Stablecoins and other cryptocurrencies cannot be used as a substitute for central bank money and are primarily speculative investments, according to Reserve Bank (RBNZ) Governor Adrian Orr.
New Zealand’s top central banker made the comments in a briefing to Parliament’s finance and expenditure committee on Monday afternoon.
Committee Chairman and National Party MP Stuart Smith asked whether the RBNZ was concerned independent digital currencies could replace fiat money.
Orr said they were “critically concerned” about people relying too heavily on stablecoins, bitcoin, and other “purported alternatives” to central bank money.
“Concepts such as bitcoin; it’s neither a means of exchange, it's not a store of value, and it's not a unit of account. Yet people try to use it as that,” he told the committee.
While there were other purposes for cryptocurrencies, they were not a “substitute for, or even a compliment to” fiat money backed by a central bank.
So-called stablecoins were an “oxymoron” as they were only as strong as the balance sheet of whoever is offering the coin, and their willingness to maintain it throughout time.
Orr said fiat currencies, such as the New Zealand dollar, had backing from Parliament and the RBNZ, who together could ensure the credibility of the currency across generations.
Stablecoins are backed by a specified asset or basket of assets used to maintain a stable value against that asset. This is usually a fiat currency, such as the US dollar. This makes stablecoins different from cryptoassets/cryptocurrencies such as bitcoin, which tend not to have assets as backing and so, are more volatile. Stablecoins are often used for buying or selling cryptoassets, and making cross-border payments.
Stablecoin providers may take fiat money in exchange for a crypto coin and reap a return by parking that cash in interest earning investments.
Mainstream banks and other financial institutions are subject to heavy regulations and disclosure requirements that help to protect consumers from losses. Stablecoin operators tend to be unregulated and much less transparent about their balance sheets.
The two largest stable coins are Tether and USDC with US$96 billion and US$28 billion in circulation, according to CoinMarketCap. The total value of Bitcoin is almost US$1 trillion.
Last year, New Zealand firm EasyCrypto launched its own NZ dollar denominated stablecoin which is backed “1-for-1” by fiat dollars in a local bank and will be audited by E&Y “once fully operational.
A research paper issued by the Bank for International Settlements, the central banks' bank, late last year found of 68 stablecoins 'pegged' to the value of a specific asset, none had been able to maintain parity with their pegs at all times.
EasyCrypto shoots back
In a recent blog post, Janine Grainger, founder of Easy Crypto, hit back at stablecoin critics such as Sam Stubbs’ article in The Post.
“As is typical of any new innovation, stablecoins have found themselves under the scrutiny of well-known commentators, with some questioning their legitimacy and value,” she wrote.
Grainger said the finance industry was “on the brink of a seismic shift” as assets, transactions, and financial instruments turned digital.
Stablecoins were at the forefront of this transformation and were acting as a bridge between traditional currencies and the emerging digital realm.
“They have gained popularity for their ability to combine the features of crypto—rapid transaction processing, security and efficiency—with the trust and reliability of an underlying ‘real world’ asset”.
Central bank digital currencies could play this role in the future but are still some years away from implementation.
Grainger said it was a “myth” that stablecoins weren’t regulated. Many reputable projects had regular audits to verify the digital assets were backed by fiat ones.
However, stablecoins are not subject to the same formal regulations as retail banks and other deposit taking institutions.
Grainger said the use of stablecoins and decentralised finance in general was still in its infancy.
“Dismissing stablecoins outright is an obvious mistake given their potential within the evolving global financial landscape”.
Cash is king
The RBNZ is working on a central bank digital currency, which would be intended to use some of the technological advantages of digital currencies without the risks.
The RBNZ expects to have a high level design ready by the end of 2024 and will then decide whether to proceed with the project. Even if it did go ahead, the new form of cash would be “several years” away from being introduced in New Zealand.
Meanwhile, the RBNZ is working to ensure physical cash remains available and easy to access across the country, even as its use in transactions continues to decline.
Orr told the Finance and Expenditure Committee that it would always play an important role in society and the economy.
“Physical cash is being used less and less. So, we are going to have less cash but not be cashless,” he said.
The importance of physical cash was demonstrated during Cyclone Gabrielle when electronic systems were knocked offline and banknotes became the only means of exchange.
Other reasons for keeping cash could be their use in cultural practices, and for maintaining privacy in some transactions.
Orr said the central bank was working on “more efficient and effective ways of circulating cash” as its use declined and retail banks stopped supplying cash to some communities.
The central bank has enlisted some small towns, which have been “debanked” for a cash circulation trial which aims to keep cash available even in remote communities.
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