Econ2050: Cryptocurrencies, Stablecoins, and Central Bank Digital Currencies (CBDCs) Notes

Overview of the Cryptocurrency Market and Taxonomy

  • Lecturer Information: These notes were developed for Econ2050: Money and Finance, Topic 10: Cryptocurrencies & CBDCs, presented by Sean Turnell.

  • Market Landscape (Top 10 Cryptocurrencies):

    • Bitcoin (BTC)

    • Ethereum (ETH)

    • XRP

    • Tether (USDT)

    • BNB

    • Solana (SOL)

    • USD Coin (USDC)

    • Lido Staked ETH

    • Dogecoin (DOGE)

    • TRON (TRX)

Definition and Characteristics of Cryptocurrencies

  • Core Definition: A cryptocurrency is described as a digital or virtual currency that is secured by cryptography.

  • Technological Infrastructure:

    • They exist on decentralized networks utilizing blockchain technology.

    • A blockchain is a distributed ledger established via a network of computers.

    • These networks are independent of government influence or oversight.

  • Functionality:

    • Facilitate direct online payments between parties (Peer-to-Peer or P2P).

    • Lack of Legislated/Intrinsic Value: Cryptocurrencies have no inherent value and are worth only what participants in the market are willing to pay. This distinguishes them from national (fiat) currencies, which derive value partly from being legislated as legal tender.

  • Currency vs. Assets Classification:

    • Global Standard: In most nations, cryptocurrencies are viewed as assets (commodities or securities) rather than legal money or currency.

    • Exception - El Salvador: This is the only country mentioned that has declared Bitcoin as legal tender.

    • Australian Context: Cryptocurrencies are treated as assets and are subsequently subject to Capital Gains Tax (CGT). Exchanges offering crypto services are legal businesses and must comply with Anti-Money-Laundering (AML)\text{Anti-Money-Laundering (AML)} and Counter-Terrorism Financing (CTF)\text{Counter-Terrorism Financing (CTF)} standards.

Deep Dive into Bitcoin (BTC)

  • Foundational Concept: Described by Satoshi Nakamoto as a "purely peer-to-peer version of electronic cash" that bypasses financial institutions.

  • Mechanisms and Protocol:

    • Double Spending Solution: The network solves this problem using a P2P network that timestamps transactions by hashing them into an ongoing chain that cannot be altered.

    • Cryptographic Proof: The system relies on proof rather than trust, allowing two parties to transact directly without a trusted third party.

    • The Blockchain: A cryptographic protocol functioning as a digital currency. It creates a unique digital property verified by its position in a public ledger (the blockchain).

  • Mining and Supply:

    • Process: Bitcoins are created by network members as a reward for maintaining the system through solved complex mathematical algorithms.

    • Scarcity: Algorithms increase in complexity over time. The total supply is capped at 21 million21 \text{ million} BTC. Current circulation is slightly over 20 million20 \text{ million}.

    • Mining Evolution: Over time, the computational capacity required has increased significantly. Today, mining is largely performed by specialized entities rather than individual hobbyists.

  • Determinants of Bitcoin Value:

    • Current use of the payment system (volume and velocity of ledger payments).

    • Market Speculation.

    • External variables: Interference from authorities and engagement from celebrities.

Benefits, Risks, and Global Challenges

  • Potential Benefits:

    • Cost Efficiency: May offer advantages over traditional systems for international transfers.

    • Institutional Trust: Serves as an alternative in countries where trust in the government or traditional financial institutions is low.

    • Privacy: Appeals to individuals seeking higher levels of anonymity.

  • Macroeconomic and Social Issues:

    • Money Laundering: Useful for illicit activities. The UN estimates that 2−5%2-5\% of global GDP is laundered annually, with crypto representing a growing share.

    • Sanctions Evasion: Used by international criminal networks and rogue states.

    • Environmental Impact: Bitcoin mining requires extraordinary amounts of electricity for server operation. Production is often scattered globally to locate the cheapest electricity sources.

  • Financial Stability Concerns:

    • Banking Sector Impact: Widespread adoption could challenge the role of traditional banks.

    • Current Risk Level: Currently, crypto-assets do not pose a systemic risk because they are not yet commonly used for everyday payments.

    • Volatility: Massive price swings remain a point of concern.

    • Quantum Computing (Q-Day): The future development of quantum computing poses a threat to complex encryption, potentially leading to widespread theft of assets.

Global and Regional Crypto Regulation

  • Regulatory Fragmentation: There is no global body equivalent to the Basel Committee for cryptocurrencies. Individual countries are currently in a "catch up" phase.

  • Australian Policy: Generally favorable; aims to position the country as an industry player.

    • Digital Asset Statement (DAS), March 2025: Focused on sector growth, consumer protection, and market integrity. It targets the conduct of issuers, service providers, and platforms rather than the legality of creating crypto.

  • European Union (EU):

    • Focuses on transparency, disclosure, and supervision of transactions.

    • The Travel Rule: Requires financial companies to screen, record, and communicate sender/recipient information on crypto transactions to combat money laundering.

  • United States (USA):

    • CLARITY Act: The "Digital Asset Market Clarity Act" (currently before Congress) aims to end regulatory turf wars between the SEC (Securities and Exchange Commission\text{Securities and Exchange Commission}) and the CFTC (Commodity Futures Trading Commission\text{Commodity Futures Trading Commission}). It seeks to define most digital assets as commodities rather than traditional financial instruments because they are decentralized and not claims on an institution.

Stablecoins

  • Definition: A cryptocurrency designed to maintain a stable value relative to a specific asset, primarily fiat currencies like the US Dollar (USUS).

  • Use Cases:

    • Facilitation of international transactions.

    • Safe haven against volatility in assets like Bitcoin.

    • Potential for high yield/return compared to near-zero bank deposit rates (controversial).

    • Hedging against inflation.

  • Systemic Risks and the Financial Stability Board (FSB):

    • Stablecoin "Runs": Similar to bank runs, driven by concerns over reserve quality or the speed at which reserves can be liquidated.

    • Wealth Impact: If widely held, a drop in stablecoin value could significantly impact consumer spending and economic activity.

    • Operational Risk: Disruptions in payment arrangements could block international trade flows.

    • Institutional Exposure: Banks acting as wallet providers or custodians are exposed to credit, market, and operational risks.

  • US GENIUS Act (2025):

    • Full Name: "Guiding and Establishing National Innovation for the US Stablecoins Act."

    • Provisions:

      • Defines stablecoins as distinct from traditional securities (exempt from SEC oversight).

      • Mandatory 1:1 Backing: Required 100%100\% reserves of highly liquid assets (USD or short-term Treasury Bills).

      • Disclosure: Monthly reserve composition reports and independent audits.

      • Liability Priority: Holders are given priority in legal claims.

Central Bank Digital Currencies (CBDCs)

  • Definition: A digital form of central bank money, denominated in the national unit of account, representing a direct liability of the Central Bank.

  • Implementation and Pilots:

    • The Bahamas (2020): First to issue a CBDC, known as the "Sand Dollar."

    • Nigeria (2021): Launched the eNaira. Considered a failure/moribund because it required a bank account for use, failing the unbanked.

    • Sweden: Testing the e-Krona.

    • China: Piloting the e-CNY.

  • Motivations for Issuance:

    • Maintaining monetary control during economic cycles.

    • Enhancing financial inclusion and cross-border payment efficiency.

    • Reducing illegal activities.

    • Programmable Money: Facilitating instantaneous government stimulus transfers to households and firms.

    • Interest Rate Policy: Breaking through the zero-bound effectiveness of monetary policy.

  • Concerns and Opposition:

    • State Surveillance: Fear that CBDCs could be used to monitor or control citizens.

    • Disintermediation of Banks: If citizens move deposits to the Central Bank, commercial banks lose funding sources.

    • RBA View (2017): The Reserve Bank of Australia cautioned that digital banknotes might make it easier to run on the banking system during times of stress compared to physical banknotes.

    • US Anti-CBDC Surveillance State Act (July 2025): Passed by the House and endorsed by the White House. It prevents the Federal Reserve from issuing a retail CBDC to protect financial privacy and specifically prohibits using CBDCs for programmable economic manipulation.