Amid reports ASIC has issued a license for the first stablecoin to trade as a non-cash payment facility in Australia, stablecoins are emerging as a viable payment asset-backed mechanism to exchange funds. Yet the financial services sector is eagerly awaiting fundamental legislation to govern these progressive instruments.

A type of cryptocurrency, stablecoins are designed to maintain a steady value because they are pegged to trusted assets like the US dollar, gold or another cryptocurrency.

While it’s early days, a new Citi report expects the value of the stablecoin market to reach US$1.9 trillion as a base case by 2023, with the market worth US$282 billion currently.

Citi’s report says presently, the stablecoin market is being drive by factors like the underlying crypto market, e-commerce and international demand for US dollars. But long term, the report posits assets valued in stablecoins may take their place alongside other financial instruments based on blockchain formats. This includes bank-issued crypto-based financial products such as tokenised deposits.

“Stablecoins have the potential to reshape the Australian financial services landscape by altering payment systems and facilitating rapid cross-border transactions,” says Sydney University associate professor, Daniel Gozman.

They may be particularly valuable in cross-border transactions, for which traditional payment rails remain costly, opaque and slow.

“The appeal lies in settlement finality, operational continuity and auditability,” says Effie Dimitropoulos, CEO of one of Australia’s first homegrown stablecoins, AUDC.

But, without a dedicated licensing framework, institutions that are issuing stablecoins are flying blind, not really knowing if what they are doing is in line with regulators’ expectations.

“We operate within a strong governance structure, segregated reserves, daily mark-to-market valuations and independent audits. But clear statutory guidance is needed to give the banking sector confidence in integrating stablecoins into core infrastructure,” says Dimitropoulos.

The Australian Securities and Investments Commission’s (ASIC) temporary reforms, including the stablecoin distribution exemption, provide relief for intermediaries, yet they also come with inherent uncertainties. ‘

“The exemption, valid only until 2025 or 2028 in some frameworks, introduces a temporal limitation that complicates long-term planning for both financial institutions and emerging fintech players. This temporary nature raises concerns regarding the commitment to a permanent regulatory framework, leaving market participants in a state of cautious optimism,” says Gozman.

Understanding Stablecoin regulatory hurdles

Robust consumer protection is another regulatory hurdle that needs to be overcome.

“The lack of a unified regulatory standard across jurisdictions means that even compliant intermediaries risk potential loopholes that could lead to money laundering, fraud, or even systemic risks if a run on the stablecoin were to occur. Additionally, traditional banks may remain hesitant to support stablecoin custodians, fearing operational and liquidity issues that may arise from digital asset volatility,” he adds.

A step forward is the Reserve Bank of Australia’s Project Acacia, which involves high-profile collaborations between major banks and fintech outfits. The aim is to trial stablecoins in real-world, tokenised asset markets. Treasury’s stablecoin consultation process is also a welcome step toward creating regulatory certainty.

“When governed appropriately, fiat-backed stablecoins enhance rather than threaten financial stability. They digitise value already held in cash or cash-equivalent reserves, without introducing credit risk. For policymakers, the challenge is distinguishing between high-integrity issuers and offshore or synthetic models that lack transparency,” says Dimitropoulos.

“We anticipate stablecoins becoming embedded in the financial system’s operational layer, from real-time treasury operations to digital asset settlement and programmable payments. For banks, the strategic imperative is to explore integration pathways now.

"Stablecoins that meet high standards of compliance, transparency and governance can complement existing infrastructure, unlock new efficiencies and help institutions remain competitive in a digitised financial environment."

The difficulty in regulating stablecoins comes with navigating their a nuanced mix of benefits and potential drawbacks, each carrying significant implications for both monetary policy and overall financial stability.

“On the positive side, stablecoins drive efficiency by streamlining payment systems and reducing transaction costs, which is particularly beneficial for start-ups and international traders,” says Gozman.

Conversely, stablecoins introduce risks not previously considered in the Australian context. This includes liquidity crises or operational mishaps such as runs on stablecoins, which could precipitate wider financial instability.

“There is a concern that, if widely adopted without sufficient safeguards, stablecoins might trigger fire sales of reserve assets, disrupting funding markets during periods of stress,” says Gozman.

Moreover, from a monetary policy perspective, the increasing use of stablecoins could complicate the ability of central banks to control money supply and inflation, as these digital currencies exist outside traditional banking structures Additionally, regulatory gaps may open the door to criminal activities such as money laundering if anti-money laundering (AML) measures are not rigorously enforced

But these hurdles can almost certainly be overcome in time. While there is a way to go before the future for this instrument is clear, it’s increasingly looking like stablecoins will play an important role in Australia’s financial system.