The Digital Australian Dollar – the new frontier

Prepared by Nicholas Cardone & Catherine Evans

In October 2017, a group of fintech start-ups pitched the idea of a government-endorsed Australian dollar cryptocurrency to the Reserve Bank of Australia (RBA) (i.e. a digital fiat currency). This ‘Digital Australian Dollar’ (DAD) would use blockchain technology to remove the role of middlemen (e.g. banks) to process payment transactions, which would result in faster payment processing times at cheaper costs (who wouldn’t want that?).

Although the Federal Government and RBA have not indicated when (or if) the DAD will be implemented, the DAD would be an excellent opportunity to increase the trust and certainty of cryptocurrencies and blockchain technology amongst the wider public. In order to get there though, there are a few legal and practical challenges to be overcome to ensure the successful implementation of the DAD.

Let’s get legal

Section 8 of the Currency Act 1965 (Cth) would need to be amended to classify the DAD as a formal unit of Australian currency. Although this seems easy, various practical consequences will result which likely require amendments to other laws and codes. For example:

  • every transaction relating to money or the payment of money must be done according to the currency of Australia.[1] If the DAD is recognised as a form of Australian currency, this would give customers the legal option to pay businesses for goods and services with DAD instead of traditional Australian dollars. If businesses do not have the infrastructure to support DAD payments, this will obviously affect the initial uptake of DAD as customers would just use traditional Australian dollars for payment.

 

  • in connection with the first point, the infrastructure to support DAD payments may be expensive for businesses to initially implement. To cover their initial cost (and the ongoing cost of processing DAD transactions on the blockchain), businesses may need to charge customers surcharges to pass on the costs of DAD transactions. The Australian Competition & Consumer Commission (ACCC) consider this is an acceptable practice, but has recently restricted businesses from charging ‘excessive’ surcharges to customers for eftpos, Visa or MasterCard transactions. A DAD transaction would work outside of the existing eftpos, Visa and MasterCard regimes due to its blockchain characteristics, meaning there would be nothing preventing a business from charging an ‘excessive’ surcharge on a DAD transaction. Amendments would be required to the Competition and Consumer Act 2010 (Cth) to remedy this.

 

  • DAD transactions will be irreversible (as they are conducted through a blockchain). The payment itself could be practically reversed by another blockchain transaction back to the original holder (all transactions remain in the blockchain and are not removable) but without an intermediary who is forced by legislation or a code of conduct to reverse transactions on behalf of the transacting parties, this may be difficult to enforce/effect. Scenarios that need to be worked through and considered are DAD transactions conducted by mistake (e.g. wrong amounts are entered), by fraud (e.g. an unauthorised person gains access to DADs) or where a refund is demanded by a customer. The rules of the blockchain could be designed to put in place protections for disgruntled customers, or a contractual framework implemented or legislation tailored to protect customers in these scenarios.

Creation of DAD

DAD transactions will need to be supported by blockchain technology (or some other form of distributive ledger technology). The obvious question is – who will create this blockchain? It is unlikely that this blockchain would be based on an existing platform (such as Ethereum), meaning a bespoke blockchain will be the likely option to support the DAD.   The Federal Government and RBA will likely task the CSIRO with this, but it is fundamental that this blockchain is audited before it is implemented to assess any ‘gaps’ which could potentially be exploited. After all, we do not want a repeat of the DAO incident.

The Federal Government and RBA will also need to consider whether it can issue an unlimited number of new DADs on an ad-hoc basis (to respond to economic factors), or whether there will be a limit on the number of DADs that can be created (such as in the case of Bitcoin).

In addition, if the financial data of all DAD users is accessible on the DAD blockchain (e.g. if it is a public blockchain), privacy and security mechanisms would need to be implemented to prevent the unauthorised use or disclosure of this information.

Issuing DAD

Another practical question to consider is how individuals could obtain and access DADs. As a blockchain user would ordinarily need to hold a private key to access data on a blockchain, a user of DAD will likely need to hold an equivalent key to access the DAD blockchain and facilitate DAD transactions. In practice, this would mean that individuals would have a bank account for their traditional Australian dollars and a separate private key for their DADs . Security requirements and guidelines for  the DAD private key would be required to mitigate the risk of someone ‘hacking’ an individual’s DAD account if the key is lost/stolen, especially considering that the widely known and understood mechanisms implemented by banks to prevent fraud would unlikely be transferrable to the DAD blockchain.

The initial distribution of DAD also needs to be considered. Could DAD be distributed through an Initial Coin Offering? Would there simply be an exchange (run by the RBA) that could transfer traditional Australian dollars to DAD on a like-for-like basis? These are all issues the RBA would need to consider.

We are excited about the DAD and will continue to monitor its developments. If you would like to chat about it over a coffee, please let us know.

[1] Currency Act 1965 (Cth) s 9(1).