Philip Lowe calls Bitcoin a 'speculative mania'

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Australia’s central bank has no plans to issue digitised Australian dollars based on blockchain technology anytime soon, RBA Governor Philip Lowe says.

In a speech this morning titled “An eAUD”?, Lowe also said cryptocurrencies had emerged as another payment option, although recent price-action in the sector was fueled more by speculation.

Here’s Lowe on Bitcoin:

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.

When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions.

So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.

Lowe’s speech follows comments by ECB board member Ewald Nowotny earlier this week, who said the European Union needs to consider regulating Bitcoin.

In considering other changes to the central bank’s functions in the digital era, Lowe also discussed the issuance of purely electronic bank notes.

“The easiest case to think about is a form of electronic Australian dollar banknotes,” Lowe said.

“Such banknotes could coexist with the electronic account-to-account-based payments system operated by the banks, just as polymer banknotes coexist with the electronic systems today.”

Lowe said electronic bank notes could theoretically be issued by private banks, although at this stage he considers the central bank is still best suited for that role.

He also noted there were significant design issues to work through to remove risks to financial system stability in times of stress.

In such a scenario, “it is likely that the process of switching from commercial bank deposits to digital banknotes would be easier than switching to physical banknotes,” Lowe said.

“In other words, it might be easier to run on the banking system. This could have adverse implications for financial stability.”

The other key change discussed by Lowe was the introduction of a payments system via the issuance of Australian dollars in the form of tokens that could be settled on a decentralised ledger.

“The tokens could be exchanged among members of a private, permissioned distributed ledger, separate from the RBA’s Real-time Gross Settlement (RTGS) system, but with mechanisms for the tokens to be exchanged for central bank deposits when required,” Lowe said.

However, the RBA still looks to be in the relatively early stages of testing the merits of such a system.

Lowe said the bank needs to better understand how such a system would increase efficiencies and reduce risk.

“To help understand these various issues, Reserve Bank staff have been liaising closely with fintechs and financial institutions,” Lowe said.

“We also regularly talk with other central banks that have tested distributed ledger technologies in some related contexts.”

“We are also currently working with some external entities to observe or participate in proof-of-concepts similar to those of other central banks. So this area remains a work in progress for us.”

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