A Digital AUD: stablecoins linked to national currency find favour at the RBA

AFR

Reserve Bank of Australia governor Philip Lowe said a digital version of Australian dollar cash is more likely to be issued by commercial banks than the central bank, as he called on the government to develop a tough regulatory regime for stablecoins in the retail market.

In a speech to a G20 event in Bali last weekend, Dr Lowe said stablecoins linked to the value of a national currency is ‘‘the one piece of the crypto landscape where I think there is real promise”.

‘‘If that is how things develop, we need to have a first class regulatory regime where these stablecoins are effectively regulated like bank deposits,” he added.

Beyond stablecoins, Dr Lowe described the rest of the crypto sector as speculative and said the ‘‘cryptocurrency” label is misleading because most crypto does not display the characteristics of currency, including price stability.

He said people value money which is backed by the state, whether banknotes issued by a central bank or deposits in private banks underpinned by government deposit insurance.

‘‘Many examples of unbacked crypto seem to be little more than forms of speculation to me,” Dr Lowe said.

‘‘Privately backed money can work for a while, but it usually ends in disaster.”

Despite ringing the alarm bells on crypto – which has been heavily sold off this year -Dr Lowe said the technology underpinning the sector could nonetheless change the way money moves around in the digital economy.

Technology shifts over the years have seen gold replaced with banknotes, and then digital payments using money in bank accounts. It’s possible, he said, that some bank account and card payments will be replaced with tokenised versions of deposits, or digital representations of central bank cash, and moved via digital smartphone wallets.

Tokenised money has advantages including allowing payments to be offered by a broader range of players than banks, and reduced payment costs, given the high fees charged by banks and debit and credit card companies for moving money around. It could also allow payments to be settled in a more decentralised manner, help facilitate micropayments, and allow money to be ‘‘programmable” to allow users to control where it is spent.

‘‘I think it is quite possible that new forms of money will offer better consumer experiences than passing pieces of paper or polymer around, or moving money between bank accounts,” Dr Lowe told the G20 seminar on Central Bank Digital Currency and Crypto-Assets in Bali on Sunday.

‘‘It must be the case that new forms of money will emerge that offer better solutions to the ones we have now.”

‘‘My view is if these tokens are going to be used more widely by the community, they are going to need to be backed by the state or be prudentially regulated, just like we regulate bank deposits . . . We regulate private money in banks. We should ultimately regulate private money that is a stablecoin that sits in our digital wallets as well.”

The comments come as ANZ Bank tests a stablecoin it has called the A$DC with institutional clients. ANZ’s creation of a stablecoin contrasts with Commonwealth Bank’s crypto strategy, which centres around providing retail market access to a range of speculative coins in its banking app, but this has run into challenges with the corporate regulator.

While many global central banks explore creating digital cash to push back on privately created cryptocurrencies, Dr Lowe said he favoured an alternative approach where tokens representing cash would be issued by the private sector, ‘‘backed by very high collateral, perhaps central bank deposits or government securities, or the issuing authority [would be] regulated like a bank”.

There was a stronger case for central banks to issue wholesale market digital currency, which he said could be used to help develop new markets such as for minerals still in the ground.

‘‘I think it is quite likely that in time we will issue some form of digital currency for wholesale settlements to complement the RTGS system,” he said, a reference to the ‘‘real-time gross settlement” that allows banks to make payments between themselves via ‘‘exchange settlement accounts” at the RBA.

Treasury and the other members of the Council of Financial Regulators are considering stablecoin regulation as part of a revised ‘‘stored value facilities” (SVF) regime. But Dr Lowe said there more work to do.

Users of Australian dollar tokens had to be confident they would be repaid and were not counterfeit, just like banknotes; and they need to be interoperable, just like bank-issued cards can be used to pay anywhere.

‘‘I don’t think any country has a sufficiently strong system at the moment. In Australia, we don’t. We are looking to put it in place, but we are still not there,” he said.

The RBA review announced by the federal government excludes the RBA’s payments, financial infrastructure, banking, and banknotes functions.

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