Banks like NAB and ANZ are scrambling to catchup with tech giants by creating their own crypto assets like stable coins

“Commercial banks are the issuers of most of what we currently consider as money – that is, deposits in safe and highly regulated financial institutions,” says Tony Richards, the former head of payments policy at the Reserve Bank of Australia.

“If stablecoins will be widely used as a form of money in the future, there is every reason to think that commercial banks could be significant issuers of those claims.”

Digital versions of cash

Central banks are also working to create digital versions of cash, known as central bank digital currencies (CBDCs), which could also enable cheaper and faster commerce over blockchain systems, while allowing governments to keep control of money.

Alongside the new Digital Finance Cooperative Research Centre, the RBA plans to soon announce details of a pilot program to create an eAUD to experiment around new business models for a web3 economy.

The creation of stablecoins by banks is remarkable given how horrendous last year was for the broader cryptocurrency sector, culminating in the collapse of digital currency exchange FTX. There was also the failure of another stablecoin, terra-luna, which was not backed by fiat money but volatile cryptocurrencies.

Lessons from the rout are emerging. One is it may be better for the financial system if stablecoins are offered by regulated and trusted banks, so users can be confident they are backed one-to-one by money in a bank account, guaranteed by the government.

Financial services is not the only industry slow to respond to technological tsunamis. In the music world, record companies watched as computers allowed CDs to be burnt and shared on internet networks. However, the industry finally realised it could give customers a legitimate, and safe way to download music, striking deals with the likes of Apple to open up a new streaming industry, allowing Sweden’s Spotify to emerge from the chaos of Pirate Bay.

The Napster moment for banks came in June 2019, when Facebook announced an ambitious project to create a stablecoin, Libra. The plan was to allow users of its WhatsApp or Messenger apps to send money for free and instantly, just like they were sending a text message.

Ultimately, the project died because of Facebook’s failure to recover trust from its massive privacy breaches in 2018 and as global regulators questioned whether big technology companies should be trusted to create digital coins.

But since then, many other tech companies have looked to step into the breach, from big players like Circle and Tether, which operate the largest $US stablecoins, to the thousands of smaller crypto players.

“There are new, specialised fintech companies already issuing stablecoins, mostly US dollar ones, that are largely being used in the trading of crypto assets,” says Dr Richards, now chairman of the Digital Finance CRC’s CBDC steering committee.

“Then there are the large technology companies which are household names – say Facebook or Google – which have large user bases, and could potentially launch retail stablecoins that might scale up very quickly.”

Tokenised assets

Part of the driver of the banks’ response is a desire to participate in emerging markets for “tokenised” assets, extending beyond stablecoins and speculative crypto coins.

Hard assets such as commodities and even property are being digitised to create liquidity in previously illiquid markets. Boston Consulting Group said last year the market for tokenised assets on blockchains could reach $US16 trillion ($22.9 trillion) by the end of this decade. Stablecoins and central bank digital currencies are required to facilitate this.

Strategic challenge for banks

“There will be increasing tokenisation of all sorts of assets to facilitate trading of those assets, both in traditional asset classes and new ones that are not tradeable right now,” Dr Richards says. “Bringing liquidity to new asset classes will enable new investment products and new risk management opportunities.”

The move by NAB and ANZ to mint stablecoins raises strategic questions for the other two big banks. Commonwealth Bank’s crypto strategy is uncertain after a rare strategic error last year under chief executive Matt Comyn. The bank then tried to facilitate retail customer access to speculative crypto coins through its banking app, a move that ASIC now prevents given the volatility and potential to expose customers to big losses. It remains to be seen whether CBA will go down the stablecoin route.

Westpac, meanwhile, also minted a stablecoin last year as part of an internal pilot to prove the technology. But unlike NAB and ANZ, it has not decided whether to take it to market.

As regulators and governments scramble to determine the most appropriate framework for banks – and non-banks – to create stablecoins, there is hope the NAB and ANZ move will provide support to developers still licking their wounds after the travails of last year.

“The persistent adoption of crypto technology by financial institutions like ANZ and now NAB has the potential to create significant efficiencies in the financial system, such as instant settlement, atomic swaps, smart contracts and other programmatic potential,” says Jonathon Miller, managing director of Kraken, a cryptocurrency exchange.

“It is an explicit recognition of the competitive advantage over traditional payment systems, and we expect this trend to continue. Inevitably it will evolve to include the adoption of various other cryptocurrencies and tokens for increasing use cases in the Australian economy.”

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