The National Australia Bank (NAB), one of Australia’s ‘Big Four’ banking groups, published a three-page research paper on 19th December titled “Bitcoin to replace AUD?” (Australian dollars).

Despite the provocative title, the paper does not suggest replacing the national currency with bitcoin, nor say it could happen in the near future. Rather, it is an explanation of bitcoin and a comparison of the nature of digital currencies with existing sovereign currencies, and how they fit into the current international financial system.

Bitcoin could well become a widely accepted medium of exchange, the paper said, but it would take many more years to achieve mainstream acceptance.

Major banks around the world have stayed mostly quiet on bitcoin, or presented reports full of references to money laundering and warnings about bitcoin that would seem to apply equally to all national currencies: they can be stolen, or used to purchase illegal goods.

The tone of NAB’s report, however, appears neutral and genuinely curious about bitcoin, presenting a mostly well-explained guide for FX traders more used to the ways other currencies function. It could be an indication of the way large financial players speak of bitcoin amongst themselves, rather than to the general public.

What is a currency?

The paper reminded readers currency has taken many forms over the years, and that Australia’s first currency was rum.

“As such, bitcoins can indeed be a currency, as could anything labeled as such. As long as you believe it is.”

Unlike recent government pronouncements, the NAB report suggests bitcoin does in fact meet most of the classical stipulations of a currency: it is durable (thanks to its basis in easily-duplicatable digital data), portable (people can access it from a variety of devices and locations), scarce (thanks to the overall limit and adjustable mining difficulty), fungible and divisible. It faced some problems with recognizability and acceptance, it said, with only a handful of physical businesses taking bitcoin as payment in Australia.

The explanation of cryptocurrencies was also refreshing, especially to those tired of hearing the accusation that bitcoin is ‘not backed by anything’:

“These are de-centralized digital (or electronic) mediums of exchange. They are not backed by physical assets but rather peer security.”

Exchanges vs. merchants

The paper reviewed the bitcoin situation in other countries, explaining the exchange business and noting that (as of the time of its release) 47% of all bitcoin trades were in Chinese yuan (CNY), with US dollars representing 45%. Other world currencies accounted for only the remaining 8% of bitcoin trades.

Arguments against bitcoin in the report were mainly economic: There are significant costs behind its creation, and the overall 21 million BTC limit could prove deflationary. It also mentioned “a large red flag saying ‘buyer beware’ at current levels of price and use,” with simple demand and supply being the only ways to determine bitcoin’s fair value.

“The fact that there are multiple exchanges but only 1723 registered businesses worldwide advertised as using bitcoin (no doubt there are more in reality), suggests there may be something in the idea that there is currently more people buying bitcoin in anticipation of an increase in bitcoin value, rather than buying bitcoin in order to use them as a payment method. That strongly suggests a bubble in the present value of bitcoin.”

International view

The report gave a rundown of authorities’ positions on bitcoin worldwide, including Thailand’s implicit ban and the recent changes in China, but also noting that Germany regards bitcoin as capital gains – taxable ‘private money’ and Switzerland might be about to declare bitcoin a foreign currency.

It also briefly referred to bitcoin’s ‘connection’ to illegal activity, in the context that this image was a barrier to building widespread trust, which would take a long time.

NAB is generally considered to be the most bitcoin-friendly of that country’s large banks. One other, the Commonwealth Bank, has actively blocked transactions and closed bitcoin-related accounts, while others have not yet made their positions clear.

Tristan Winters, a board member of the Bitcoin Foundation’s chapter the Bitcoin Association of Australia, welcomed the report.

“It’s great to see that Australia’s legacy banking system will be joining us in the 21st Century. The Association is pleased by the NAB’s well reasoned and objective analysis. That’s what we’re looking for from the whole sector.”

National Australia Bank – Bitcoin to replace AUD?