Insights for Investors by Investors

Cryptocurrencies or Stablecoins (Central Bank Digital Currencies)?

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After months of deliberating, ASIC has finally given the green-light approval for two spot exchange-traded funds (ETFs) in the world’s largest two cryptocurrencies, Bitcoin and Ethereum. ASIC has provided best-practice guidelines and a set of requirements for Bitcoin ETF issuers, with a particular focus on the protection and storage of crypto assets. For example, private keys — the equivalent of a master password — will need to remain “offline” in cold storage, and must meet robust physical security practices.

Essentially, the approval allows Australian investors to gain direct exposure to the spot price of Bitcoin and Ethereum. However, not everyone is punching the air in delight. The RBA has issued a stern warning to investors to err on the side of caution when buying cryptocurrencies, because the risk of losing value is quite high. As cryptocurrencies become regulated around the world, concerns mount that their value could tumble when central banks re-assert control over their country’s monetary systems.

According to the Australian Financial Review, RBA head of payments policy, Tony Richards says, “there are plausible scenarios where a range of factors could come together to significantly challenge the current fervour for cryptocurrencies, so that the current speculative demand could begin to reverse, and much of the price increases of recent years could be unwound.”

Central banks could trigger a regulatory crackdown against private currencies and smaller coins,   excessive energy consumption used in the “mining” of cryptocurrencies, or currencies that facilitate illegal activities.

In the AFR, Richards 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.”

So far the rise of cryptocurrencies hasn’t yet become a real threat to the financial stability of this country or monetary policy. But some time in the future, it may. To combat this threat, it’s likely that global banks will begin to issue central bank digital currencies (CBCDs), which are digital forms of fiat currency, and thus are a new type of digital money that is backed by a central bank: effectively, a digital version of cash that is available via a digital wallet. A long list of countries have expressed their interest in issuing this digital currency and some are already doing it.  China, South Korea, Brazil and Japan are already exploring CBDCs.

These currencies are a big step forward as they significantly enhance the efficiency of a country’s payment systems, provide financial stability, security, provide easy-to-use payment processes through mobile phones, and tend to trade with minimal price volatility by being pegged to the fiat currency. Dubbed “stablecoins,” the fiat-currency-linked digital currencies are being created to help fend off the growing threat of internet money.

This second group of new digital currencies are specifically designed to minimise price volatility against a fiat currency i.e. US dollar. This makes them more attractive as a store of value or method of payment than typical cryptocurrencies.

Richard concludes, “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.”

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