As the RBNZ mulls developing a central bank digital currency, the NZ Bankers' Association queries what public policy problem one would address

Bank lobby group the New Zealand Bankers' Association (NZBA) says that, as the Reserve Bank considers developing a central bank digital currency (CBDC), it's important to probe what public policy problem a CBDC would address.

In a future of money issues paper released last year, the Reserve Bank said a CBDC would be a useful development for central bank money, supporting 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.

A CBDC is a virtual currency issued by a state that has official legal tender status. A CBDC would allow households and businesses to directly make electronic payments using money issued by the central bank, which in New Zealand is the Reserve Bank. It could see an electronic record or digital token used as the virtual form of a country's fiat currency, which in NZ's case is the NZ dollar. This is against the backdrop of a world awash with cryptocurrencies such as bitcoin, and the development of stablecoins, a type of cryptocurrency backed by a reserve asset, such as fiat currency or gold.

In a submission on the Reserve Bank's issues paper, NZBA says it supports the Reserve Bank undertaking further work in relation to cryptocurrencies and a potential CBDC for NZ. NZBA says it would welcome the opportunity to work with the Reserve Bank on emerging issues in this area, especially because of the potential impact on payments systems and banking.

However, NZBA's submission questions whether a CBDC could be a problem looking for a solution.

"It is important to understand what public policy 'problem' a CBDC would address, and any related discussions should include the potential for that problem to be resolved more efficiently through other means. We note that some central banks, most notably the Federal Reserve, have suggested that CBDC’s may be a 'solution looking for a problem,' and that even where there are problems in the payment system, there are more effective means to resolve them than a CBDC," NZBA said.

In a speech last week Governor Adrian Orr noted the Reserve Bank is conscious of the challenges potentially posed by a CBDC.

"A CBDC is likely to affect the banking sector’s current business model. By how much would depend both on the design of the CBDC and how the public used it," Orr said.

"A CBDC must be, by design, operationally resilient to outages and cyber security risks and comply with all relevant legislation and regulation. A CBDC should act as a catalyst for innovation and competition in a wider money and payment ecosystem that supports, rather than crowds out private innovation," Orr added.

He went on to say a CBDC would take many years to design and implement.

"Future consultation will get down to specifics of design and implementation assuming the case continues to be assessed positively...We will soon be commencing proof-of-concept design and testing for a CBDC as part of our assessment of the case for a CBDC in New Zealand," Orr said.

Last year credit rating agency Fitch warned about the potential of disintermediation, or loss of business and relevance, for banks from the introduction of CBDCs.

"We believe the introduction of CBDCs will inevitably involve households and businesses converting some of their commercial bank deposits into CBDCs. All other things being equal, this would require banks to shrink their balance sheets – a process known as disintermediation," Fitch said.

"A potentially significant risk posed by the broader introduction of CBDCs is that disintermediation could occur at a destabilising rate, for example by triggering a sharp contraction in bank lending. The potential for bank runs could even increase in stress scenarios."

Meanwhile, NZBA said it agrees a CBDC may be considered as important for the sovereignty of the NZ dollar, and without a NZ dollar CBDC the currency may be negatively impacted if, for example, online payments such as peer-to-peer start using other digital currencies that become mainstream through online platforms.

"We agree that the ability to manipulate the economy through use of monetary policy could be vastly reduced if the majority of money trade is not with the NZ dollar. A CBDC could be a useful tool in mitigating this risk," NZBA said.

"CBDC should be considered as part of New Zealand’s strategy planning to address the decline in cash usage. It could be designed to be more inclusive than other means of payment and stored value tools."

"Some of the perceived benefits of the CBDC in the consultation document are based on current state of the systems, for example peer-to-peer capability. It’s worth noting as these new systems are in a lot of cases under development and may impact the way in which CBDC may benefit the financial system in the future," said NZBA.

The lobby group provides a list of questions it says need to be worked through to determine the value and potential success of a CBDC. These include:

a) what need/problem a CBDC would address;
b) what form would it take;
c) how would it be distributed and used;
d) what infrastructure would be needed; and
e) how would this be funded.

"These issues require a detailed understanding of both the current and developing payments systems, technologies, operational processes and business models, making it even more important that the Reserve Bank works closely with banks and other payments services providers as it develops potential policy approaches," NZBA said.

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