The Reserve Bank of Australia doesn’t expect cryptocurrencies to be adopted for widespread transactional use.
The RBA’s Head of Payments, Tony Richards, also discussed the potential regulatory response for Initial Coin Offerings (ICOs) and the use of digital currencies in illegal transactions in a speech to the House of Representatives standing committee on tax and revenue on Friday.
So far, the regulatory response to cryptocurrencies has been more focused on ICOs and derivative investment products such as exchange traded funds (ETFs), rather than payment transactions.
“The use of bitcoin and other digital currencies as an actual method of payment remains relatively limited in Australia, as elsewhere,” Richards said.
“From the Bank’s payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues.”
The comments follow an October research report by Bank of America Merril Lynch (BAML), which argued Bitcoin’s incapacity to scale up its transaction capabilities from a cost and speed perspective meant it would struggle to compete with traditional payment platforms.
While Richards doesn’t expect wide-spread transactional use, he noted the rise in price of major cryptocurrencies such as Bitcoin and Ether and said the moves were largely due to speculative demand.
He added that speculative activity is even more pronounced in “the use of digital currencies as the means of participation in Initial Coin Offerings”.
In September, the Australian Securities & Investments Commission (ASIC) released a guidance paper which set out a list of parameters in order to define what type of ICOs would be regarded as a Managed Investment Scheme (MIS), and therefore subject to the Corporations Act.
Based on the guidelines in the report, it appears that the majority of Australian ICOs will be subject to registration, licensing and disclosure requirements in accordance with the Corporations Act.
In a report on cryptocurrencies over the weekend, research firm Bernstein said regulators will play catch-up to ICOs.
“Regulation always lags technology and they play pendulum with each other till they reach some form of equilibrium”, Bernstein said.
At the same time, the Bernstein analysts expressed some optimism that ICOs are providing a viable alternative to venture capital funding.
“Protocol development is being funded through token sales at an unprecedented scale,” the analysts said.
“Once the railroads are laid, the applications will emerge but until then speculation is providing the start-up capital.”
The RBA’s Richards said from a payments perspective, the decentralised technology behind cryptocurrencies meant regulation of those systems “was unlikely to be effective”.
Instead, he said authorities were focused on the links between cryptocurrency and traditional payment systems — in other words, the gateways for money to go into crypto and then be converted back to traditional fiat currency.
Typically, fiat currencies are converted into cryptocurrencies such as Bitcoin and Ethereum, and funds are transferred from there into ICOs. Currently, accepting fiat money directly for a new ICO carries with it potential legal risks.
Richards noted the move by Chinese regulators to ban cryptocurrency exchanges earlier this year, but didn’t discuss any pending regulation in Australia.
He added that cryptocurrencies would have to remain in the sights on tax authorities, due to the prevalence of their use in illegal transactions.
For their part, Bernstein’s analysts were more dismissive of the use of cryptos in criminal activity.
“Yes, the demand could be from illegal businesses or money launderers, but those problems exist in the world without Bitcoin,” they said.
While regulators form their response to the rise in popularity of digital currency, demand in the new market for cryptos unabated. A short time ago, Bitcoin was trading back near all-time highs above $US6,000.