Opening Statement to the Senate Economics References Committee Inquiry

Opening Statement to the Senate Economics References Committee Inquiry into Digital Currency

Tony Richards
Head of Payments Policy

David Emery
Senior Manager, Payments Policy Department

Senate Economics References Committee Inquiry into Digital CurrencySydney - 7 April 2015

The Reserve Bank has taken an interest in digital currencies and monitors developments in this area. Digital currencies represent an interesting development in the payments and financial system landscape. The concept of a decentralised ledger is an innovation with potentially broad applications for a modern economy.

At present, digital currencies are not widely used in Australia or in other developed economies. While they do not constitute legal tender in Australia, there is nothing to prevent two parties from agreeing to settle a payment using a digital currency. Looking ahead, growth in the use of digital currencies will presumably depend both on the evolution of digital currencies and distributed ledger technologies, as well as the extent to which digital currencies can better meet the needs of users than existing payment methods. One case where digital currencies might gain traction is in the area of international remittances, which can be expensive and subject to delays in the receipt of funds. More broadly, however, many payment attributes of digital currencies are already available in the ‘traditional’ payments system – or will be available in the case of new services that may be facilitated by the New Payments Platform project. Accordingly, it remains to be seen what would drive their widespread use domestically, particularly in light of the price volatility of digital currencies observed to date.

Given the very limited use and acceptance of digital currencies in Australia, digital currencies do not currently raise any issues for the Bank in terms of the Bank's monetary policy and financial stability mandates.

The Bank is also the principal regulator of the payments system. Our comments today will focus on this aspect of the Bank's mandate. The Bank's approach to the use of its regulatory powers under the Payment Systems (Regulation) Act 1998 has generally been to rely on industry- or market-driven solutions, only intervening when necessary on the grounds of its statutory responsibility for efficiency and competition in the payments system and controlling systemic risk. Digital currencies are not currently regulated by the Bank or subject to regulatory oversight. However, the Bank will continue to monitor the use of digital currencies. In the event that the use of a particular digital currency was to grow significantly and to raise public interest concerns, the Bank would consider whether it would be desirable and feasible to ‘designate’ it as subject to regulation and to then impose standards on participants in that system. The Bank will also be assessing whether the regulatory framework can accommodate alternative mediums of exchange such as digital currencies, consistent with the observations of the final report of the Financial System Inquiry.

At present, however, the Bank's judgement is that the current very limited use of digital currencies means that they do not raise any significant concerns with respect to competition, efficiency or risk to the financial system. Accordingly, it is currently unlikely that any benefits of regulation would outweigh the potential costs. In this regard, one has to be mindful of the risk of misinterpretation of the degree of protection offered by regulation or oversight, which may lead users to exercise less caution than warranted when selecting and using service providers.

Of course, in the event that the Bank deemed it necessary to take regulatory action in the payments system aspects of digital currencies, the international character of such systems could place constraints on its ability to act unilaterally, so any action might need to be suitably coordinated. One vehicle for coordination would be through the Committee on Payments and Market Infrastructure (CPMI) at the Bank for International Settlements, of which the Bank is a member. The CPMI monitors developments in digital currencies.

Finally, we note that digital currencies have the potential to raise more immediate concerns over issues relating to taxation, Anti-Money Laundering and Counter-Terrorism Financing Rules and consumer protection. These are areas that are outside the Bank's realm of expertise and responsibility.

We would now be happy to answer any questions from the Committee on the Bank's submission.