Transcript of Question & Answer Session Cryptocurrencies and Distributed Ledger Technology

I just want to touch on, one of the negatives I think that the RBA is obviously looking at is the scalability issues, obviously because of the first generation asset. We've got second and third generation that aren't using a lot of power, that are much faster [unclear] which allows a lot more through. It's obviously really young, the technology as well. [unclear] young asset, it's just gone through a massive bubble. Where do you see things over the next couple of years? Although your talk was obviously focussed on Bitcoin, I'm sure a lot of your researchers have sort of looked at well where is the technology moving and is it getting into an area that is more attractive as an alternative payment system.

So the question is, I think, Bitcoin is a first generation payment system, cryptocurrency. Are there subsequent generations that might be able to solve some of these problems? I think the answer is that there is a lot of work going on in these other areas. But the fact remains that Bitcoin is still, by a significant margin, the largest of the cryptocurrencies out there. I think your question highlighted, in some respects, the idea that there are actually thousands of cryptocurrencies that have been created out there. Most of them have got zero use, close to zero …

[unclear]

Most of them have got very little use. But it highlights the fact that any cryptocurrency protocol is very easily replicated and potentially improved upon. So one implication of that is that any particular cryptocurrency that has got some particular value now, it might even be quite highly valued now, the value could easily go to zero when and if users move on to other cryptocurrencies. I think that's one thing for people to note in terms of the risk around cryptocurrencies is that the value of any particular one could go to zero. It will be interesting to see if the scalability problems can be solved, but I would also go back to the point that the existing payments system is offering pretty good services currently and payments through the existing rails are getting better all the time. Australian households seem to be pretty happy with the type of payments services they are getting from financial institutions. So you have to ask yourself is there a huge gap there for cryptocurrencies to fill? To date, it seems like usage of cryptocurrencies hasn't really taken off.

Just a reminder to state your name and affiliation please when asking a question.

Jeff [unclear] Tony, thank you for a very informative speech. My question is related to the last one, I think. When you were talking about cryptocurrencies, a lot of the problems you saw related to particularly around speculative bubble [unclear], less so blockchain technology. So my question is, not about cryptocurrency, but about the use of the technology from across the payment systems and other forms of payment. When you talked about that towards the end of the presentation, you said, if I heard you correctly, you think there is limited scope for its use in a – whatever the jargon is – on a non-trusted basis, in other words without some centralised clearing mechanism, but why is that? Could you just fill me out a little bit on why you can't see it's use on cross-border payments, not cryptocurrency, just the blockchain technology. It's a more efficient payment system.

If you thought it was important to set up a payment system that didn't have a trusted central party, then something like the Bitcoin system might make sense because you've got to find a way to allow two parties who don't trust each other to transact. You've got to solve what's called the double-spending problem, it's that someone has some funds and they give them to lots of different people. And Bitcoin solves the double-spending problem, but it does so in a way that is not particularly efficient, in terms of it's not particularly quick.

So then the question is, why would you want to set up a system that didn't have a trusted central party? Or more to the point, if you can have a trusted central party, surely that's more efficient. Again, the example of VisaNet, for example, which has got a much larger throughput than the Bitcoin system. And payment systems like that, as they need to evolve, as they need to provide better services to their users, having a central party you're able to bring about improvements. The Reserve Bank, for example, we run the system for exchange settlement account balances and my understanding is that Australian banks are very happy with that service.

So I think it gets down to the circumstances where you would want to run something without a central party and where you've got parties that just don't trust each other at all -- there's probably not very many of them. If you can do something with a trusted central party who can run a centralised ledger or a shared permissioned ledger, it's probably going to be more efficient than having a trust-less ledger where you need lots of different entities to do this costly verification work.

Just down here behind the camera.

Natalie [unclear] AUSTRAC in reference to cryptocurrency said that regulation will help strengthen public and consumer confidence in the sector so that [unclear 10:20] to that idea of protecting citizens, protecting the financial services sector but also growing and incorporating that technology, how does the Reserve Bank when communicating with AUSTRAC and other official bodies on that kind of mandate and on that kind of outlook when it comes to cryptocurrencies?

So the question is how the Reserve Bank interacts with other entities, including AUSTRAC. The Bank interacts closely with the other regulators in this area, particularly ASIC, but also APRA, and with the Treasury and we have some interactions with AUSTRAC. The AUSTRAC regulation that you mentioned is for money laundering purposes. It's to reduce that particular risk of money laundering. It doesn't speak to the question of market risk -- that is, the value of cryptocurrencies can fluctuate wildly. Nor does it speak to the intermediary risks -- the fact is that there have been a lot of hacks of cryptocurrency wallets and intermediaries. All outside Australia, I would note. So there are a lot of risks there. The only regulation really, to date, has been in terms of AML and there hasn't been any regulation that I'm aware of in any country that speaks to the question of investor protection or anything prudential.

[off microphone]

I might largely pass on the question of the effect on short-term interest rates because I think the use of cryptocurrencies in Australia is just so trivial that it doesn't have any effect and I think we can assume that will be the case for a long time.

The question of disintermediation that's allowed by the use of distributed ledgers? I suppose you can get disintermediation in the sense of it's possible that things like crowdfunding are easier in a world of distributed ledgers. It still doesn't necessarily follow that you get trust-less blockchains in those environments. You probably have some sort of a party playing a coordinating role. But my point about inefficiencies in some existing processes, such as cross-border transactions. I think the issue there is that you've got a lot of parties involved, there are a lot of steps in the process and you've got a lot of parties that are, in that case, in different countries. And it's just been incredibly difficult to make those processes more efficient when there's no central entity that can sort of say – ‘Let's improve the system of correspondent banking or trade financing’.

But the arrival of distributed ledger technology has, I think, highlighted the inefficiencies in that process and is actually causing people to come forward and say, "We want to make this process more efficient." I still think you'll typically have some sort of a central entity in there guiding that process, but you may well have a new ledger -- a permissioned ledger. So you've got lots of people able to write to different parts of the ledger and having the ability to see those parts of the ledger that are relevant to them. But you've probably got a verification method that is unlikely to be proof-of-work, it's more likely to be proof-of-stake or something like that, where you got parties that trust each other. So absolutely, distributed ledger technology has got big implications for the future, but trust-less blockchain systems might not.

Right there in the back.

[off microphone]

Right. So the question is, could cryptocurrencies gain more traction in some countries that have got less developed financial infrastructure? What we have seen is that countries with less developed financial infrastructure are more prone to disruption. So for example, in Kenya you've seen the rise of M-Pesa, but that was a population that was significantly unbanked. So what you've had was the introduction of the new payment system that was basically run by the mobile network operator. I'm not sure that I would say that it will often be the case that there are countries that have got a low level of financial intermediation but where cryptocurrencies could thrive. With cryptocurrencies, unless people really want to transact and hold these cryptocurrencies, then they still have to get in and out of their domestic currency.

So I think there's still a role for domestic currencies in all economies. There are a few countries in the world that don't have trust in their domestic currencies, so there the US dollar is used. The idea that cryptocurrency usage could thrive in other countries and could therefore take-off in countries that have got a very high level of … We've got a very highly banked population. I find it unlikely that the Australian banking system would not be able to offer payment services to Australian consumers, businesses and governments that would mean those entities would be looking at cryptocurrencies instead.

[off microphone]

In terms of particular countries, there are reports of cryptocurrency launches in a few lower- and middle-income countries. I think in many cases, the reports of their launches are somewhat overstated. The Venezuelan case is an interesting one, I think. I think it's largely still on the drawing board and I think it's too soon to declare that one a victory, but it does highlight the fact that if you're in a country that doesn't have a credible currency then people might start to look for other ones. Whether or not they're cryptocurrencies or whether they're something like the US dollar is another issue. But we in Australia have got a perfectly credible currency. It's called the Australian dollar. We've had low and stable inflation for at least 25 years and the likelihood that there'd be significant adoption of an alternative currency seems pretty low.

[Off microphone] You mentioned near the end that [unclear] commercial banks. What are the key ingredients to [unclear].

So the question was what are we looking for in innovations, I suppose, in business to business use of cryptocurrencies in a world where you've seen innovation in the form of the NPP and the ASX introducing a distributed ledger solution for its CHESS clearing and settlement system? I think this is one where we've got to let the private sector experiment. There are banks out there that are talking about doing proofs of concept or in fact have done some proofs of concept, involving the creation of tokens that are passed around a blockchain. I think it's an area that we can let the private sector experiment.

We are asking the question of whether or not there's a role for the central bank to be providing some new form of settlement asset that can be passed around the blockchain. There's no precedent for this internationally, a lot of central banks are in the early stages of looking at it. But I wouldn't expect to see anything happening in that space in the near term.

But there are some interesting legal issues to be resolved in the area of smart contracts and there are risks, I think, in the area of smart contracts. One issue is that people write code that they think they've anticipated all of the things that could happen, but then once you put the smart contract in place, you discover that there was something that you hadn't anticipated. An example of that is the DAO, the DAO episode in the Ethereum blockchain where there was sort of a, I suppose you would say a hack or a theft of some money because someone hadn't thought of all the possible loopholes in the smart contract. There are absolutely risks out there and I think it's appropriate for us to move reasonably slowly.

Just one here and then that one and then we'd better finish up.

Just going back to the comment about cryptocurrency. I think there are other forces out there driving these things other than lack of trust. There's a very clear example looking at UAE and Saudi Arabia [unclear] to develop a cryptocurrency in that region of the world. You have Russia developing crypto-rubles. An interesting thing about Ripple signing up with Saudi Arabia and the UAE, is that Ripple is endeavouring to develop an alternative system to break the SWIFT monopoly in that case there is enormous drive from various countries. US economic sanctions revolve essentially around the control of SWIFT. If Ripple breaks that in countries like Russia and North Korea, China. Endless countries who are suffering economic sanctions have very strong incentives to go down this path, in my view.

I suppose the question is about the possibility the SWIFT could be disrupted. I think it's well-known that cross-border correspondent banking, cross-border transfers, is a fairly inefficient process and it has shone the light on SWIFT, and SWIFT is responding with its, I think it's called the Global Payments Initiative. So what we're seeing is that the traditional financial system is trying to improve the services that's it's offering to avoid being disintermediated. I think that in the event that you were to have another system that was providing services to rogue states, it might well find difficulty operating in most parts of the world.

It's the last question.

[off microphone] with the ICOs, do you have the view about the right to control the whole cryptocurrency space?

The question was ICOs and the regulation of ICOs. It's not an area I have expertise in, but my understanding is that if ICOs are considered a financial product then ASIC has jurisdiction over them. And if it's not clear that they are a financial product, then the ACCC might have jurisdiction under its general powers to intervene when there's misleading and deceptive conduct. But my understanding is that ACCC may be referring its powers to ASIC so that ASIC would have powers over ICOs, whether or not they are construed as being financial products.

Did you want to mention [unclear]?

Before I finish, Stephen has just reminded me, the Reserve Bank has recently put out a brochure on cryptocurrencies. I think we've got some copies in the room. It's also on our website. So I commend that to you, which gives you some further information on cryptocurrencies. There's also a link to it in the version of my remarks on the Reserve Bank's website.

Please thank Tony again.