Afterpay says shifting payments to blockchain technology will cut payment costs by removing intermediary banks, and it is urging the government and central bank to develop policy to allow an Australian dollar “stablecoin” to be created.
This will safeguard the fiat currency as the use of private cryptocurrencies becomes more popular, the buy now, pay later leader said. Rules could subject private issuers of stablecoins to capital requirements and consumer protections.
Afterpay does not offer crypto-related products but told the Senate select committee on Australia as a technology and financial centre that it was “actively considering how innovative features could be a part of the financial management ecosystem that we are building”.
Senior Afterpay executives will appear before the committee on Wednesday. The company says its customers “expect us to evolve with their needs and aspirations, whether or not they meet traditional definitions of financial products and services”.
Square, which is buying Afterpay in a deal valued at $39 billion when announced five weeks ago, earns significant revenue from bitcoin. It owns 8027 bitcoins, worth around $500 million at current prices, and reported a 200 per cent increase in bitcoin revenue year-on-year to $US2.7 billion for the quarter last month.
Afterpay is calling on the government to collaborate with industry and “actively consider what framework an optimal environment for an Australian dollar-backed stablecoin should look like”.
Stablecoins are a form of digital currency whose value is pegged to another asset, such as a fiat currency, reducing volatility and lifting the practical use of crypto as a medium of exchange.
A stablecoin could be used to exchange value on a blockchain without using existing payment “rails”, such as those run by the global card schemes, which involve banks that issue debit and credit cards earning big interchange fees from merchants. It would also avoid users having to transact in bitcoin or ether, whose prices are highly volatile.
“Merchants stand to benefit considerably from the cryptocurrency model, as card network fees are entirely removed from the equation … replaced by a single transaction fee associated with validating the payment on the blockchain,” Afterpay said in its submission.
It said blockchain has the potential to reduce transaction costs “due to the removal of functions – real-time authorisations, chargebacks, settlements – which require third-party involvement in the current payment system. Within the cryptocurrency payments chain, third parties such as card acquirers, card networks, infrastructure providers and banks (and their applicable fees) are removed.”
Taking payments off the card rails would also increase Afterpay’s profitability as it currently pays scheme fees as the merchant-of-record for the transactions it processes.
It has proposed a government-industry task force be formed to develop a “best-in-class regulatory framework for cryptocurrencies and digital assets more broadly”.
Afterpay said policymakers should consider “if regulatory instruments are required for stablecoin issuers to have transparent and adequate prudential reserve holdings, consumer-focused data protections and fair and appealable processes in place regarding account blacklisting.
“The objective of this being to provide stablecoin purchasers with greater protections over the value of their asset, while also driving innovation and Australia’s position as a global fintech leader.”
The head of payments at the Reserve Bank, Tony Richards, told the same committee on August 27 that the RBA is warming to creating a wholesale market digital version of the Australian dollar to facilitate the movement of assets on blockchain. He said the RBA sees “the possibility a case could emerge for a wholesale central bank digital currency”.
For privately created stablecoins, Dr Richards backed regulation, given “we would consider that it’s the public sector’s responsibility to make sure that they are safe and secure”.
“So, when and if you see the emergence of stablecoins that could present a systemic risk to the economy, I think you’d see regulation of those accordingly,” Dr Richards said.
Without an official response, Afterpay suggested that private players – potentially in a foreign jurisdiction – would step in and “mint, market and popularise” an Australian dollar-backed stablecoin outside the regulatory perimeter.
Major banks have shunned cryptocurrency and have refused to bank most crypto businesses, citing concerns about money laundering risk. A major theme of the committee’s hearings on Wednesday will be whether such blanket refusals are anti-competitive.
But Afterpay has highlighted the transparency benefits from blockchain, saying its “decentralised, transparent and secure nature creates inherent consumer protection benefits, namely freedom from costs created by the involvement of third parties, unprecedented security and trust in the indelibility and immutability of transactions, and an open and transparent ledger immune to manipulation and censorship”.
It recognises “novel risks” for consumers including the loss of digital keys, burned transactions and complexity but pointed to distributed ledger technology’s ability to “deliver significant benefits to global financial systems and provide consumers with easy and fair access to financial services”.