Crypto volatility will discourage large corporate transactions: RBA

The high degree of volatility of cryptocurrencies means high-value transactions will remain rare with fiat currency instruments or stable coins to remain favoured.

A recent speech by Tony Richards for the Reserve Bank of Australia highlights the implications of the growth in cryptocurrencies and the roles that such digital assets could play in Australia’s future.

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Additionally, he expects the establishment of strong regulatory frameworks for stablecoins leading to the issuance of such coins by highly rated entities and central banks.

“[The issuance] 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,” said Richards.

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

He believes that a more reliable future can be seen in stablecoins, a digital asset designed to minimise price volatility than a cryptocurrency such as Bitcoin or Dogecoin.

According to Richards, there are several factors that could significantly impact current attitudes towards cryptocurrencies, potentially reversing current speculative demand and unwinding the dramatic price increases of recent years. These include:

• Greater understanding of the market and increased warning of securities regulators, leading to less following of fads
• Greater attention towards the high energy usage involved in mining proof-of-work cryptocurrencies from governments and policymakers.
• Greater focus on the level of anonymity that many cryptocurrencies can offer and their potential use in facilitating crime and the black economy.

“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,” Richards said.

“If so — and also reflecting that the relevant code is often open-source, publicly available and easily copied — it seems plausible that current valuations of many cryptocurrencies would not be sustained.”

While no high-income economies have yet issued a central bank digital currency (CBDC), Richards sites Sweden and various areas in Europe as those more seriously thinking about doing so.

He says that in preparation for a shift towards issuance of retail CBDCs, the Reserve Bank has increased its research in the area, engaging with the Digital Finance Cooperative Research Centre (CRC) on possible projects.

“The Bank will continue to work with the private sector and our international counterparts to ensure we stay abreast of innovations in the payments system. And there will be significant work to be done with the other financial regulators and the Parliament to ensure that we have a fit-for-purpose regulatory framework for digital assets,” Richards says.

“It will be fascinating to see how things evolve over the next decade.”