Member Spotlight: BTC Markets, Cryptocurrency and CBDCs in Australia
In last week’s spotlight, we discussed Covid-19’s acceleration effect regarding the adoption of new technologies. Continuing that trend, this week we spoke with CEO of BTC Markets, Caroline Bowler about the opportunities that the current market presents for cryptocurrency adoption and, in particular, Central Bank Digital Currencies.
During the past few months, the cryptocurrency markets, with Bitcoin in particular, experienced significant movement. This can potentially be attributed to uncertainty in traditional markets and the recent Bitcoin halving. Despite prices slumping in recent weeks since the halving, investor activity in Bitcoin derivatives is at record levels. “The pandemic has amplified digital asset’s presence on the global financial stage,” says Ms Bowler, “we see an opportunity for investors adopting digital assets to cushion against the economic effects of Covid-19. For example, bitcoin as a potential deflationary hedge against inflation brought on by quantitative easing. Evidence of investor activity can be seen by looking at the asset’s derivative markets.”
Bitcoin future and options contracts allow investors to profit from the digital asset’s future price. Several derivative exchanges who list these contracts, such as the Chicago Mercantile Exchange, are experiencing record levels of open interest on their markets. Likewise, digital assets are being used as part of a diversified investment strategy, due to their stand-alone status as an asset class.
This acceleration is not limited to standard cryptocurrencies. Central Bank Digital Currencies (“CBDCs”) have also seen a recent wave of interest as the economic effects of Covid-19 begin to present themselves.
What are Central Bank Digital Currencies
CBDCs are a digital representation of a fiat currency that is generally issued and regulated by the relevant central bank, but exist entirely as a digital currency. The BIS has placed the various CBDC market implementations into 3 distinct categories:
- Hybrid: where the CBDC is issued by the central bank, but retail payments are facilitated by intermediaries;
- Indirect: where the CBDC is a claim on a wholesale intermediary; and
- Direct: where the CBDC is issued by the central bank directly to retail users.
The most publicised Hybrid CBDC pilot at the moment comes from China. It is reported that the People’s Bank of China would issue and redeem retail CBDC using a network of domestic commercial banks. The Bank of England is also conducting research into a model where the central bank is solely responsible for the creation and destruction of tokens within a core ledger, with ‘payment interface providers’ being in charge of user interaction. In this model named the ‘platform model’, payment interface providers are responsible for Know Your Customer implementation but are afforded the flexibility to provide additional overlay services.
Indirect CBDCs are a means to implement digital currency by private sector entities, such as fintech firms, companies, and banks, whereby these entities can issue a stablecoin backed by central bank reserves. The International Monetary Fund has coined the term “synthetic CBDC” to describe such a product. Blockchain company, R3, noted in a recent report that a synthetic CBDC could be a technological solution to narrow banking. A narrow bank is a deposit-taking bank that holds a reserve account with a central bank and is restricted from making loans, reducing credit risk to near zero.
An example of a Direct CBDC is Sveriges Riksbank’s e-krona, a digital version of Sweden’s Krona for retail use that will either be available as a tokenized CBDC or through central bank accounts. However, not all Direct CBDCs will be designed for retail use and will be developed to fit the relevant market.
The rise of Central Bank Digital Currencies
Prior to the global outbreak of Covid-19, the Bank of International Settlements (“BIS”) published a survey that demonstrated that about 80% of central banks are engaging in work with CBDCs, 40% have progressed from a proof-of-concept. Despite this intense interest, only 10% have developed pilot projects.
“The pandemic has amplified digital asset’s presence on the global financial stage”
However, with governments becoming more proactive in implementing monetary policy to counteract Covid-19’s negative market effects, as well as increasing concerns that cash could be a transmission vector for Covid-19, CBDCs have been thrust into the limelight. Despite the risk posed in handling polymer notes being no greater than touching other common surfaces, the BIS notes that the misconception that cash can aid in Covi-19 transmission may permanently alter public payment behaviour. In an April 2020 report, BIS noted that while retail CBDC may become more prominent, the Covid-19 crisis highlights the need to design CBDCs to be accessible by unbanked and using contactless technical interfaces that are suitable for the entire population. So while this crisis may accelerate the adoption of technological solutions, it also presents new challenges that need to be overcome.
The role of CBDCs in Australia
The Reserve Bank is currently exploring as to whether there is a role for CBDCs in Australia. “The Reserve Bank of Australia (RBA) is already investigating the use case of an ‘eAUD’, says Ms Bowler, “however, this wouldn’t be available for public use, but for inter-bank use between the RBA and other financial institutions.” The Reserve Bank, in their submission to the Select Committee on Financial Technology and Regulatory Technology, noted that while they are not currently considering a retail CBDC, any such implementation would be in the form of a claim against the Reserve Bank, rather than a commercial bank, suggesting that this will take on a Hybrid form. The Reserve Bank has not ruled out its application in wholesale markets, noting that a CBDC could bring benefits such as improving speed, cost and robustness of payments, atomic transactions and programmable money.
Despite this, many are hopeful that one day Australia will take advantage of the benefits that a CBDC can bring. “We’re optimistic that we’ll be using a CBDC in the future. It’s role and its relationship with other digital assets has yet to be fully explored,” says Ms Bowler.
About BTC Markets
BTC Markets is Australia’s leading digital asset exchange, trusted by 260,000 verified clients who have traded over AU$9.8 billion. Founded in 2013 on values of reliability and integrity, the exchange is a pioneering figure in Australia’s blockchain sector. Our mission is to offer sophisticated digital financial products, via an intuitive reliable platform, to the investor community. More information is available on btcmarkets.net.