Bullion, prudential regulation and monetary law in Australia - a case for a narrow APRA carve-out and targeted Currency Act reform

“Virtually everything in history is documented by [the] coinage. And there is one thing interesting about the coinage, the buildings crumble, the paper gets lost, coins have survived.” ^[1]

Executive summary

Australia currently operates a de facto two-tier monetary and financial system separating legal tender from prudentially recognised “money-like” assets. Within this framework, bullion occupies an anomalous position: certain gold and silver coins are legal tender under the Currency Act 1965 (Cth) (Currency Act)^[2], yet prudential regulation treats bullion exposures as commodities for funding and liquidity purposes under Basel III as implemented by the Australian Prudential Regulation Authority (APRA)^[3].

This article argues that a narrow carve-out for fully allocated, unencumbered bullion under APRA’s liquidity standards would be conservative, risk-consistent and economically coherent for a commodity-exporting nation such as Australia.

It further proposes a limited amendment to the Currency Act to permit gold and silver coins to discharge debts at market value by agreement, thereby aligning monetary law more closely with economic reality without undermining monetary sovereignty.

1. Introduction

Australia’s financial architecture draws a sharp but often unarticulated distinction between monetary law and prudential regulation. Legal tender rules determine what must be accepted in discharge of a debt, while prudential standards determine how banks manage balance-sheet risk. These domains operate in parallel rather than in conflict, yet bullion sits uneasily between them.

2. Legal tender and the Currency Act

Under the Currency Act, Australian notes and coins, including certain gold and silver coins issued by the Commonwealth, are legal tender at their face value. Legal tender status is a narrow statutory concept concerned with the discharge of debts; it does not determine how assets are treated for banking, liquidity or capital purposes. The continued designation of bullion coins as legal tender at face value is historically grounded but economically artificial given their market value.

3. Basel III, APRA and the treatment of Bullion

Basel III, implemented in Australia through APRA’s prudential standards (notably APS 210)^[4], classifies assets functionally. Commodities and commodity-like exposures attract high Required Stable Funding (RSF) factors under the Net Stable Funding Ratio (NSFR), typically around 85 per cent.

Silver is unambiguously treated as a commodity. Gold, despite its monetary history and central bank reserve status, is generally treated as a commodity for funding purposes unless held by a central bank. The NSFR is concerned with funding risk, not monetary status.

4. A de facto two-tier system

The result is a two-tier system. Commonwealth money (notes, coin and reserve bank settlement balances)^[5] sits at the apex, while bank-intermediated assets, including deposits, securities, commodities and bullion, are regulated as balance-sheet risks. Bullion is legally capable of discharging debts yet not favoured prudentially, reflecting a mismatch between legal form and economic substance rather than an inconsistency in law^[6].

5. The case for a narrow APRA carve-out

A carve-out limited to fully allocated, unencumbered bullion would not give bullion the privilege of being money. It would simply recognise that such holdings do not generate maturity transformation or rollover risk, the core concerns of the NSFR. Properly designed, a carve-out would apply only where bullion is segregated, fully paid for, unencumbered and not used for leverage or short-term funding.

6. Proposed APRA wording

For the purposes of APS 210, an Authorised Deposit-taking Institution may apply a reduced Required Stable Funding (RSF) factor to holdings of precious metals where the bullion is fully allocated, segregated, unencumbered, not rehypothecated, and not funded through short-term wholesale liabilities. This treatment would not confer legal tender status nor affect capital adequacy requirements.

7. Amending the Currency Act: market value acceptance by agreement

While a prudential carve-out would not require acceptance of bullion in payment, Australia could modernise the Currency Act by permitting gold and silver coins to be accepted in discharge of debts at their market value by agreement. This would preserve the Australian dollar as the unit of account while recognising bullion’s economic role by consent.

8. Implications for Australian gold producers

A coherent regulatory treatment of bullion would indirectly benefit Australian gold producers by supporting deeper domestic bullion markets, reducing reliance on offshore clearing centres, and enabling more resilient financing structures grounded in physical metal. This approach is consistent with developments in the United States, where a growing number of states (now more than ten, including Utah, Texas, Wyoming and Florida)^[7] have enacted legislation recognising gold and silver coins as legal tender at their market value for payment purposes, without displacing the US dollar as the unit of account.

9. Conclusion

Because Australia’s legal and prudential frameworks already accommodate a two-tier system, a narrow APRA carve-out for allocated bullion, combined with a modest update to the Currency Act, would enhance coherence without undermining monetary sovereignty or financial stability.

^[1] Martin A. Armstrong in “The Forecaster” https://theforecaster-movie.com/the-story/. In addition to the buildings and paper mentioned by Armstrong, purely digital coins and crypto-assets may also fail. They remain contingent on software, electricity, network access and custodial integrity, and may be compromised, frozen, altered or rendered inaccessible through hacking, protocol failure, key loss or systemic intervention.

^[2] Currency Act 1965 (Cth) ss 9–16.

^[3] Australian Prudential Regulation Authority, Prudential Standard APS 210 Liquidity.

^[4] Basel Committee on Banking Supervision, Basel III: The Net Stable Funding Ratio (BIS, 2014).

^[5] Reserve Bank of Australia, ‘Legal Tender’, RBA Banknotes website.

^[6] World Gold Council, ‘Basel III and the Gold Market’ (2021).

^[7] Utah Legal Tender Act 2011; Texas Government Code Chapter 2116; Wyoming Legal Tender Act 2018; Florida HB 999 (2024).