Digital currencies gaining government backing
Blockchain-based digital currencies such as Bitcoin are rapidly coming onto the radar for transformation-minded government organisations, as the government’s financial technology reformists remove financial obstacles to the use of virtual currencies in order to reduce costs and improve the efficiency of a range of government processes.
The announcement that the government would move to remove the longstanding ‘double tax’ treatment for users of digital currencies was among numerous outcomes in a newly released Treasury position paper, Backing Australian FinTech, which explored opportunities in the financial technologies (FinTech) market and called out the potential value of virtual currencies in facilitating digital transformation, promoting new home-grown innovation, and promoting competition policy and microeconomic reform.
“I want to help create an environment for Australia’s FinTech sector where it can be both internationally competitive and play a central role in aiding the positive transformation of our economy,” Federal Treasurer Scott Morrison wrote in the report’s introduction, which also called out the importance of controls to manage attempts at money laundering and terrorism funding using anonymous online currencies.
The report — which also follows on from February’s appointment of an expert advisory group — including representatives of the Westpac Bank, Veda, Reinventure, Society One, Commonwealth Bank of Australia, PayPal Australia, Tyro Payments and more — aims to find ways to transition Australia’s $140 billion financial services sector into an Asia–Pacific regional FinTech leader.
Following on from the government’s $1.1 billion National Innovation and Science Agenda (NISA), that effort will explore opportunities in areas such as crowdfunding, data management, mobile payments, digital currencies, the GST treatment of digital currency, peer-to-peer lending and regulations around ‘robo advisers’ — all of which can increase consumer choice and competition amongst financial services providers.
A core conceit of the transformation is the formalisation of support for blockchain, the foundation technology behind the workings of Bitcoin and some 600 other virtual currencies currently on the market.
“While it is in the early stages of development,” the report notes, “the technology has the potential to radically simplify the way our market operates end to end, with significant benefits to investors, participants, regulators and government agencies.
Blockchain is already getting early interest from key financial services innovators such as the ASX, which announced in January that it has invested $14.9m in US-based Digital Asset Holdings to develop blockchain-based solutions (which it also refers to as ‘distributed ledger technology’) to provide technology supporting an overhaul of the exchange’s main trading and post-trade platforms.
The ASX’s blockchain derivative — expected to reduce administration costs by simplifying and speeding post-trade processing, potentially to near real time — will be designed to comply with the regulations that govern financial markets, with a private network managing permissions for parties involved.
“By building a solution alongside the existing CHESS system,” ASX Managing Director and CEO Elmer Funke Kupper said in a statement, “all stakeholders can participate fully in the innovation process and have confidence in the clearing and settlement processes that underpin one of the top 10 equity markets in the world.”
US financial giant JP Morgan Chase followed suit with a similar blockchain-based trading systems announcement just weeks later, highlighting the growing interest within the financial services sector to tap into FinTech opportunities for significant change.
Yet there is also considerable caution around the technology: Bitcoin, in particular, has suffered wild swings in its value and its anonymity has made it the preferred currency of cybercriminals and ransomware extortionists.
“There are parts of the technology that are compelling, but at this stage there is still a lot of hype around it,” Bank Australia Chief Risk Officer Patrick Ashkettle told a recent FST Media conference on financial services security. “It needs to have a user requirement that is compelling.”
IOOF Holdings Head of Infosecurity, Technology Risk and Audit Ashutosh Kapsé was equally cautious: “We need to look at it very much from a risk angle,” he said. “For example, having a distributed ledger means that all of our transactions are going to be pretty transparent to each other. Are we okay to put that all out into other players’ ledgers so they are visible to all?”
That the government has decided to weigh in in support of blockchain highlights its increasing perceived relevance in an era where the pace of digital transformation is accelerating and every aspect of dealing with government is being put under the microscope to identify potential efficiencies.
With digital already enshrined as the preferred method for government transactions by the Digital Transformation Office’s Digital Service Standard (DSS) — which particularly applies to the same high-volume transactional agencies that will benefit from the efficiencies of blockchain-based transactions — the use of alternative currencies may well become part of official policy as government organisations reinvent themselves and their services for the digital age.
In this context, government interest also reflects its interest in developing a cogent regulatory regime for blockchain currencies that can mirror the standards applied to conventional financial transactions, while reining in its potential use for fraudulent and criminal activities.
“FinTech is going to revolutionise how consumers and businesses, as the drivers of economic activity, interact,” Morrison wrote. “This is going to have big implications for demand in the future. We need to be part of those changes.”
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