RBA warns of ‘faddish’ crypto crash


He said he found estimates that one in five Australians own crypto assets implausible, and flagged an official response involving central banks issuing digital versions of cash.

Senior members of the local crypto community pushed back on the RBA’s analysis, saying government and regulators underestimated the level of sophistication of Millennials and digital natives participating in the markets.

“It continues to be our experience that hawkish views about cryptocurrency are driven by entrenched narratives around bad actors and financial crime, narratives that are not supported by the data,” said Steve Vallas, chief executive of Blockchain Australia.

QE backlash

But Dr Richards, who will retire from the bank at the end of the year, said that if central bank digital currencies (CBDCs) help to facilitate digital transactions with a stable, digital version of cash, “households might be less influenced by fads and a fear of missing out, and might start to pay more attention to the warnings of securities regulators and consumer protection agencies in many countries about the risks of investing in something with no issuer, no backing and highly uncertain value.

“There could be greater focus on the (near) anonymity that many cryptocurrencies can offer, and their potential use in facilitating financial crime and the black economy,” he said.

The market capitalisation of digital currencies, including bitcoin and ether, has surged this year and thousands of different coins are being touted to investors.

Their rise is not yet an issue threatening financial stability, but the RBA expects global central banks to move to assert control over digital finance and respond to the growth in bitcoin and other coins by issuing CBDCs. These are a new form of digital money that would be a claim on the central bank.

Regulators may also allow commercial banks to issue “stablecoins” – digital currencies pegged to fiat currencies to minimise price volatility – to fend off the growing threat of internet money being offered by global technology players such as Facebook (now Meta).

The rise of private currencies, including bitcoin, has been in part a response to a perceived debasing of fiat currencies by central banks printing money through “quantitative easing” – or bond buying – policies.

After COP26, he also warned “the very high use of energy involved in mining proof-of-work cryptocurrencies could attract greater attention from governments and policymakers”. The combined energy use for bitcoin and the Ethereum network was estimated to be similar to the world’s 13th-largest economy, he said.

Central banks have been monitoring the arrival of private money since bitcoin emerged as a decentralised means of exchanging money without oversight from banks early last decade.

Official response has gathered pace this year. The Bank of England has created a taskforce to consider a British CBDC, while international regulatory groups, including the Bank of International Settlements, have published detailed studies on the moves.

Key challenge

Jon Deane: “People buy bitcoin to move away from the devaluation of fiat currencies by central banks.” 

One of the key concerns for regulators is the risk of bank commercial deposits becoming more flighty in a financial crisis.

The RBA and other members of the Council of Financial Regulators are working with AUSTRAC and the ACCC to examine the appropriate regulatory framework for crypto assets, including stablecoins.

Greg Medcraft, who led the OECD’s work on digital currencies for the past few years, told the Asian Corporate Governance Association on Wednesday that decentralised finance is on the rise and a key policy challenge “is the absence of a single regulatory access point”.

“Another challenge is [decentralised finance] is global in operation, with no defined jurisdiction,” he said.

Jon Deane, chief executive officer of Trovio, a digital asset infrastructure adviser and asset manager, said the development of a CBDC would not derail the growth of crypto, and he disputed the comments on the environmental impact, saying 57 per cent of bitcoin mining uses renewable energy sources.

“People buy bitcoin to move away from the devaluation of fiat currencies by central banks, to a finite resource that acts as both a store of value and ultimate settlement layer,” Mr Deane said.

The RBA recognises there will be many use cases for decentralised finance applications, not necessarily requiring cryptocurrencies to be issued, but believes market intermediaries will continue to play a significant role in the system.

“I can imagine a future where the establishment of strong regulatory frameworks for stablecoins could lead to issuance of stablecoins by highly rated entities, and central banks could move towards issuing CBDCs,” Dr Richards said.

“In either case, they would be denominated in fiat currencies, be safer than existing stablecoins, and would likely have faster, safer and more efficient transaction verification mechanisms than most cryptocurrencies.

“Accordingly, it is likely that they would be viewed as superior instruments for the settlement of transactions in tokenised assets on distributed ledgers.”

That is a reference to versions of the technology that underpins bitcoin being used to facilitate the immediate transfer of digitised assets beyond money, including property or commodities. The RBA is sceptical about the private crypto craze but believes the “tokenisation” (creating digital representations) of hard assets will become an important trend in financial markets.

The RBA has responded to arguments being made in international forums that providing a new digital form of central bank money for general purpose use “could be important for safeguarding confidence in national monies and the role of fiat currencies at the heart of monetary, financial and payment systems”, Dr Richards said.

“By introducing CBDCs, central banks would not be getting into the retail payments business, but they would be providing a riskless and interoperable form of digital money that could potentially stimulate competition between different private-sector service providers.”

‘Hype and misinformation’

The speech may be uncomfortable reading for Commonwealth Bank, which this month said it would make 10 cryptocurrencies available for customers to buy in its popular app.

It also contrasts with a much more supportive view of crypto coming out of the Senate select committee on Australia as a Financial and Technology Centre, which made recommendations in October to bring crypto into the mainstream that are being considered by Treasury.

Asked for his response about the CBA move into crypto, Dr Richards said this was not an issue for the RBA but “more an issue for ASIC and APRA, to the extent it raises regulatory issues”. CBA is working with a US company called Chainalysis to provide fraud and compliance services.

But Dr Richards said cryptocurrency remained “the payment method of choice for ransoms, and it is also a place where it is possible to have a high degree of anonymity in holdings.

“So I think there are genuine concerns raised about the fact cryptocurrencies can be used to facilitate financial crime, and I would suspect that is something the policy authorities around the world will pay attention to … It is absolutely a concern.”

Dogecoin is trading at around one-third of its level in June and the RBA has flagged concerns with other popular cryptocurrencies such as Shiba Inu, which is centred on a breed of Japanese hunting dogs and has been promoted by Elon Musk.

“If there were to be global policy action to deal with some particular concerns about the use of cryptocurrencies, plus the arrival of new stablecoins and CBDCs, that could safely meet the needs of a wide range of users, existing cryptocurrencies might then have only niche use cases, at best,” Dr Richards said.

He also questioned the numbers of Australians holding cryptocurrency, suggesting these had been exaggerated.

The Senate committee’s report, based on material submitted to the inquiry, pointed to surveys that one-in-five Australians held some sort of crypto asset but “I find these statistics somewhat implausible”, Dr Richards said.

Commonwealth Bank said its surveys had found 8 per cent of Australians held crypto, and it wanted to increase this by offering 10 versions, including bitcoin and ether, in its banking app.

“Some of the estimates out there are extremely surprising and may be symptomatic of the significant amount of hype and misinformation in this area,” Dr Richards said.

Fintechs developing blockchain have called on the RBA to consider issuing a CBDC since 2017. That year, Reserve Bank governor Philip Lowe described bitcoin as a “speculative mania” and said a convincing case for a CBDC had yet to be made out.

But this year, banks have been arguing that a CBDC will maintain their role operating payments in more decentralised networks.

Reflecting on the significance of the issues, Dr Richards said the emergence of cryptocurrencies, stablecoins and CBDCs had attached the most discussion, conversation and debate…



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