Currency War Goes Beyond Tokens

The Governor of the Reserve Bank of Australia, Philip Lowe, made some revealing comments right at the end of his testimony to a parliamentary committee last week.

After being grilled on monetary policy for several hours, Lowe then fielded a question on digital currencies and the increasing momentum for technology companies to issue their own tokens.

“Tokens that move between phones which are not issued by the central bank, they are issued by technology companies. That raises a huge number of issues,” Lowe said.

“At central bank meetings I go to, there are great concerns about the shape of the global monetary system if that became the way we shifted tokens amongst each other if the tokens were issued by Facebook.”

Lowe’s comments were a surprisingly candid answer to a question many central bankers have been keen to downplay so far.

Yes, central bankers are worried about the potential for traditional currencies to be disintermediated by the rise of token-based digital currencies issued outside the banking system.

Ecosystem vs. system

However, the RBA is not in the business, right now, of coming up with an alternative digital currency for retail use.

A recent research paper from the bank said that Australia’s electronic payments infrastructure was such that demand for a retail and digital Australian dollar was not considered very strong.

Other nations, such as the Bahamas — were using a digital currency for financial inclusion reasons. China’s efforts were more about the internationalization of the yuan, but neither of these imperatives applied in Australia.

Instead, the RBA is more focused on testing a wholesale digital currency that can be transferred through distributed ledger technology. A trial is currently underway with some significant banking players.

The RBAs view is that a wholesale digital AUD as a settlement asset, rather than a longer-term store of value which might attract interest. So, in the future, the use could be for settlement on property transactions or for trade finance, where large sums need to be shifted quickly and securely.

But let’s go back to the retail space and Dr. Lowe’s comments, which he expanded upon in a speech this week wherein he acknowledged that we now have to think about a payments “ecosystem” rather than a payments system.

“In this ecosystem, the payment chains can be longer, and there are more entities involved and new technologies used,” he said.

“This more complex and dynamic environment is opening up new opportunities for innovation as well as new competition issues to consider.”

He then went on to talk about the increasing use of digital wallets and payments within apps and how China’s Ant Group and Tencent had developed new payments infrastructure which had created “fundamental changes” to retail payments in China.

In Australia, said Lowe, the most prominent new players are Apple Pay and Google Pay, with Facebook’s Libra — now renamed Diem — appearing off on the horizon.

Competitor moves

While welcoming the way in which these payment methods reduce fraud costs through biometric authentication and the tokenization of a customer’s card numbers as a “step forward,” Lowe went on to address the critical issue of competition.

The use of near-field communication technology, for example, could restrict the use of other wallet providers to offer services on Android or iOS devices. While the German parliament addressed this in 2019 legislation, it was still to be dealt with in Australia, which watched a European antitrust suit on this issue with interest.

Then there was the issue of the value of information and data. The RBA Governor noted some different approaches for the tech providers. Google was collecting information on Google Pay payments, which can be used for other marketing purposes, while Apple says it does not.

But this was balanced by the fee structures, with Google not charging for transactions while Apple does charge issuers. Perhaps Google users are paying by having their data harvested?

This is more in the area of data and privacy legislation than the remit of the RBA. Still, Governor Lowe was savvy enough to understand that data analysis is part of these platform providers’ “DNA” and that a compelling payment offering is part of the business plan to keep users.

Fund protection

The protection of funds within these payments systems was of more relevance to the RBA and Australian regulators. He acknowledged domestic proposals for local regulators to oversee these alternative currencies.

Internationally, the Facebook Diem proposal is the one that Lowe and his central banking colleagues spend more time thinking about.

The Libra Association — now the Diem Association — has applied to the Swiss financial regulator for a payment system license with a plan to launch a single currency stablecoin.

In effect, this could create a global digital currency outside of the central banking system with more retail potential than Bitcoin or any of the current wave of cryptocurrencies could ever hope for.

“This initiative has raised concerns from governments and regulators in many jurisdictions regarding a wide range of issues including consumer protection, financial stability, money laundering, and privacy,” Lowe said.

“If Diem poses bank-like risks, it will be subject to bank-like regulatory requirements, and it remains to be seen how this and other similar initiatives progress.”

Existential threat

The RBA’s regulatory responsibilities, Lowe admitted, are several decades old and the product of a time before digital currencies.

“In practice, the RBA has the ability to regulate only a fairly limited range of entities,” he said.

“It is worth considering what the right balance is here and whether the regulatory arrangements could be modified to better address the complexities of our modern payments ecosystem.”

Philip Lowe is unfailingly polite, but the essence of his message is a warning.

Regulators are watching the new generation of digital currencies very closely, and there is little chance they will be allowed to exist outside the traditional banking system.

In all those discussions between central banks, there is likely to be a common theme.

Regulation needs to catch up to technological innovation in the payments system and bring it inside the system.

Suppose the new players — and Facebook in particular — think the regulators will allow them to exist in some parallel and unregulated universe. In that case, they might be in for a surprise sometime soon. 

Image credit: iStockphoto/istock_onespirit