RBA not convinced Facebook's Libra will succeed in Australia
The Reserve Bank of Australia (RBA) said it has closely monitored developments in cryptocurrencies, such as Bitcoin, over a number of years, and believes it's still unclear whether there will be strong demand domestically.
According to the RBA, such developments have the potential to affect its mandates as the issuer of banknotes, operator of the country's real-time gross settlement system, in addition to its responsibilities for the "stability of the financial system and the stability and efficiency of the payments system".
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"A number of Australian fintech entities are providing services relating to cryptocurrencies, both as a means of payment and as a speculative asset," the RBA said in a submission [PDF] to the Select Committee on Financial Technology and Regulatory Technology and its probe into the opportunities the two vectors present to Australia.
"The bank's current assessment is that the cryptocurrencies seen to date do not provide the usual functions of money, which explains why they have not become widely used in Australia as a means of payment."
However, it said newer cryptocurrencies are emerging, or have been proposed, which seek to address some of the shortcomings of earlier iterations. It said the next generation of cryptocurrencies could become more widely used in the future.
"First generation cryptocurrencies such as Bitcoin, the largest and most well-known cryptocurrency, exhibit significant price volatility, meaning that they are a poor store of value," it continued.
Pointing to Facebook's Libra project, the RBA said it has the potential to become widely used given the involvement of various companies that may be able to leverage their large existing user bases and technological capabilities.
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"Based on what is known publicly about Libra, it will be distinguishable from existing cryptocurrencies as it will be fully backed by an asset reserve comprised of a basket of bank deposits and short-term government securities denominated in a range of national currencies," it wrote.
The RBA said the announcement of Libra has prompted regulators around the world to closely consider the potential risks and benefits of cryptocurrencies, with a particular focus on stablecoins.
Agreeing with a determination made previously by the G7, the RBA said private sector global stablecoin initiatives should not be permitted to launch until all risks and regulatory requirements have been addressed.
"The bank is working closely with relevant agencies domestically and internationally to understand recent proposals to ensure they will be adequately regulated and supervised," it said.
The RBA said that in Australia, it is unclear that there will be strong demand for global stablecoins even if they do meet all regulatory requirements, particularly for domestic payments.
"Australia is already well served by a range of low-cost and efficient real-time payment methods, such as the NPP, that utilise funds held in accounts at prudentially supervised financial institutions," it told the committee.
"Moreover, while Australians may not have been well served by banks providing cross-border payment services in the past, a number of new non-bank digital players have entered the market in recent years offering significantly cheaper and faster money transfer services."
On the idea of central banks issuing a new type of electronic money in the form of a central bank digital currency (CBDC), possibly issued on a blockchain platform, the RBA said there currently is not a need.
"The bank's assessment -- like those of most other central banks -- is that the case for issuing a CBDC for use by households has not been established," it said.
"One possibility is that there would be little demand by households for such an asset, given that they already have good access to digital money in the form of commercial bank deposits that provide payment services, are interest-bearing, and are protected (up to AU$250,000 per account) by the Financial Claims Scheme."
It said however, a greater demand for a CBDC could emerge, particularly in "times of uncertainty".
The RBA, through its in-house Innovation Lab, has been exploring if there is a role for a digital Australian dollar in the context of the bank's responsibilities for issuing the currency and overseeing the payments system.
In the lab, the RBA developed a proof-of-concept of a wholesale settlement system running on a private, permissioned Ethereum network.
According to the bank, the proof-of-concept simulated the issuance of central bank-backed tokens to commercial banks in exchange for exchange settlement account balances, the exchange of these tokens among the commercial banks, and their eventual redemption with the central bank.
"The bank intends to extend this research over the coming year, potentially through collaboration with one or more external partners," it said.