Stablecoins and Australia's financial architecture: A policy choice, not a technology question
The countdown is on for regulatory clarity on stablecoins, and it's time for banks, regulators and policymakers to prepare for what could be a fundamental reshaping of Australia's financial system. Here's what you need to know.
Australia's approach to stablecoins will determine not just how digital payments evolve, but the very architecture of our financial system for decades to come.
With global stablecoin market capitalisation exceeding $300 billion, these digital instruments are becoming infrastructure. The choices Australian policymakers make now will shape whether that infrastructure serves our economic interests or undermines them.
The question isn't whether stablecoins will be adopted. It's whether we design the resulting system proactively or accept what market forces deliver by default.
Beyond the technology hype
Strip away the blockchain terminology and stablecoins reveal themselves as something familiar: a contemporary implementation of a narrow banking concept.
Stablecoin issuers accept customer funds, issue digital claims redeemable at par, and hold only safe, liquid assets. They don't engage in credit creation or risky lending. In economic terms, they function more like specialised payment utilities than banks.
This isn't a fringe observation. The Bank of England's recent consultations on systemic stablecoins and the Federal Reserve's exploration of specialised "skinny" payment accounts both recognise this reality. Globally, regulators are moving from viewing stablecoins as peripheral innovations to recognising them as potentially systemic components.
Australia faces distinctive challenges. As a small open economy, we face potential dollarisation pressures if USD-denominated – or other non-AUD stablecoins dominate. Meanwhile, our New Payments Platform reduces immediate domestic efficiency benefits, concentrating stablecoin value in areas such as cross-border payments and programmable treasury applications.
The collateral structure question
Here's where local policy design becomes critical: the backing assets for stablecoins determine how cash flows back into the banking system, affecting funding, financial resilience and other areas. At a high level there are 3 options (which could be considered in combination):
Government securities backing: Stablecoin issuers could hold short-dated Commonwealth securities. The structure matters enormously: a reverse repo arrangement where banks lend high-quality liquid assets to issuers and receive cash could be relatively neutral for bank liquidity. A deposit-based structure where issuers purchase securities directly from the market could drain bank deposits with no immediate offsetting inflows in some scenarios.
Large-scale adoption could create competition for high quality liquid assets, requiring deliberate policy responses. There's also a strategic question: Should the Australian Office of Financial Management consider stablecoin demand when setting debt issuance strategy?
Bank deposit instruments backing: Regulations could permit backing via negotiable certificates of deposit or term deposits. NCDs offer liquidity but create concentration risks. During stress, if issuers liquidate NCDs to meet redemptions, funding runs could occur. Term deposits create maturity mismatches as they are backing instantly redeemable stablecoins.
Central bank reserve backing: Allowing issuers to hold backing assets directly in RBA settlement accounts (ESA) offers the strongest safety signal but raises significant concerns. Deposits would migrate from banks with no immediate offsetting inflow, creating liquidity pressures.
The critical crisis dynamic: if stablecoins are backed by central bank reserves, customers may perceive them as safer than bank deposits during financial stress. This could accelerate deposit flight during crises, fundamentally altering crisis dynamics. In traditional systems, only wholesale participants can rapidly shift to central bank liabilities. Stablecoins would change this.
From two tiers to three?
Today, Australia operates a two-tier monetary system: the RBA provides settlement balances and manages policy; commercial banks provide deposits, credit, and payments.
Stablecoins introduce a potential third tier: specialised payment providers offering deposit-like liabilities, fully backed by safe assets, with no credit creation.
This offers benefits: efficiency gains, programmable money capabilities, competitive pressure on fees and cross-border costs. But it introduces risks: altered bank funding, redistributed liquidity, weakened monetary transmission, and new run dynamics.
Technical questions are really policy choices. Should stablecoin issuers receive dedicated RBA accounts, or use bank custodial arrangements? Do custodial balances count toward the bank's liquid assets? How are these relationships treated for risk assessments?
If stablecoin issuers hold RBA reserves, the RBA's policy rate affects their economics but may not flow through to users if zero-interest requirements apply. The distribution of reserves across new institutions complicates liquidity management. And if stablecoins become the fastest flight to safety during shocks, crisis management requires rethinking.
The sovereignty question
The most significant policy choice is whether to foster domestic AUD stablecoins or accept offshore USD dominance. These policy choices may also impact interest rates and monetary policy transmission mechanisms.
Clear frameworks for AUD stablecoins can shape adoption toward domestic instruments. Regulatory ambiguity creates first-mover advantages for offshore USD instruments already operating globally.
While Australia's floating exchange rate means capital flows to foreign stablecoins don't affect domestic money supply, monetary sovereignty is more than that. It's about maintaining influence over payment architecture, financial stability frameworks, and crisis management.
If significant Australian payments migrate to USD instruments issued offshore, we cede influence to foreign regulators and issuers.
A window for proactive design
Australia has already begun taking steps in the right direction. The RBA’s Project Acacia is exploring the use of wholesale stablecoins for tokenised asset settlement, with Westpac among the participating institutions. ASIC's regulatory sandbox and relief for pilot AUD stablecoin projects signal openness to innovation. However, to shape future outcomes, experimentation alone isn't sufficient. What's required now are comprehensive frameworks to support:
- Explicit collateral standards defining permissible backing assets with tiered requirements based on issuer scale and systemic importance
- AOFM coordination ensuring adequate supply of short-dated government securities if required for backing
- Cross-agency governance to ensure consistent approaches are developed and maintained
- Monitoring frameworks tracking deposit migration, bank funding composition, HQLA dynamics, and crisis indicators
- Contingent tools potentially including modernised Committed Liquidity Facility arrangements and emergency facilities for systemic issuers
- Domestic focus fostering AUD stablecoins with strong prudential requirements to maintain monetary sovereignty
Designing the architecture
The three-tiered system isn't theoretical. Elements are emerging through pilots, sandboxes, and market experimentation.
Market forces are already driving adoption. The choice is whether this architecture evolves through deliberate design or emerges by default.
Proactive policy can deliver competitive payments solutions, reduced cross-border costs, financial innovation, and enhanced competition, while preserving stability, sovereignty, and prudential soundness.
Passive approaches risk importing offshore arrangements that could be difficult to unwind, suboptimal architecture by default, loss of policy control, and unmanaged risks to bank funding and stability.
The collateral choices, return flow mechanisms, and architectural implications aren't abstract concerns. They're practical decisions that will determine the composition of the Australia's financial system for decades ahead.
The time for these decisions is now, while we can still shape outcomes rather than react to them. Stablecoins don't ask whether we wish to redesign our monetary architecture. Their adoption forces us to answer a range of questions, explicitly or implicitly. The challenge is whether policymakers and market participants will seize the opportunity to proactively design our future financial system, or accept what emerges by default.
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