Reserve Bank preparing for private money evolution

The Reserve Bank has this week published a new issues paper titled ‘The Future of Money – Private Innovation in Money’ (Issues Paper).  Submissions are due by 3 April 2023.

The Issues Paper follows earlier Future of Money – Te Moni Anamata consultations in 2021.

The role of the Reserve Bank

The Issues Paper focuses on the Reserve Bank’s role as the ‘steward of money’ in New Zealand, a role that has expanded under the Reserve Bank of New Zealand Act 2021 to include (among other things) monitoring technological developments in money.

The Issues Paper acknowledges that – as with any central bank – the Reserve Bank’s power to issue central bank money is the core tool to influence the provision of 'private money'.  This power underlies the Reserve Bank’s ability to provide a value anchor, implement monetary policy and act as lender of last resort.

Historically ‘private money’ has generally meant bank accounts, but increasingly new digital ‘currencies’ are emerging in the market. The paper ultimately wrestles with what the Reserve Bank’s future role will be if private money becomes less directly tied to New Zealand’s central bank money and the Reserve Bank’s regulation of deposit takers (leaving aside the Reserve Bank’s separately planned central bank digital currency (CBDC) which addresses some of these concerns from another angle).

This includes overlapping questions raised in relation to private money issued by large, potentially dominant, businesses other than banks and deposit takers; sovereignty over private money circulating in currencies other than NZD; and new risks to the public.

The Reserve Bank is seeking feedback on how its approach to regulation can best balance the opportunities and risks that these innovations bring to the table.

Factors underlying the Reserve Bank’s approach

The Issues Paper identifies the following key factors guiding the Reserve Bank’s approach:

• Competition: “a competitive market with effective incentives for innovation and continuous improvement is the foundation for trust and efficiency in private money”
• Choice: “a competitive market provides more choices for New Zealanders. However, choices in private and central bank money need to be meaningful to support both market discipline and inclusion”
• Trust: the Reserve Bank “value[s] the high level of trust in private money across our current system, regardless of who issues the money. This means that users of money must be able to trust money is what it says it is worth, and that money can facilitate economic exchanges efficiently and with minimum transaction costs”, and
• Same risk, same regulation: “there should be a level playing-field between different forms of private money. Regulation should be calibrated to the new technological context and adjusted where risks differ, or new risks emerge.”

The Issues Paper identifies opportunities for innovation and competition in the area of private money and ways that New Zealanders can pay, invest and borrow, including greater financial inclusion.

Monitoring new developments

The Issues Paper proposes a new monitoring framework, expanding on the current approach used for financial market infrastructures (FMIs), to allow the Reserve Bank to “act if necessary”.

In addition to the factors applied to FMIs, the framework would include monitoring the extent of usage of relevant forms of private money (including where it is included as part of a bundle of services by a wider business or platform), as well as non-economic factors and the wider ecosystem relating to that form of private money.

Our Comments

New forms of private money may have a significant impact on the New Zealand economy and the Reserve Bank’s role in it. The extent of those impacts will depend on whether and how quickly these new forms are adopted by the public (as well as the introduction of the Reserve Bank’s own CBDC).

Globally we have seen stablecoins and tokenised deposits, from both new and traditional market actors, grow considerably and increase access to the financial system.  On the other hand, recent developments such as the ‘bank run’ and insolvency of FTX (one of the world’s largest cryptocurrency exchanges) and the termination of ASX’s clearing and settlement distributed ledger product have removed some of the shine from crypto technologies in the money and payment system.  Traditional payment and settlement services are also slowly (but steadily) improving to fill long-standing gaps relating to real time settlements.

New technologies are also likely to have wider ripple effects on the Reserve Bank’s functions that have not yet been fully tested or solved in any jurisdiction, and may (as the Issues Paper acknowledges) be difficult to reverse once a technology or asset type takes root.

The Reserve Bank will need to walk a line that enables the fast development and use of new technologies in New Zealand – encouraging both new and existing fintech businesses to work within the New Zealand regulatory net – while managing the risk of loss of savings and erosion of confidence that have plagued high profile global failures.

Next Steps

The Reserve Bank is planning to offer webinars on the Issues Paper in February and March (subject to demand).

Particular feedback is being sought on:

• the opportunities and risks posed by private innovation in money,
• how these innovations might impact the Reserve Bank’s role in safeguarding the financial system, and its influence of the economy via interest rates, and
• what regulatory responses are required to help deliver these objectives while leaving room for the potential that this technology may bring.

If you want to discuss what these proposals mean for you, or help in preparing a submission in time for April next year, please do get in touch.