Research Paper: The Case for an Australian Dollar Stablecoin
Over a year has passed since JellyC participated in the Central Bank Digital Currency (CBDC) project initiated by the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC). From a pool of 170 applications, 14 use cases were selected for the project, revealing critical insights into the future of currency and payments in Australia (full report).
The project highlighted five key benefits of a CBDC:
Guaranteed value
Direct control without intermediaries
Programmability
Atomic (instant) settlement and transparency
Among the standout use cases were 'smarter,' programmable payments, and the prospect of utilising CBDC as a settlement asset in financial markets. Having spent over three decades in financial markets, I can attest to the urgency of transitioning from our archaic T+2 settlement system—it's 2024, and we are still operating in a model that demands modernisation. The project demonstrated that a CBDC could eliminate the need for centralised clearing in many cases, minimising the roles of intermediaries.
While the RBA concluded that adopting an eAUD (Australian CBDC) is still "some years away", it also noted that tokenised bank deposits and stablecoins could offer many of the same benefits as a CBDC. This insight is why we established Ubiquity, an Australian dollar (A$) stablecoin operator.
The Global Landscape of Stablecoins
Around the world, US Dollar stablecoins dominate, comprising nearly 98% of the total stablecoin market. Tether (USDT) continues to lead, representing about 70% of the approximately US$170 billion market capitalisation. Daily trading volumes for stablecoins hover around US$50-60 billion, a figure modest when compared to the daily turnover of US$7.5 trillion in the global foreign exchange market. This contrast underscores the substantial growth potential for stablecoins to provide safer and more efficient solutions within the FX markets.
Regulatory progress is also a significant influencer in the global stablecoin landscape. On June 30, 2024, the EU's new rules for stablecoin issuers under MiCA came into force and this sparked interest in the Euro stablecoin market. Circle, the issuer of USD Coin (USDC), has received approval to operate as an Electronic Money Institution (EMI) in France under MiCA. This allows Circle to issue stablecoins, including EURC (a Euro-pegged stablecoin), within the EU.
Meanwhile, Japan, Hong Kong, and Singapore are quickly establishing frameworks to support stablecoin innovation and issuance.
Japan has established one of the world's first comprehensive regulatory frameworks for stablecoins that came into effect in June 2023. However, these regulations are quite restrictive in that only licensed banks, fund transfer agents, and trust companies are permitted to issue stablecoins in Japan and they must be pegged to the Japanese Yen. The law defines stablecoins as "electronic payment instruments" and regulates them as digital money. Stablecoins are issued as deposits and thereby protected by deposit insurance. Foreign issued stablecoins are effectively banned from the Japanese market unless the issuer maintains assets in Japan corresponding to the stablecoins distributed there.
In March this year, the Hong Kong Monetary Authority (HKMA) launched a stablecoin issuer sandbox as part of efforts to develop a regulatory framework for stablecoins. The sandbox allows institutions planning to issue stablecoins in Hong Kong to test their operational plans within a controlled environment.
Three participants took up the HKMA’s offer:
1. JINGDONG Coinlink Technology Hong Kong Limited
2. RD InnoTech Limited
3. A coalition comprising:
- Standard Chartered Bank (Hong Kong) Limited
- Animoca Brands Limited
- Hong Kong Telecommunications (HKT) Limited
The Sandbox facilitates two-way communication between the HKMA and participants on proposed regulatory requirements. Participants had to demonstrate genuine interest in developing a stablecoin business in Hong Kong with a reasonable business plan. Operations under the sandbox are conducted within a limited scope and in a risk-controllable manner and at this stage participants cannot handle public funds or offer products associated with the sandbox.
Meanwhile, the Monetary Authority of Singapore (MAS) has confirmed their stablecoin regulation framework and has given the green light to 19 crypto service providers, mostly Major Payment Institutions (MPI) to operate under the new regulatory framework for Single Currency Stablecoins (SCS) pegged to the Singapore Dollar or G10 currencies since it came into operation in August 2023.
The Case for an Australian Dollar Stablecoin
Considering Australia’s unique position in the global economy, now is the opportune time for an Australian dollar stablecoin. The Australian dollar accounts for 6.9% of global trade and ranks as the 5th most actively traded currency, translating into approximately US$150 billion of the US$7.5tn daily turnover in the global foreign exchange market.
Currently, the dominance of US dollar-based stablecoins can be attributed to several factors but mostly it is the USD’s global reserve status and its acceptance in all corners of the world. This has extended to the stablecoin market. There are potential scenarios where stablecoin turnover could start to match the currency turnover in fiat currencies. It would be logical to expect that an A$ stablecoin would reach its fiat turnover rate overtime – 6.9% of global trade.
Several Potential Drivers of Diversification
Increased Global Adoption: As stablecoins gain traction beyond the crypto ecosystem, cross-border payments via blockchain and smart contracts will outpace traditional methods, leading to heightened demand for non-USD stablecoins.
Regulatory Developments: With regulatory clarity on the horizon, many financial institutions are poised to enter the stablecoin market. The anticipated regulations in Australia by late 2026 to early 2027 present a clear pathway for integration.
The introduction of Central Bank Digital Currencies (CBDCs) by major economies could influence stablecoin usage and diversification. This is being explored by more than 50% of the world’s central banks.
Economic Shifts: Ongoing devaluation in certain currencies highlights the need for stable alternatives, driving users toward stablecoins pegged to more stable currencies, including the Australian dollar. We have seen currencies like the Argentinian Peso and the Turkish Lira lose significant value in recent times, this encourages the use of stablecoins pegged to more stable currencies. There are also substantial de-dollarization efforts taking place to reduce reliance on the US dollar and this could easily extend to the stablecoin market.
Technological Advancements: Innovations in the use of blockchain technology in supply chain financing, digital escrow and the settlement of financial instruments will also facilitate the adoption of stablecoins. Consider that in Europe, 2-4% of bond transactions and 5-10% of equity transactions fail settlement - this could be avoided with smart contracts in Stablecoins. The sharp selloff in Gilts that ensued after Liz Truss's minibudget in 2022 was triggered by the Liability Driven Investment Funds (LDI). This scenario could potentially have been avoided if collateral had been transferable in a quick and secure manner. Blockchain technology and smart contracts using stablecoins can enable such transactions.
Furthermore, enhanced blockchain interoperability has the potential to make it easier to use and trade various currency-pegged stablecoins.
Why an A$ stablecoin now?
My journey towards recognising the advantages of an A$ stablecoin began during my tenure in traditional finance at NAB. These use cases were centred around foreign exchange and the settlement of securities. The ability to execute foreign exchange transactions and settle securities instantaneously—24/7—is undeniably attractive. Gone would be the days of waiting due to banking hours or holidays around the world; collateral could be relocated to any corner of the globe in mere seconds. I am confident that these benefits will encourage financial institutions to embrace stablecoins as regulatory clarity emerges.
Since my departure from NAB, I've delved deeper into the myriad use cases for stablecoins, unveiling a wealth of possibilities across various sectors. A pertinent example is the RBA’s eAUD project, which has illuminated new opportunities for an A$ stablecoin that could greatly benefit the retail landscape. The fact that a $5.00 coffee now costs $5.07 when paid with a card in Australia has recently garnered attention, especially following the recent Senate inquiries involving major bank CEOs. This “tapping” phenomenon is costing Australians an astonishing A$4 billion annually. By utilizing an A$ stablecoin, we could bypass the payment networks of VISA, Mastercard, or Apple, eliminating these excessive fees.
The convenience of tapping your card or smartphone for each transaction comes at a price—approximately 2%. Over the course of just 34 taps, A$100 dwindles to A$50. In contrast, cash transactions maintain their value; A$100 remains A$100 after 34 exchanges. Additionally, tapping your card overseas incurs an extra 3% or more in foreign exchange spreads. Consider how many times you tap in a single day.
Moreover, the burden of foreign exchange fees disproportionately affects those who can least afford it. For example, Pacific Islander workers sending money home face some of the highest exchange rate fees globally. As remittance flows are projected to grow by300% over the next decade, it is vital to address this issue. Currently, Australian workers remit approximately A$10 billion to their families abroad, while Australian families receive around A$2.3 billion each year—each transaction subject to an average fee of 8%, with Pacific Islanders suffering the most significant impacts.
In light of these challenges, the introduction of an A$ stablecoin could offer a transformative solution, promoting efficiency and fairness within both domestic and international transactions. It’s time to harness the potential of stablecoins for the benefit of all Australians.
An additional foreign exchange flow that was explored in the RBA project was the A$36 billion (in 2023) influx into Australia brought by the 700,000 international students in the country. These students face an average foreign exchange fee of 10%, money that could otherwise be invested in their education. Small businesses (those with less than 200 employees), too, grapple with inflated FX spreads, with smaller companies paying significantly higher rates than their larger counterparts. In 2022, small businesses accounted for 14% of Australia’s merchandise imports valued at A$309 billion, the FX fees can be as high as 5% on the face value of the transaction—translating to a staggering A$2 billion!
By implementing stablecoins and blockchain solutions, we could eliminate these fees: A$1.2 billion for remittances, A$3.6 billion for students, A$2 billion for small businesses, and A$4 billion for tapping your phone.
Key Drivers
Global Positioning: With the Australian dollar representing 6.9% of global trade and ranking as the 5th most actively traded currency, an A$ stablecoin holds the potential to capture a meaningful share of the growing stablecoin market.
Regulatory Progress: Although full regulation is still on the horizon, the groundwork laid by the RBA’s CBDC project and the expected regulatory framework by 2026-2027 provide a clear pathway for stablecoin development in Australia.
Technological Advancements: The advantages of blockchain technology—instant settlement, reduced intermediaries, and programmable payments—perfectly align with the demands of modern financial markets and cross-border transactions.
Cost Savings: An A$ stablecoin could significantly reduce transaction costs for everyday Australians, potentially saving billions in fees associated with card payments, foreign exchange, and remittances.
Future Outlook
An Australian dollar stablecoin is necessary for Australia to maintain competitiveness in the evolving global financial landscape. It has the potential to improve Australia's international trade and financial standing; provide efficient and cost-effective solutions for cross-border payments and remittances; foster the growth of blockchain-based financial services; and create new opportunities for innovation, including programmable money and smart contracts.
As stablecoin adoption rises and regulatory frameworks develop, Australia has the chance to lead in this domain. By adopting an A$ stablecoin now, Australia can capitalise on the benefits of this technology, promote financial innovation, lower costs for consumers and businesses, and enhance its position in the global financial system.
Disclaimer: JellyC Pty Ltd is a corporate authorised representative (CAR Number 001293184) of TAF Capital Pty Ltd ACN 159 557 598 AFSL 425925. Any information in this document is not intended to promote or recommend any particular product or services offered by CAR. It does not take into account the objectives, financial situation or needs of any investor. Before making an investment decision, investors should read the relevant offer document and (if appropriate) seek professional advice to determine whether the investment is suitable for them. This information is intended only for wholesale clients within the meaning of s761G and s761GA of the Corporations Act 2001 (Cth). Past performance is not indicative of future performance. The information contained in this email is confidential and is intended solely for the addressee. If you are not the named addressee, please delete this email. You must not disclose or use in any way the information in the email. If you have received this email by mistake, please notify the sender immediately by reply e-mail and delete this email and destroy any printed copy.