Cryptocurrencies: Miracle or mirage?

Jarek Kowcza
11:41am January 30 2023

The world of cryptocurrencies faces an uncertain future after a tumultuous 2022. (Getty)

Even for the typically volatile world of cryptocurrencies, 2022 was a tumultuous year.

It was a year where the bull market came to a crashing halt, taking many significant players with it and leaving budding crypto millionaires asking themselves: to HODL or not to HODL?

The biggest scalp was the collapse of what was then the second largest cryptocurrency exchange, FTX. Billions of dollars of value evaporated in the space of just a few short days, leaving investors nursing giant losses.

FTX customers have been left wondering whether they will receive any of the deposits owed to them. Bankruptcy, along with the criminal and civil proceedings against FTX founder and former CEO Sam Bankman-Fried, will take time to run their course.

These events have inevitably led to calls for more regulation, with coordinated global approaches likely on the horizon.

In Australia, authorities are working on new rules around licensing and custody arrangements. These will impact how customer deposits and assets are held by exchanges, reducing the risk of them disappearing into thin air if an exchange collapses.
 

FTX founder Sam Bankman-Fried. (Getty)

This boom and bust cycle in crypto, like those before it, has many elements of a financial bubble driven by investor mania and irrationality. The latest downturn has understandably led people to question the viability of the entire crypto space.

But there are some key areas where innovation may continue.

One that stands out is Central Bank Digital Currencies (CBDCs). As the name implies, these would be cryptocurrencies issued directly by central banks.

One of their key advantages is that they could act as form of electronic cash.

This could address the biggest issues with private cryptocurrencies, given that they do not currently meet the key characteristics of money:
 

  • Medium of exchange:
    • Crypto transactions are inefficient, have high costs, slow transaction times, and are not widely accepted.
  • Store of value:
    • Cryptocurrencies exhibit extreme price volatility and regular crashes, making them a poor store of value.
  • Unit of account:
    • Fiat currencies, rather than cryptocurrencies, are used to price goods and services. Even where cryptocurrencies are accepted, prices are still typically in fiat currency.


CBDCs have many potential advantages, including lowering the cost of payments and removing price volatility. In developing countries, they could also increase financial inclusion and participation.

It is an area of evolving interest, which most central banks are investigating.

In Australia, the Reserve Bank (RBA) has been working with researchers to consider the merits of a CBDC. So far, they haven’t been convinced that a strong public policy case exists.

Australia already has a modern and efficient payments system. For example, the New Payments Platform enables near-instant electronic transfers from one account to another – replicating one of the key touted potential benefits of crypto.

Countries with less well-developed payments systems and with higher costs may benefit more from a CBDC. Certain types of payments may also become cheaper, with overseas transfers an obvious example.

High hopes, new possibilities

Even in Australia’s modern payments system, use cases still exist. In fact, the future may be closer than you think.

The RBA recently launched a pilot eAUD project to work with around 80 stakeholders on over 140 potential use cases. This will be an area to keep an eye on as proposals are trialled through early 2023.

Some of the more revolutionary possibilities lie in using CBDCs as a foundation on which to build a more efficient and interoperable digital domestic and global financial system.

CBDCs could provide a stable, secure base from which other innovations can be overlayed. This could lead to improved financial products and services, offered at a lower cost, with less need for intermediation, and with reduced counterparty risks.

We may even see uses no one has even thought of yet appear.

It’s important to keep a cool head in an industry prone to hype and promises, most of which have yet to be delivered.

The optimists would say the future is looking less hazy, but it’s unclear whether it’s a monetary system oasis on the horizon, or just a mirage in the haze of the summer heat.


For a deeper dive into the world of cryptocurrencies, see our four-part report:

Part one (PDF 8MB) provides a broad overview of the state of cryptocurrencies.

Part two (PDF 5MB) looks at new innovations in digital currencies and how they might evolve.

Part three (PDF 4MB) examines the potential uses of cryptocurrencies in investment portfolios and considers whether they can add value to traditional investment portfolios.

Part four (PDF 4MB) discusses the speculative nature of cryptocurrencies and how the asset class has benefited from an environment characterised by low interest rates, accommodative monetary policy, and the search for yield.

Jarek Kowcza

Jarek joined the Westpac Group as a Senior Economist in 2021. He works across several businesses, including Westpac Business Bank, St.George Bank, BankSA, Bank of Melbourne and BT. Prior to this, Jarek worked for The Treasury in Canberra for over eight years. He holds a Bachelor of Economics and Bachelor of Finance double degree from the University of Adelaide.

Don't miss

Related articles

Westpac’s new BaaS boss eyes growth

By Emma Foster
Freelance journalist

‘Clearly maturing’: Bringing cryptos in from the cold

By Tim Boreham
Freelance Journalist

TECH IN 10: A new online mortgage experience

By Emma Foster
Freelance journalist

Browse topics