and making it real. What we do see at the moment is lots of innovation of limited parties who are collaborating but then they’re not talking to others who are separately innovating. So it means you’re not sharing the ideas and you’re not getting scale. So there’s fragmentation of the innovation and there’s different entities around the world choosing different underlying protocols, often driven by the local rules, or systems of government. So instead of the original dream of, we’re all going to be on one ledger and everything is going to interoperate and it’s just going to be magic, the world doesn’t work that way. It’s harder to get humans to agree and you also have the big - some of the biggest investors in this technology are natural competitors and yet this technology is meant to be a shared, collaborative venture. So there’s a lot of entities who are innovating in this space who have to learn, you might call it, co-opetition. They have to learn to work together and to realise that we will all benefit and the whole economy will all benefit if we can work together. We’ve got to overcome that existing fragmentation though. Some regulators around the world are bringing people together and it’s interesting, for example, how - the RBA is a good example. The Project Acacia. They will invite industry in. So it will be public and industry working together. That’s a good thing.

Okay. Well, we’ve gone over time and I think you’ll all agree we’ve had a terrific opportunity to be brought up to speed by this by a terrific panel. Thank you very much to the audience for your terrific questions and engagement and can you please join me in thanking our panel.