It is a form of privately issued currency, in digital form. Being a digital asset, crypto-currency is not usually held or transacted in physical form. Spending takes the form of a transfer from one person’s digital (or virtual) wallet to another person’s digital (virtual) wallet. Crypto-currencies are not widely accepted as a means of payment in Australia because they are not legal tender.
The word crypto-currency includes the word ‘crypto’, which is derived from the Greek word kryptos, which means hidden. This explains the meaning of the word ‘Cryptography‘, which refers to the use of a secure communication channel, which allows messages to be viewed only by the sender and intended recipient. This is achieved by converting plain text into unintelligible text and vice-versa. A message that can only be read by intended recipients is said to be encrypted and requires a key or password to unencrypt the message. In other words, the data is transmitted in a form that only those for whom it is intended can read and process it. This technology is known as blockchain, which maintains a secure, tamper-resistant record of transactions and keeps track of who owns what, and when they owned it.
Blockchain is a complex system that enables transactions to be processed and recorded securely in a way that it is impossible to modify the information once it is within the system. It is a digital ledger or a database of transactions that is distributed across an entire network of participating computer systems. It keeps track of who owns what and prevents people from tampering with the information to gain a benefit dishonestly. This makes it ideal to administer and support the distribution of digital currencies by preventing people from modifying their holdings to gain currency to which they are not entitled. The creation of blockchain technology addresses the problem of people making copies of their holding and attempting to spend it multiple times.
There is clear evidence that the Reserve Bank of Australia (RBA) is contemplating the application of a retail form of digital currency. In an address to the Australian Payments Network Summit on 9 December 2021, RBA governor Philip Lowe, in a speech titled Payments: the future?, outlined how digital wallets are replacing physical wallets and that he expects these digital wallets to eventually provide access to digital forms of money. However, he added that how far we go in this direction is yet to be determined. He did state that the RBA is open to the possibility of a form of retail central bank digital currency (CBDC) – or an eAUD. He went on to say one possibility is that the digital currency is issued by, and backed by, the RBA, just as the RBA currently issues Australian dollar banknotes.
Meanwhile, Governor Lowe observed the value of ATM withdrawals over the past six months was about 30% lower than the comparable period three years ago. He then moved on to the regulatory challenges posed by rapidly advancing technology in the payments system and the need for regulatory oversight that encourages innovation, while ensuring the payments system is secure and stable.
Governor Lowe referred to the RBA’s interest in the Digital Finance Cooperative Research Centre, administered by the Ministry of Industry, Science and Technology. The RBA is working with the Digital Finance CRC in support of the evolution of payments in Australia. The Digital Finance CRC comprises more than 20 organisations in the finance industry, such as fintechs and major banks, including the Reserve Bank. Its purpose is to develop and exploit the opportunities arising from the digitisation of assets so they can be traded and exchanged directly and in real-time between any individual or organisation.
In his closing remarks, Governor Lowe noted that the Council of Financial Regulators is reviewing the regulatory treatment of different types of crypto assets, with the objective of establishing a regulatory framework that better accommodates new digital currencies.
The resources and cerebral rigour in the form of research, analysis and policy work currently being applied to the digital currency space by the RBA and government regulatory authorities, is ongoing and considerable. It is also significant that the Commonwealth Bank has announced plans to offer customers the opportunity to buy, sell and hold crypto assets, including crypto-currency, through a Commonwealth Bank app.
The future of payments is evolving to include a digital currency that provides a safe, trustworthy form of money. The RBA has stated its intention to continue working with the private sector to ensure that it remains abreast of innovations in the payments system. The Bank acknowledges there remains significant work to be done with financial regulators and the Parliament to create a fit-for-purpose regulatory framework for digital assets.
The development of this regulatory framework and the evolution of crypto-currency as a payment methodology, should be a focus of forward-thinking Australians.