Westpac, CBA dip into money markets using digital Aussie dollar

afr.com:

Westpac and Commonwealth Bank have used a digital version of the Australian dollar backed by the Reserve Bank to trade and pay for real certificates of deposit, which are debt instruments issued by each bank.

The deal is a world-first between mainstream regulated banks using a “central bank digital currency”, or CBDC, and market securities. It also points to the initial benefits of CBDCs in interbank markets, where banks do business with each other.

Imperium Markets hosted the trades last week on its marketplace. Imperium’s was one of 14 pilots using the RBA CBDC, announced in March, with the Digital Finance Co-operative Research Centre. It was the only pilot involving the money market.

Banks say the tests, which were completed last Thursday, point to new blockchain-based trading systems, which run on decentralised ledgers, improving liquidity and creating efficiencies in payments, reconciliation and clearing – which still rely on manual processes. Yet banks will proceed cautiously given the need for new regulation and novel technology risks.

Imperium said the tests illustrated the benefits of operating a single market infrastructure covering trading, payment, custody and the broader management of securities. This could also help improve the efficiency of the bond market.

Currently, large parts of the debt markets still operate on a workflow of phone calls, emails and spreadsheets, using manual processes that create operational risks and a lack of data for regulators to scrutinise.

CBDCs can help eliminate settlement risk, through a process known as “atomic settlement”. This allows a payment and the transfer of title for a security to be exchanged at precisely the same time.

This promises to reduce the amount of capital