Brad Jones, Assistant Governor of the Reserve Bank of Australia, today shared the central bank’s research on the impact of DLT and tokenization on Australia’s capital markets. Its hypothetical estimates found up to A$4 billion (US$2.5bn) in annual transaction cost savings and another A$13 billion (US$8.bn) in reduced cost of capital. The central bank will outline its central bank digital currency (CBDC) roadmap in mid-2024.
Tokenization could lead to big increases in trading volumes, resulting in tighter bid-ask spreads. The figures are based on declines in spreads achieved historically following innovations. We’d note that the BIS published research on the impact of DLT on spreads for asset backed securities (ABS) and found significant improvements. The Australian figures reflect similar benefits.
Apart from spreads, Australia’s estimates include savings from instant or atomic settlement, reduced collateral requirements and fewer settlement fails.
Turning to the cost of capital savings, the central bank estimates declines of 5 to 24 basis points. In other words, the cost of capital could fall by as much as 0.24%.
How to settle tokenized transactions: tokenized deposits?
In his speech today, Mr. Jones explored the potential benefits of tokenization and its risks. He also discussed the need for on-chain money for atomic settlement or the possibility of so-called trigger payments. That’s where a DLT transaction triggers a conventional payment.
He explored four options for settlement: cryptocurrencies, stablecoins, tokenized deposits and wholesale CBDC. Unsurprisingly for a central banker, cryptocurrencies were seen as a non starter. He also wasn’t keen on non-bank issued stablecoins. However, he had reservations about stablecoins generally, especially in countries such as Australia that don’t have massive government bond markets. Given stablecoins use government bonds as reserve assets, the concern is the impact of stablecoins on these markets.
Hence, he prefers to use tokenized deposits where banks settle between themselves with central bank money. Alternatively, DLT transactions could use wholesale CBDC directly.
Mr. Jones mentioned the recently concluded Australian CBDC research and said it still has an active ongoing research program. Tokenized markets are a key area of interest. And with the Treasury, in mid 2024 the central bank will publish a stocktake of its research and outline its roadmap.