A digital cash future in New Zealand?

07 May 2024

The Reserve Bank of New Zealand (RBNZ) is consulting on a proposed “digital cash” option - a central bank digital currency (CBDC) that RBNZ considers could play “a transformational role in the New Zealand economy”.

We look at how it might work and the potential implications for the financial and banking sector. Submissions close on 26 July 2024.

Key features

Key design features under consideration are that the digital cash be:

  • Issued by RBNZ onto RBNZ’s balance sheet and denominated in New Zealand dollars. It would represent a direct legal liability on RBNZ and would be exchangeable 1:1 with physical cash (banknotes and coins) and with RBNZ central bank currency reserves.
  • Distributed by private sector third party service providers (such as banks, payments companies and new entrants) directly to users, although RBNZ would own and operate a digital cash payments platform to facilitate all digital cash payments.
  • Accessible by everyone, usable on a range of electronic devices and without a need to access a bank account. RBNZ contemplates that digital cash could also support wholesale uses such as cross-border payments.
  • Private, secure and able to be trusted. Users would need a verifiable digital identity, provided through their service providers and RBNZ would set rules on how third parties could collect, use, share and delete personal information. There would be no limitations on how digital cash could be used.

Strategic design of digital cash

RBNZ’s preferred design is that the digital cash ecosystem be user-centric, enable strong market participation, have a high level of innovation and consider the impacts on other payments participants.

Principles and priorities identified in the original issues paper released by RBNZ in December 2021 include:

  • Digital cash principles – digital cash should be uniform, universal, private, innovative, reliable and orderly.
  • Māori data sovereignty – the inherent rights and interests of Māori in relation to the collection, ownership and application of Māori data would be protected.
  • Privacy and personal autonomy – the design must ensure minimal data collection, embed appropriate personal and transactional data governance and ensure users have full autonomy and control over their personal information, and the storage and use of digital cash. Digital identity would be the responsibility of market service providers although RBNZ is considering using the tools currently being developed by the Department of Internal Affairs to verify or certify identifiable information (some of this technology can be seen in action now through the enhanced capability of RealMe).

Issuance of digital cash

RBNZ is considering using the existing Exchange Settlement Account System (ESAS). In this scenario, individuals and businesses would exchange private bank deposits for digital cash, exchangeable at par with ESAS reserves and physical currency in circulation. If there is not enough settlement cash available to meet demand, RBNZ would draw on its normal domestic liquidity tools (such as foreign exchange swaps and open market operations).

Chapman Tripp comment

We think the RBNZ is right to be considering possible long-term risks to financial stability and the effectiveness of monetary policy if the development of digital currencies is ignored.

While far from a certainty, any large-scale movement out of New Zealand dollars and into cryptocurrencies or other privately issued digital currencies would reduce RBNZ’s ability to influence the domestic economy through interest rate settings.

However, introducing a CBDC gives rise to a series of complex and interrelated implications, including global trends in the role of central bank money and digital infrastructure, competition, digital privacy, and monetary policy. For example:

  • As the RBNZ acknowledges, user demand could be high. This could result in a loss of profits, lending power and liquidity for banks and other deposit takers. Bank runs could, for example, become more likely if customers can respond swiftly to rumours of a bank’s financial distress by transferring bank account holdings into a digital cash wallet.
  • The detailed characteristics of any digital cash option are yet to be decided and will be critical to industry participants deciding how (and whether) to develop solutions that integrate with the digital cash ecosystem. The New Zealand public’s appetite for a digital cash option will only be met where industry participants and innovators can see an achievable, and profitable, path to delivery. (We note that in some countries where CBDC regimes are already in play, uptake has been slower than anticipated.)
  • From the perspective of the New Zealand public, trust and confidence in digital cash will be imperative. In particular, New Zealanders are unlikely to welcome a digital cash solution if they do not trust that their privacy is protected and that systems for the collection, use and storage of their personal information are robust.
  • The limitations of a CBDC should be acknowledged, including the inclusion needs for those who are reluctant to use digital technology or who are digitally excluded for whatever reason.
  • A range of novel questions would need to be resolved about the legal status of digital cash and the law reform that would be required to enable its use. The leading industry players in the UK have established an experimental service to test these regulatory impacts. Perhaps, in the New Zealand context, this could be a role for Payments NZ.

Next steps

Submissions close on Friday 26 July 2024.

RBNZ first consulted on forms of CBDCs in a series of consultations on The Future of Money – Central Bank Digital Currency in 2021. The focus in this discussion paper is on the retail use of digital cash by everyday individuals.

We encourage early engagement through this consultation to shape the core principles and design options for New Zealand’s digital cash, should RBNZ decide it is an appropriate course for New Zealand.

If you would like more information or assistance with preparing a submission, please get in touch with one of our experts.
Read our previous insights:

Our special thanks to Hye-Song Goo for her contributions to this article.

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