Australian central bank says 'speculative mania' and crime fuel Bitcoin

Why use a slow expensive risky currency when you can do real-time bank-to-bank transfers?

Reserve Bank of Australia. Image: TK Kurikawa, Shutterstock

The governor of the Reserve Bank of Australia has opined that cryptocurrencies are most useful “to those who want to make transactions in the black or illegal economy, rather than everyday transactions” and concluded that current enthusiasm for the instruments therefore “feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.”

The Reserve Bank of Australia (RBA) is analogous to the US Federal Reserve or the Bank of England. While Australia's economy is rather smaller than the USA's or the UK's, RBA governor Dr Philip Lowe is one of a small group of central bank heads in advanced economies, so his comments carry some weight.

He remarked on cryptocurrencies in a speech delivered to an Australian payments conference in Sydney on Wednesday, during which he considered whether Australia needs an electronic version of its Dollar.

Lowe considered that an idea worth pondering because the nation is ditching cash, fast: ATM withdrawals are down and electronic payments are rising fast. The RBA has therefore encouraged local banks to develop a New Payments Platform (NPP) that as of February 2018 will allow real-time bank-to-bank transfers, an improvement on current end-of-day transfers.

The governor offered his opinion that electronic payments in Australia will continue to be organised by banks, but noted this is not the case in nations like Kenya and China. He then considered cryptocurrencies and dismissed them with the remarks above and the following observations:

The value of Bitcoin is very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with Bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering.

Lowe said he doesn't rule out new payment methods, but said “there is a certain attraction of being able to make payments from funds held in prudentially regulated accounts that can earn interest.”

He also pondered whether electronic banknotes might be possible, or useful, if only to replicate cash's pleasing anonymity. He even suggested banks could issue such a currency, but concluded that “having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency”. He added that “The history of private issuance is one of periodic panic and instability. In times of uncertainty and stress, people don't want to hold privately issued fiat money.”

As a final nail in the coffin of his argument, he imagined a scenario in which “in times of banking system stress, people might seek to exchange their deposits in commercial banks for these banknotes, which are a claim on the central bank. It is likely that the process of switching from commercial bank deposits to digital banknotes would be easier than switching to physical banknotes. In other words, it might be easier to run on the banking system.”

For those of you who've forgotten a little history, runs on banks tend to spark significant economic crashes.

Bitcoin, photo via Shutterstock

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Lowe also sketched a role for distributed ledgers that he said “might allow the payment and settlement process to become highly integrated with other business processes, generating efficiencies and risk reductions for private business.”

As a central banker from a nation where the central bank can point to 25 years without a recession, Lowe was understandably optimistic about the central bank's current and future managing payments. But he did not rule out disruptive technologies, concluding that the RBA needs “... to better understand the potential efficiencies for private business and why it would be preferable for such a settlement system to be provided by the central bank, rather than the private sector; why privately issued tokens or files could not do the job.”

He also said widespread use of a distributed ledger “could add to the resilience of the overall payments system,” words that might give cryptocurrencies investors and blockchain enthusiasts less reason to lament some of his other remarks. ®

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