“We certainly believe there are elements of blockchain technology that will form part of the future of finance,” said NAB chief innovation officer, Howard Silby.
“That continues to be the source of some debate. But certainly, from our point of view, we see [blockchain] has the potential to deliver instantaneous, transparent, inclusive, financial outcomes.”
Stablecoins reduce the volatility seen in many cryptocurrencies by linking value to a real currency. They are an essential ingredient to realising efficiencies promised by blockchain technology, especially around settlement processes because they allow payment and transfer of digital assets to occur at the same time instead of the current one- to two-day delay.
Carbon trading is a key opportunity to adopt stablecoins because they will allow payment at the same time that carbon credits are transferred to occur “on chain”, or on the same platform, without linking to legacy payment networks. This creates trading efficiencies and reduces settlement risk.
Banks are also keen to offer stablecoins to investors in “tokenised” (digitised) real-world assets, an emerging area for financial markets. This would create instant settlement when digital assets are sold, avoiding volatile cryptocurrencies and the constant transferring of funds in and out of crypto exchanges, which creates counterparty risk. Stablecoins can also be used to build Web3 applications.
Banks’ ongoing interest in blockchain technology to improve financial markets infrastructure comes despite a horror 2022 for crypto markets, culminating in the collapse of the FTX crypto exchange and arrest of its founder Sam Bankman-Fried, who is due to face trial in October.
It also follows ASX’s failure to deploy blockchain to replace the CHESS system that settles the equity market, and the collapse of another form of stablecoin last year, Terra Luna, which was supported by other cryptocurrencies rather than a national currency.
Mr Silby said NAB stablecoins could also be used in repurchase agreements, a form of short-term finance in bond markets; and for “green deposits”, which link customer savings to green loans.
The main focus will be using the AUDN as a settlement token, as NAB seeks to transition from T+2 to T0 settlement in some markets. Known as “atomic settlement”, stablecoins allow for all legs of multiple, linked transactions between multiple parties to be settled simultaneously.
The race by major banks to develop new forms of digital money is also a competitive pushback against technology companies, as banks seek to take advantage of their trusted and regulated status in the economy.
While plans by a group of global technology companies led by Facebook to create a stablecoin that was to be called Libra have collapsed, global regulators remain concerned about big tech’s bigger role providing internet money.
In the US, the biggest stablecoin, Circle, known as USDC, is provided by a non-bank technology company.
DigitalX, an ASX-listed digital asset specialist, has pledged to use the AUDN once it is launched to NAB customers.
It will use the NAB stablecoin to prove its reserves in its digital asset funds and to create real-time atomic settlement for Australian equities in partnership with Automic Group, a share registry.
“What we learnt from Luna last year is the look through of the back book of the stablecoin is the most important thing: if it is not constructed properly, there is counterparty risk,” said DigitalX CEO Lisa Wade, a former NAB executive.
“Stablecoins are the link in the chain for essential financial market infrastructure and, absolutely, banks have the regulatory advantage – I can trust my deposit.”
NAB and ANZ are not the only local players developing Australian dollar stablecoins.
Novatti, an ASX-listed payments company whose related entity, International Bank of Australia, was awarded a restricted banking licence by the Australian Prudential Regulation Authority in November, has created a stablecoin known as the AUDD.
Another cash-backed stablecoin, the AUDE, has been created by a non-bank, Ettle, and was also launched late last year, including to the retail market.
The government is considering a crypto regulation regime, but it is unclear if stablecoin regulation will be part of initial law. Stablecoin regulation was part of a private member’s bill drafted by Liberal senator Andrew Bragg in September.
As well as carbon markets and repos, NAB wants to use its AUDN to provide lower cost international fund transfers. The technology could allow it to avoid the SWIFT network and reduce reliance on complex and costly corresponding bank relationships when money is sent abroad.
“We see a digital cash component as essential,” Mr Silby said. “We can see obvious benefits for the cash leg of settlement of carbon credits on a blockchain, and we also plan to use it for cross border remittance.
“We are planning to offer stablecoins in multiple currencies in jurisdictions where NAB has licences.”
The AUDN will not be available to customers for at least three months, as NAB conducts internal testing, including moving money between subsidiaries and branches, which is being supervised by banking regulators.
US banks JPMorgan and Wells Fargo have created stablecoins to realise internal efficiencies, including netting of transactions between subsidiaries.
The approach to crypto by ANZ and NAB contrasts with CBA, which is trying to facilitate retail market access to speculative crypto coins via its banking app, which the Australian Securities and Investments Commission is preventing.
Bank-created stablecoins could compete with central bank digital currencies, but market participants expect CDBC and private market stablecoins will operate in parallel and be applied to different use cases.
The Reserve Bank of Australia is exploring use cases for CBDC with the Digital Finance Co-operative Research Centre. NAB and the other major banks have submitted use cases to the RBA, part of more than 100 submissions; the RBA will choose the successful pilots in the first half of the year.
NAB sees its stablecoin as akin to a “tokenised” deposit. It minted its AUDN coin in December on the Ethereum blockchain and has also “burned” the coin to remove it from circulation. The AUDN does not float in crypto markets but is created for specific use cases.
The on-chain asset tokenisation market globally surpassed $US2.3 billion in 2021 and is expected to reach $US5.6 billion by 2026 and $US16 trillion by 2030, according to the Boston Consulting Group.
ANZ initially created its A$DC to help the Victor Smorgon Group move fiat dollars into crypto investments. It then used it to purchase Australian carbon credit units tokenised by BetaCarbon, a carbon trading platform. The A$DC is being piloted by the federal government to help collect excise taxes.
Mr Silby said conversations with regulators on AUDN had been “constructive”. With the government suggesting it would regulate crypto custodians as part of its regulatory reforms, Mr Silby said NAB was keen to play a role “in the safe storage of digital assets” for institutional and high net-worth customers, suggesting it could become licensed under any new regime.
Novatti’s AUDD stablecoin went live in November on the Stellar blockchain, and is partnering with Ripple, a US-based digital currency company, to launch AUDD on its XRP Ledger.
AUDE, meanwhile, was created by fintech Ettle in partnership with Meadow Labs and will be offered to both retail and institutional investors on Ethereum and the Algorand blockchain.
Other Australian dollar stablecoins include the Australian Dollar Token (AUDT), and XAUD, in which DigitalX has an equity stake.
Earlier products were created by AUDRamp, which went live in September 2018, and TrueAUD, which was launched in April 2019, but volumes are minimal.
In the United States, Circle’s USDC has grown very fast. It has reserves of $US44 billion, 1.6 million holders, and it has already supported almost 9 trillion blockchain transactions. There have been rumours the company will follow Coinbase to list in public US markets.
But US banks are also responding. The USDF Consortium, a group of nine federally insured US banks, have created a US dollar-backed stablecoin for business payments and real-time settlement of securities transactions, and are also experimenting with cross-border transactions, according to reports.
“We certainly believe well regulated entities are going to have a massive role here ensuring there is trust in any financial system that uses digital assets and currencies on a blockchain,” Mr Silby said.
“We have a strong regulatory framework for banking. How digital assets will be treated is still emerging. But what is clear is it is less about the tech and more about whether companies in the space have governance practices, separation of duties, and understand differences in custody and trading. These are things banks are well experienced at.”