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In its latest Financial Stability Review, the central bank says digital currencies have similar hazards to other payment systems but with more downside potential.
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Widespread use of crypto increases risk of disruption, says RBA
12 October 2022
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11 minute read
More widespread use of crypto for everyday payments will increase risks for merchants and customers, says the Reserve Bank of Australia.
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In its Financial Stability Review for October, the bank focuses on the emerging risks from cryptocurrency assets and says they generate similar threats to other payment systems (such as credit, liquidity, operational, and settlement risks) but with greater potential for disaster.
“The extent to which these issues pose risks for financial stability would depend on the scale and nature of the system,” the RBA said.
“However, in an extreme case, it could have the potential to disrupt critical financial services or threaten confidence in financial institutions.”
These potential risks are on the radar of regulators in Australia and globally, who are in the process of charting out regulatory frameworks that would apply to crypto-assets with payment stablecoins a particular focus.
Stablecoins are crypto assets that aim to minimise price volatility against another asset or a basket of assets, commonly a fiat currency like the US dollar or a common store of value like gold.
The RBA’s warning came ahead of the Accountants Daily Strategy Day 2022 later this year, where speakers will outline the obligations for accountants and their clients who are crypto investors, and provide insight into ATO requirements and how crypto is currently being taxed in Australia.
Crypto assets are currently not widely used for everyday payments and the RBA said they were unsuitable in many cases due to high fees, capacity and speed constraints imposed by the underlying technology, and volatility (in the case of unbacked crypto assets).
“However, there is considerable interest globally in the potential for stablecoins to enhance the efficiency of a range of payment and other financial services,” the RBA said.
Crypto risks could spill over into financial system
The Financial Stability Review also warned that as linkages between the crypto ecosystem and the traditional finance system grow, risks could “spill over” to upset other parts of the financial system.
While there have been recent episodes of stress in crypto asset markets, the impacts did not spread to other parts of the financial system because linkages between crypto assets and traditional financial markets remain small, the RBA noted.
However, linkages have grown in recent years due to greater involvement from traditional investors, banks, and other financial institutions.
“The rapid growth of asset-backed stablecoins has also introduced direct linkages between crypto assets and financial asset markets,” the RBA said.
“Continued growth and stronger linkages could see financial stability risks arise from a number of sources in the future.”
Crypto regulation in the works
Central banks, domestic authorities, and international bodies are endeavouring to understand the financial stability risks associated with the crypto ecosystem (including identifying gaps in existing supervisory and regulatory frameworks and the infrastructure needed to build resilience against risks) and the need for regulatory adjustments, according to the RBA.
“Work is underway by policymakers to consider what adjustments are needed to current regulatory frameworks to enable effective oversight of the risks presented by crypto asset-related activities,” it said.
Regulators are working to improve consumer protections around crypto assets, including by targeting misleading or fraudulent advertising by crypto market operators such as exchanges and lending platforms, the RBA said.
In addition, more jurisdictions, including Australia, are consulting on or in the process of developing domestic regulation, it added.
“Furthermore, regulators are working to ensure compliance of crypto activities with existing legislation,” the central bank said.
“One focus is on identifying the extent to which crypto assets and intermediaries share common features with the traditional financial system, with the goal of producing ‘technology neutral’ regulation (i.e., same activity, same risk, same regulation).”
The federal government recently said it will take steps to tighten crypto regulation by starting with “token mapping” analysis, which would identify how crypto and related services should be regulated by creating a uniform set of terms for the assets.
He lamented that consumers need more protection but regulation has struggled to keep pace with developments in the crypto space.
In a recent opinion piece, GBG regional general manager at Australia and New Zealand Carol Chris noted that Australia is leading the way to a licensing framework for digital assets, and warned crypto service providers to prepare for crypto regulation, or risk becoming non-compliant, losing its reputation, or being unable to operate at all.
To hear more about the digital asset revolution, the regulatory crackdown on cryptocurrency and its tax implications, come along to the Accountants Daily Strategy Day 2022.
It will be held on 29 November at Grand Hyatt Melbourne and 1 December at Parkroyal Parramatta.
Click here to book your tickets and don’t miss out!
For more information including agenda and speakers, click here.
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