RBA hasn’t been worried by “limited” Bitcoin risk



news A research paper produced internally by the Reserve Bank of Australia 12 months ago has shown the nation’s central bank was at that stage not concerned about the potential impact of the Bitcoin crypto-currency on Australia’s financial system, due to what it saw as the “limited” impact of a “niche product”.

Bitcoin is a peer to peer payment system which has taken the world by storm since it was first introduced as open source software in 2009 by a shadowy developer or group of developers named Satoshi Nakamoto. It is increasingly being used for Internet transactions as it is more flexible in some ways than other forms of currency.

Over the past month, the Reserve Bank of Australia, which is responsible for setting central monetary policy and ensuring the stability of Australia’s financial system, published a document through its Freedom of Information log which represented an analysis of Bitcoin put together for the bank’s May 2013 meeting of its board by its payments policy department.

At that time, the report stated, the bank considered the risks of Bitcoin and other crypto-currencies to the stability of Australia’s financial system to be quite minimal. The report is available online in PDF format. It appears to have been first reported by the Financial Review newspaper.

“Risks to the payments system (and the economy more generally) are currently limited since Bitcoin remains a niche product, particularly in Australia,” the bank wrote in the document.

The document points out that there were at that stage no Bitcoin exchanges located in Australia, and very few Australian merchants accepted Bitcoins (or any other virtual currency) as a payment method for their goods.

“The volume of Bitcoins purchased with or sold for Australian dollars at [Bitcoin exchange] Mt.Gox is also relatively small, at an average daily turnover of 1 710 Bitcoin units (around A$100 000 at the average price) during 2013,” the bank wrote. “By contrast, the average daily turnover for US dollar purchase/sales is 86,000 Bitcoin units (around US$6.6 million at the average price).”

The bank acknowledged that Bitcoin had several advantages over traditional currencies, such as low fees and fast transaction times. However, it noted that these advantages were “not themselves sufficient for the wide adoption of Bitcoin as a payment system”.

“From a competition perspective, network externalities mean that users are likely to continue using the more established payment systems (and indeed, national currencies),” the bank wrote. “These externalities make it difficult for Bitcoin to gain wide adoption.” The bank also believed that slow uptake was likely to be compounded by the fact that consumer confidence in the encryption technology underpinning Bitcoin and other crypto-currencies was not likely to be strong yet, given the new nature of the technology.

Since the bank’s research was conducted, this factor has played out in the real world, with the most significant example being the collapse of the dominant Mt.Gox Bitcoin exchange in Japan, which has left many early adopters of Bitcoin out of pocket.

The RBA did note, however, that if Bitcoin or another similar systemdid become more widely adopted, some risks would eventuate to Australia’s current payment system. These would be:

  • A reduced ability to implement monetary policy because of loss of control over the money and credit creation process
  • A fall in seigniorage revenue if virtual currencies begin to replace physical cash at the point of sale.
  • As with any other asset class, a rush to liquidate holdings of bitcoins or bitcoin- denominated assets may have implications for the stability of the financial system. This rush to liquidate could occur for reasons affecting the financial market generally (e.g. a period of deleveraging, if investors have borrowed to buy bitcoins), or because of a loss of confidence in the core Bitcoin system or large third-party service providers.

In addition, the RBA noted that the Australian Transaction Reports and Analysis Centre (AUSTRAC) had stated in a recent report that ‘digital currencies that are not backed, either directly or indirectly, by precious metal or bullion are not regulated by the AML/CTF Act’.

The bank also noted that consumer protection is also an issue with Bitcoin. “The potential anonymity of Bitcoin users and the irrevocability of transactions after confirmation limit consumers’ (or investors’) avenues for recourse against fraudulent merchants or other end-users,” the bank wrote. “The conduct of intermediaries between users and exchanges may also give rise to consumer protection issues.”

In the end, the bank appeared in May 2013 to be interested in Bitcoin, but not overly concerned by the phenomenon. The report concluded:

“Bitcoin can be characterised as both an alternative to national currencies and as a payment system. As a payment system, Bitcoin appears to involve an inefficient use of resources, but has some benefits for end-users that encourage its use over more established payment systems (low fees, anonymity, speed, irrevocability). The system also has the potential to pose a number of risks and concerns for policymakers. Although the international community has recently given some consideration to Bitcoin’s regulatory status, the focus has been on AML/CFT and consumer protection aspects instead of issues more typically associated with central banks. Given that it has not been widely traded or adopted, risks and policy concerns are currently limited in the Australian context.”

However, despite the RBA’s lack of concern about Bitcoin in May 2013, there are indications that if the bank was to produce the same research note now, it might find more reason for concern, based on a large amount of local news in the space.

In late April, following similar moves internationally, the Australian Taxation Office revealed it would hold a review into how to tax Bitcoin and other crypto-currencies. National Australia Bank in April closed accounts of customers who were engaged in exchanging crypto-currencies, seeking to limit its exposure to any Bitcoin-related risk, and AUSTRAC noted in February that it had started tracking every conversion between Bitcoins and Australian dollars.

In March a Bitcoin mining and trading company (digitalBTC) listed on the Australian Stock Exchange, and just this month experienced Australian investor Domenic Carosa led the establishment of a US$30 million investment fund which will directly invest in companies that are leveraging services based in Bitcoin and other crypto-currencies.

“Bitcoin has the potential to dramatically alter the manner in which transactions take place across the globe and the power to create new modes of financial connectivity, seamlessly across borders,” Carosa said at the time.

The RBA was right in May 2013 that Bitcoin only poses a limited threat to Australia’s financial ecosystem. But with Bitcoin usage exploding in May 2014 and a whole heap of new organisations being set up locally to jump on the bandwagon (including even ASX-listed companies), it looks as though the bank would have a lot more reason to be concerned about Bitcoin now.

I suspect that Bitcoin will not be the crypto-currency panacea that so many people are looking for. We are right at the dawn of this technology, and the Mt.Gox disaster has already shown how immature the market for these types of currencies is.

However, there is absolutely no doubt that Bitcoin is the harbinger of much bigger and more pervasive things. We will see many new crypto-currencies born over the next few years, and eventually someone will get it 100 percent right. This is the nature of innovation. We will definitely see a day where crypto-currencies start to rival traditional currencies in terms of their influence, and I personally don’t think that day is too far off. How long will it be before the Commonwealth Bank starts to trade in Bitcoin? I’m not sure … but I suspect not long.

Image credit: antanacoins, Creative Commons


  1. They will only completely rival traditional currencies once you can pay your taxes with them. Until then they will only be for speculation or hiding ilicit transactions.

    • You can’t pay your Australian taxes in USD, therefore the United States Dollar is only useful for speculation and illicit transactions.

      (See how your logic works?)

  2. I suspect Bitcoin has peaked and will, in a while, start crumbling to a rump of libertarian users.

    Good riddance to them.

    More interesting is what others will do with the techniques bitcoin has brought to light. The ability to move currency at little cost between countries is incredibly valuable and will help those who are moving to other countries for work.

    ….it also means those of us who use keyboards for a living will increasingly be working in a global market.

  3. Bitcoin is like Napster; the start of something bigger, but ultimately doomed to be superseded

    • Except bitcoin has so far managed to survive 2 bubbles, some minor protocol flaws and competition from hundreds of other coins.

      Precisely what it would take for it to be superceded is a complete collapse of the technology underpinning it. It would have to be complete and utter collapse mind you; not just a protocol flaw.

      I don’t see it happening, and I haven’t seen anyone that actually understands the coin and how it works come up with an explanation of precisely what it would take for Bitcoin to be “replaced”. But I have seen plenty of people calling the “death” of Bitcoin. (Not one of them has been right yet!)

  4. The Bitcoin ATM’s in Sydney are interesting… This makes it feel a lot less Niche to me, also reminds me of Almost Human.

    But after photo ID, palm print and a photo from the built in camera, I feel like just using them will place you on the watch list of some 3 letter agency for a 5 letter program…

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