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Reserve Bank consults on the future of money 

by Jeremy Muir, Lloyd Kavanagh

Published: September, 2021

Submission: October, 2021

 



Today, the Reserve Bank of New Zealand (RBNZ) has published a consultation on the ‘Future of Money’. The consultation is aimed at gaining the public’s input on how:


  • the RBNZ performs its role as steward of money and cash; and
  • how it should assess whether to offer central bank money in a digital form alongside cash.

The RBNZ has asked for submissions by 10am, Monday 6 December, with the aim of preparing and publishing a summary of responses to the issues papers, and an outline of next steps by 30 April 2022.


Links to the consultation documents and the media release are availablehere,here, andhere.


Who needs to read it? Why?

This update will be of interest to all participants in the financial services industry, as some of the changes proposed, especially in relation to the potential introduction of a Central Bank Digital Currency (CBDC), are significant and wide-ranging. It will also be of interest to the general public, who will ultimately be affected by the actions taken by the RBNZ.


What does it cover?

The future of money – stewardship of cash

As steward of money and cash, the RBNZ views its role as ensuring “now and in the future, that the money we issue as a central bank (‘central bank money’) is a stable value anchor for the monetary system; is available as a fair and equal way to pay and save; so ensuring that New Zealanders have access to money in forms that suit them and their changing needs”.


The Stewardship Consultation Paper outlines how the RBNZ proposes to act in this role of steward of money and cash and describes the proposed policy priority areas. The issues which have underpinned the RBNZ’s proposals have been driven by three key trends in the monetary system:


  • A continuing decline in the use of cash in transactions.
  • Digital innovation in money and payments.
  • Opportunities to stimulate innovation in the wider payment systems.

The RBNZ views these trends as both opportunities to stimulate innovation to enhance the prosperity and wellbeing of New Zealanders, and threats to the stability and functioning of the monetary system.


Summary of proposals

In delivering on this role as steward, the RBNZ states that it intends to take a proactive approach to ensuring that its systems are agile, forward looking and modern. It also recognises the fact that responsibility for policies which affect the monetary system sometimes fall outside the purview of the RBNZ. In response to that, they intend to work in a collaborative and coordinated way with other agencies to take a strategic, system-wide approach. The RBNZ also intends to formalise and expand its system stewardship role in relation to money and cash issues.


Importantly, the RBNZ intends to prioritise its work in the following three areas:


  • Optimising the lifecycle management of physical cash – and therefore New Zealanders’ access to it – by redesigning the system that makes cash available around New Zealand (actively or by supporting private sector initiatives).
  • Exploring the opportunities and threats posed to the monetary system by a form of private-sector digital asset – stablecoins.
  • Assessing the potential case for a New Zealand CBDC.

Finally, the Stewardship Consultation Paper suggests that the RBNZ may need more powers if they are to fulfil their stewardship responsibilities. These include the power to:


  • Issue a general-purpose CBDC.
  • Regulate access to cash services or cash acceptance; better align public and private incentives through cost caps.
  • Regulate new forms of money and payments that impact on stewardship goals (e.g. stablecoins).

Consultation questions are listed at the end of each section, which the RBNZ invites feedback on.


The future of money – central bank digital currency

In the RBNZ’s view, the declining use, acceptance and availability of cash in New Zealand, and emerging innovations in private money, namely stablecoins, make this an opportune time to consider broadening central bank money to include a widely available digital form, a CBDC.


Overall, the RBNZ believes that the introduction of a CBDC would be a helpful development for central bank money, as it would support their role as steward of money and cash. It would support both the value anchor role of central bank money, and the ability of central bank money to act as a fair and equal way to pay and save.


The RBNZ believes that a CBDC would directly support the role of central bank money as a value anchor by:


  • Providing individuals and businesses with the option of converting privately issued money into a digital form of central bank money (ensuring the long-term convertibility of private money into central bank money).
  • Improving the technological form of central bank money to ensure it remains relevant in a digital future.
  • Providing an additional monetary policy tool (by it being either issued to provide monetary stimulus, or interest bearing).

On the other hand, the RBNZ believes that a CBDC would both directly and indirectly provide a fair and equal way to pay and save by:


  • Directly providing a basic form of paying and saving to all at a low cost, and acting as a gateway to the formal financial sector.
  • Supporting wider financial inclusion and wellbeing efforts, including through partnering with government programmes.
  • Providing individuals with freedom and autonomy in saving and paying by giving them greater choice, and providing a personal back-up in times of uncertainty.

Finally, the RBNZ argues that a CBDC and its ecosystem (including the distribution model) could potentially create innovation and competition in the wider money and payments ecosystem. This could bring improvements to domestic payments’ efficiency and resilience, as well as enable New Zealand to take part in global initiatives that use CBDCs to improve cross-border payments.


However, the RBNZ has identified some challenges that would come with the introduction of a CBDC:


  • How a CBDC may affect the banking sector requires careful consideration.
  • As with other forms of digital money, a CBDC must be operationally resilient to outages and cyber security risks, maintain data privacy, and it would need to comply with all relevant regulation.
  • Similarly, while a CBDC has the potential to create innovation and competition in the wider money and payment ecosystem, there is a need to consider the potential for it to crowd out innovation.

Consultation questions are listed at the end of each section, which the RBNZ invites feedback on. Overall, they have indicated that developing a CBDC would require much consideration given the inherent complexities, multiple design choices and policy choices to be made. This means that the RBNZ will take a multi-stage approach to policy development, with this CBDC Consultation Paper being the first of many.


Our view

We think that the RBNZ’s decision to release a consultation on its role as steward of money and cash, and how the introduction of a CBDC could support that, is a positive step to ensuring that the RBNZ is properly fulfilling its important role in the New Zealand economy.


However, given that some of the changes are wide-ranging, especially in relation to the introduction of a CBDC, we would caution against any decisions being taken without extremely thorough consideration and screening having taken place. Therefore, we welcome the RBNZ’s statement that the CBDC Paper “is intended as the starting point for a conversation with stakeholders on the potential role of a CBDC for New Zealand”.


Finally, we welcome the RBNZ’s statement that they understand and accept the need to keep physical cash, and that physical cash is here to stay so long as some of us need it. This helps to ensure financial inclusion – one of the Council of Financial Regulator’s key themes, as there are nevertheless people who have more limited access to digital technology and who rely on physical cash as a means of payment.


What next?

If you have any questions in relation to the RBNZ’s consultation or would like any assistance in drafting a submission for the consultation, please contact one of our experts.


 



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