Some $11.8 billion poured into dog-themed ‘coins’ last week, but the Reserve Bank isn’t fussed, saying cryptocurrencies aren’t a risk to market stability.
In fact, when asked about the pitfalls of cryptocurrency on Friday, RBA assistant governor Michele Bullock said Bitcoin isn’t a focus for the bank.
“It’s not even really money,” Ms Bullock told the House Economics Committee in Canberra.
“There’s a lot of fuss about [Bitcoin] as a financial asset, but it’s not really a payments instrument, consumer protection isn’t really our thing … [its] not a focus.”
You’ve no doubt heard of Bitcoin before, but you may be less familiar with its cousin, Dogecoin, which soared in value last week amid a slew of social media-inspired equity rallies driven by Reddit and Twitter users.
Started as a joke about the then-popular Doge dog meme in 2013, the cryptocurrency increased from $0.005 – that’s five one-hundreths of a cent – on January 1 to a brief high of just under seven cents last week, sending its total market-wide value to $US9 billion ($11.85 billion).
After its staggering rise the coin has since crashed to about five cents, but is still fluctuating as Elon Musk herds his millions of followers behind memes glorifying himself and the coin.
Still, it’s worth putting this in perspective. Over $6.5 trillion is traded on foreign currency exchanges around the world every day, which means the capacity for crypto to disrupt financial markets is slim by comparison.
“Dangerous”: Why internet investing is unpredictable
But there is no shortage of other dangers coming hot on the heels of the largely rigged GameStop saga earlier this month.
Angel Zhong, a senior lecturer in finance at RMIT, worries regulators aren’t appreciating the risks viral social media trends pose to financial markets, whether through cryptocurrency or stocks.
“This is a very dangerous trend,” Dr Zhong told The New Daily.
“Whenever people like Elon Musk and others say something on Reddit or Twitter, investors without financial knowledge interpret it as a bullish trend and rush in, whether it’s Bitcoin or Dogecoin.”
Dr Zhong said equity rallies like GameStop are currently a much larger risk to market stability than cryptocurrencies, but she warned it’s notoriously difficult to predict how social media might disrupt markets.
“If we don’t do something about this social-trading trend the risks will continue to increase … regulators need to step in,” she said.
Social media drives adverse market outcomes through sheer scale, Dr Zhong explained, with previously unheard of network affects feeding into each other to drive tens of millions of people behind bull runs at once.
And although phenomena like the GameStop rally were celebrated as retail traders taking on Wall Street, its stock price has since fallen back to earth, crashing over 83 per cent in the last week.
Dr Zhong said it shows why regulators such as ASIC and the RBA should get on the “front foot” to curb potential instability and consumer harm.
Are cryptocurrencies money?
Ms Bullock said the RBA sees cryptocurrencies like Bitcoin and Dogecoin as assets and not “money”.
So, why would the RBA come to that conclusion?
Unsurprisingly, there are some key differences between what comes out of the ATM and coins based on dog memes, said Angela Jackson, lead economist at Equity Economics.
For starters, you can’t use crypto to pay taxes and it also isn’t issued by the Australian government. In other words, the RBA doesn’t create it.
But you could convince someone to sell a car for Bitcoin or Dogecoin.
“If people are prepared to accept Bitcoin as a currency, then it is a currency,” Ms Jackson told The New Daily.
“But I would be concerned if our banks were holding it.”
RBA: Not all crypto is equal
The RBA doesn’t see all crypto equally as a regulator, either.
Ms Bullock said so-called ‘stable coins’ like Facebook’s proposed Diem currency are being discussed by financial regulators around the world.
You might recall Facebook boss Mark Zuckerberg being panned for his bid to launch a non-fluctuating currency as a kind of international money in 2019.
Such was the outrage that Facebook changed the name from the original Libra last year in an attempt to escape bad PR.
Facebook has pitched the product as a genuine monetary alternative for developing economies and, as a result, central bankers like Ms Bullock are scrutinising it very closely.
With international money run by a company that leaked the data of 419 million users to a political analysis company, what could possibly go wrong?
“With these sorts of coins … nothing will happen until the regulators are happy that all the requirements are met,” Ms Bullock reassured the committee.