RBNZ considers feasibility of issuing a digital currency, but isn't keen to regulate crypto-currencies; Says it doesn't see crypto as a threat to financial stability or traditional financial institutions - for now

The Reserve Bank (RBNZ) has broken its silence on crypto-currencies with a stark warning - caveat emptor - or “buyer beware”.

Releasing its first major piece of work on crypto in a 44-page report, ‘Crypto-currencies - An introduction to not-so-funny moneys’, the RBNZ concludes they are “experimental in nature”.

Its report writers, Aaron Kumar and Christie Smith, say individual currencies may be “more Betamax than VHS, and more MySpace than Facebook”, and even if the blockchain technology behind them is here to stay, individual currencies may not be.

Nonetheless, the RBNZ is considering whether or not it should issue a digital currency.

Feasibility of RBNZ-issued digital currency considered  

Kumar and Smith, say: “Work is currently under-way to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the Reserve Bank to replace the physical currency that currently circulates with a digital alternative.

“Over time, analysis associated with this project will filter through into the public domain.”

With crypto still making up a small portion of payment transactions, and most jurisdictions still requiring tax to be paid in domestic fiat currency, the RBNZ believes “national currencies are likely to remain an important payment mechanism”.

However Kumar and Smith allude to the fact the RBNZ is a few years behind some other central banks in exploring the possibility of a central bank-issued digital currency.

They say China “quietly” opened a Digital Currency Research Institute in 2016, while Ecuador in 2015 introduced a digital currency system implemented via mobile phones.

Yet they note: “the Bank of Canada has recently concluded that distributed ledger technology is unlikely to yield positive net benefits relative to the centralised system currently employed for wholesale payments, and suggested that the complexity of decentralized systems could increase operational risks”.

Crypto not on the RBNZ’s ‘regulatory ambit’

While Auckland University Commercial Law Head of Department, Associate Professor Alex Sims, is among those calling for crypto to be regulated in New Zealand, to lay the groundwork for blockchain to be used in various sectors to automate transactions, the RBNZ isn’t keen to come to the party.

“Crypto-currency schemes are neither systemically important nor materially important for financial efficiency and therefore have not yet been brought into the Reserve Bank’s regulatory ambit,” Kumar and Smith say.

Given the decentralised nature of most crypto-currencies, exactly how they would be regulated is a “work in progress”.

It is worth noting some initial coin offerings, as well as cryptocurrency services, like wallets, exchanges and broking, already fall under the Financial Markets Conduct Act, which is overseen by the Financial Markets Authority.

RBNZ’s power under threat?

The RBNZ doesn’t see crypto undermining its ability to implement monetary policy - for now.

Yet the report writers say: “If crypto-currencies become more popular as a payment mechanism, central banks’ influence on economic activity might be diminished, adversely impacting macro stabilisation.”

They point to the Reserve Bank of Australia raising concerns around its ability to deliver low and stable inflation as “cryptocurrency schemes usually have a predetermined supply path that cannot be altered to match the business cycle”.

Bitcoin its own worst enemy

As for the impact of crypto on existing financial institutions, Kumar and Smith say it “clearly increases competitive pressure” on those providing payment services.

However, they aren’t convinced operating a distributed ledger, which stores the entire history of transactions, is more efficient than simply storing current balances in a singular ledger.

“It is not clear that crypto-currencies’ alleged cost advantage is in fact large enough to out-compete traditional financial institutions.”

They also point out that the ability for crypto to compete with financial institutions is eroded by the competition among crypto-currencies.

“[T]he open source nature of Bitcoin has made it comparatively easy to create new variant crypto-currencies. Although Bitcoin has network effects that work in its favour as the first crypto-currency, emerging crypto-currencies may offer more efficient or cheaper transaction services, potentially eroding the value of bitcoins.”

The RBNZ recognises existing financial institutions are already looking at how they can use blockchain technology. The likes of banks are also “evolving their business practices to respond to the competitive pressure of crypto-currencies”.

Crypto not credit-friendly

The RBNZ maintains the anonymity enshrined in crypto prevents it from being issued as credit, and thus posing a real threat to existing financial institutions.

For example, if a lender doesn’t know who they’re lending to, they might charge a higher interest rate, which would penalise a low-risk borrower.

A truly anonymous borrower might also be incentivised to default on their loan.

From a technological perspective, Kumar and Smith say crypto isn’t credit friendly.

Currencies like Bitcoin require you to have enough currency before a transaction is completed, so problems could arise if a borrower has exhausted their balance of coins before meeting their repayment obligations.

Ethereum envisages using arbitrators or courts to resolve any disputes, but this relies on the transactions being identifiable.

When it comes to credit, Kumar and Smith are also worried about the legal status of smart contracts and consumer protection. They have concerns that smart contracts, like automated high-frequency trading, might adversely affect asset pricing, which could affect financial stability.

Risks for consumers - fraud, human error and collusion

What about consumers?

The RBNZ says there are genuine reasons for people to use crypto-currencies, yet it warns there are a number of risks.

For example, if you lose the key to access your crypto-currency account, it could be permanently inaccessible.

Without a central authority, there is no mechanism to reverse unintended transactions. So if you send currency to an incorrect or non-existent address, you’ve lost out.

And then there’s the issue of digital wallets and exchanges being susceptible to fraud.

Going even further than this, Kumar and Smith say there’s a risk the majority of a currency’s miners could collude to control the future evolution of the blockchain in what is known as a ‘51 percent attack’.

This could see them reverse transactions, prevent transactions and monopolise the creation of new coins.

When new tech compromises the security of old tech

Kumar and Smith also say there’s a risk new technology could undermine the security of the systems crypto has been built on.

They explain: “The security of cryptographic systems also relies on algorithms being more complex than current state-of-the-art computers are capable of solving. If quantum computers were developed with much faster speeds and capabilities then cryptographic techniques would need to be amended to compensate.”

A final “deeper concern” for the RBNZ is the governance of crypto.

“Crypto-currency source codes are often contained in Git repositories, which implicitly provides a small number of developers with the ability to amend the source code, subject to an uncertain peer review process.

“Exactly who has influence over such processes, and the checks and balances on their behaviour, is quite unclear.”

Kumar and Smith point to commentary that governance issues have seen Bitcoin struggle to gain scale. This, they say, has contributed to its wildly volatile fees and transaction backlogs.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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61 Comments

There you have it, you're on your on kids.

Caveat emptor.

Thanks Dad..
Aussies are paying $1 million worth of bills using bitcoin every week, just to prove a point
http://www.news.com.au/finance/money/investing/aussies-are-paying-1-mill...
1 Bitcoin equals
11896.99 New Zealand Dollar

its just a question of who will be left holding them when they collapse

Are you talking about shares, Fiat currency, house prices, or bitcoin?

frazz, I think you just turned their world upside down.

At least shares (in decent companies), Fiat currency (issued by decent countries), and house prices (in decent countries) have a long history of being relatively stable and have a fairly strong reason to remain valued.
Bitcoin has no long term history and has no real value backing it up.
But you choose to invest in what you want.

Bitcoin is not linked to any "decent" country..rather is a world Currency. Hopefully we live on a "decent" world or it will become one.

Clearly you are not a very experienced investor, otherwise you would have the below line burned into you memory for its repeated occurrence in just about every prosperous you can get your hands on.

“Past performance is not an indicator of future outcomes"

So my newly created Jimbo Jones crypto dollar is just as safe as the USD? Care to invest?

No, I don't believe you and now your money is worth nothing. See how that works.

Here's another example, we had an election and now the NZD is worth less than before. See sentiment. You getting the picture yet?

OK I get it, the value of a currency (or almost anything) is purely based on sentiment.
But surely that sentiment is affected by the past. If Jimbo Jones dollars had been trading successfully for 40 years you would think of it as a safer investment, right? And if there was a slight downward trend on the Jimbo Jones dollar that had been safe for 40 years, you would probably look through it. And if the NZ government backed the Jimbo Jones dollar, you would feel safer still, right?
But if the Jimbo Jones dollar had only been around for 40 weeks, didn't have any government backing, there were thousands of competing currencies that were effectively identical, and the Jimbo Jones dollar took a bit of a fall, would you be so brave?

Yay you are learning! And to answer your questions;

1) Yes your Jumbo Dollars would be less risky... probably. Which mean's I might keep some for the purpose of trade.

2) Government backing might make it even less volatile and if I could pay my taxes there would be actual benefit.

3) In terms of 40 weeks we have seen 30% to 40% swings in value but the trend continues up.

The problem is Risk and Volatility are where money is made. To give you an example you might be more familiar with lets look at shares and specifically Xero. Do we have a 40 year track record? No. Is it government back? No. Does it make a profit? No. Did we make money selling in 2014 before everyone figured out what it should be valued at? Yes =)

Cash is king

Bitcoin is just giant speculators bubble with a foundation only in its own community of believers

when the next GFC happens the non criminal elements will cash in their bitcoin, some will see this as bargains to be had (bull trap) then when it starts to slide into oblivion, will be totally worthless.

or the next GFC will put an end to the debt Ponzi we are all playing in, render all current fiat currency worthless and bitcoin is what we will be left with until the world governments can converter everyone to the New "official" fiat money.

Do I have all my wealth in one asset class? No, of course not why would I.

if the electricity goes off, can you still redeem your bitcoin?

yes,...once you've paid your power bill. :-O

Bitcoin can be transmitted by radio, smoke signals, colours in a picture; any mechanism by which you can encode information you can use to encode bitcoin transactions, so there’s no way to stop it.

Ni I will use my eftpos card ...Doh!

hahahahahahahaha!

Australia had there first successful blockchain start up backed by their government. They realise where the future lies. Coin price already up 500%,
http://www.smh.com.au/business/the-economy/turnbull-government-invests-i...

Seems like the pot and the kettle. Neither are backed by anything tangible but at least with crypto the supply of currency is limited and predictable.

With both of them, the value is in the group-think surrounding the currency.

There is one big difference - the NZD is the only NZ currency, while bitcoin is just one of an infinite number of possible crypto currencies. When you pay $10k for a bitcoin, what makes you think anyone will use / value that currency in the future?

There is one big difference - the Bitcoin is the only Bitcoin , while NZD is just one of an infinite number of possible fiat currencies. When you pay $1 Bitcoin for $10k NZD, what makes you think anyone will use / value that currency in the future?

Well there isn't an infinite number of countries so there is quite a difference. I can't just make up any old thing and call it the NZD.
I acknowledge that country specific currencies could become obsolete and that would make them worthless, but I would say the immediate risk of that is significantly less than bitcoin.

Yes you can, it happens all the time. Disney Dollars are an example. You just think the ones that are government back are special for some reason. You are wrong.

I think the point you are missing is its all rubbish. Bitcoin, NZD, House prices its all sentiment.

In that case you may as well give me all your money.
Good houses and shares have an intrinsic value (maybe much less than the current sales price), a NZD has an intrinsic guarantee of value by the NZ government and the reserve bank, but a bitcoin has absolutely no intrinsic value, it is just purely sentiment.
Now I'm not saying that bitcoin is going to fail by any means, or that houses or NZD is by any means safe, I'm just saying that in my book bitcoin is significantly more risky.

NZD has intrinsic value guarantee by the reserve bank? I don't think you understand what intrinsic means.

Also again if you had much experience in actual investing and not FX and Property speculations you'd understand that risk is a good thing and risk management is the whole game.

Now is Bitcoin my whole portfolio, no that would be silly. Do I have a mix of equity, property, bonds plus a small amount in alternative assets to add a little spice to the mix. Your damn right I do!

So do you consider bitcoin to be money (a medium of exchange, a measure of value, a means of payment), or an investment? If it is an investment, what are you investing in? A pyramid scheme?
Isn't it like buying shares in a company that produces absolutely nothing in the hope that other people do too? I know you don't like to look at the past, but I can assure you that it doesn't end well.
I hope you do have good risk management...

If you are trying to nail down my beliefs;

Blockchain is a technology. One that I think will change the world. Like the internet it will all be different. How? Good? Bad? I'm not sure but it will be different.

As for Bitcoin, not is not money. It fails at everything that defines money. But so does fiat money, don't get me wrong, its better just not perfect. So looking for an alternative shouldn't be discouraged.

As for pyramids, they only suck at the bottom.

There are hundreds of crypto-currencies actually. Bit Bitcoin seems to have the largest mind share while others might be more technologically featured.

That was brutal Grendel. Well done.

Why thank you, I do try.

dp

things can change fast, this picture is a classic example and a warning to those entrenched in old technology.
http://www.businessinsider.com/5th-ave-1900-vs-1913-2011-3

..yep and we are still building motorways and new roads .....overlooking that in a blink a car will be the size of a NZ post electric courier vehicle.

I got passed by one on my cycle going home....it was keeping up with traffic no trouble and I couldn't help wondering why there are not hundreds being used as commuter vehicles. It t won't be long though.

https://www.radionz.co.nz/news/national/274575/electric-delivery-vehicle...

The trend has been for cars to get bigger and bigger, look at the original honda civic, and at the current honda civic.. and the move to SUVs and crossovers, why is that suddenly going to change?

It probably wont change for family cars. But why have a massive car for a single person commute hogging expensive road and parking space?

Biggest benefit I'm ultimately looking forward to is not having to own a car. It'll be great when self-driving cars become primarily simply another option in Transport-as-a-Service.

I too are looking forward to that day. My Corolla sits on the side of the road all week and used in weekends. Waste of space and money like most personal cars..but hey Kiwis like to look flash as they drive along in the fast lane.

Having investigated the costs of using public transport to get to and from work from my previous address, no, a private car is very often not a waste of money. it worked out to be about $4k a year cheaper to keep running and insuring a car than to rely on public transport and uber/taxis, and that was only valuing my travelling time at $15/hour. Would have worked out very differently if I had to sit on the motorway for hours a day or pay for parking, but neither of those applied to me.

So you did not add in the cost of parking..nor the environmental cost of running your car rather than using the bus. Point taken

I did factor in the cost of parking.. at work for me it costs $0, and most shopping destinations are also free. So its only the few times a year I travel into the CBD or to events that have a parking cost.

The environmental cost is another handwaving number, arguments can be made to justify any number you want. What is the environmental cost of driving an 8 ton bus around the suburbs at night with 1 or two passengers on it as is frequently the case. Peak hour bus services are one thing, but to be able to ditch the car you need to be somewhere close to 24/7 availability of good reliable public transport.

Once you need the car for weekends and nights you already have insurance, and maintenance and depreciation costs, so the marginal costs of running the car to and from work compared to public transport fares.. car might win, and did easily in my case since my commute was short and parking is free. It would be a different story if I was going into the CBD from somewhere near a train station.. but thats not the case for lots of people.

How about depreciation then..did you fact that it? Handwaving , handewaving!! .

Ask that of every Landcruiser you see with a single occupant on the southern motorway.. the point is people won't change without good reason. 90% of drivers in auckland would be fine with a honda fit or a toyota echo/vitz pregnant rollerskate car, or a nissan Leaf.. but a huge number of them drive SUVs, Commodores or Camrys because they want to.. not because they need to. Its a status symbol for some.

Agree, we should make it prohibitively expensive.

..why is it suddenly going change? You're asking the wrong question. Why is it not going to change is the question?
Change is constant. and with Apple, google tesla and all other car makers investing billions to crack the holly grail, massive change to commuting is but a blink away. You are rather naive if you think the status quo will be around for more than a few years.

So you can't come up with a reason for this change then? Just hand-waving and "because"

The fact the car becomes electric doesn't stop people from wanting a big flash car. We are illogical like that.
The fact a computer drives the car doesn't mean people want to suddenly share a car with strangers, or jam themselves into a shoebox.

And if you say financial reasons.. it costs a lot less to run a honda fit than a Commodore V8, and as far as getting you to and from work and the shops they both are functionally identical 99% of the time.. but there is no shortage of commodore v8s out there, so obviously the financial penalty is not enough to get lots of people to change.

..good grief man... you expect me to waste my time giving you reasons? Just read some news, follow the trends, follow what is happening...i.e open your eyes.

It's only ageing middle class males with waning libido who want cars like that...Bigger and flashier the car = smaller and less functional manhood.

So how do you explain middle age women driving bmw X5s etc? You don't have an argument so you resorted to throwing shade.

You can't justify it because there are currently no solid reasons to think human behaviour is going to change rapidly.
Unless the cost (time and money aka convenience) of an autonomous car as a service is an order of magnitude less than driving or being driven by a computer in your own car (whether that car is electric or petrol/diesel) there will be a gradual change.

Unless govt legislates (and there are many ways they could) to force people out of driving their own cars, there are plenty of good reasons why people will keep doing it.

As a Tesla model 3 reservation holder I know what is becoming technically possible, but human nature is human nature, we collectively like our private bubble of air conditioned, stereo equipped comfort, which also doubles as a mobile storage locker for "stuff" and "things" and a method of personal expression (just look at all the bumper stickers/stereos/fancy wheels/national flags/personalised plates etc. that adorn cars) Its going to take a lot to pry people out of that. City dwelers with no parking and short commutes will be the first to change, but those that live in the suburbs with somewhere to park their own cars, that don't go near the CBD will have no reason to change anytime soon.

Tesla "investing" billions ... that is one way of putting it.
Alternatively they are a stuck pig bleeding... albiet one with lipstick
https://www.autoblog.com/2017/11/22/tesla-spending-8000-dollars-per-minu...

"Tesla has burned through $4.2 billion over the past 12 months, spending cash at a rate of about $8,000 a minute as it struggles to ramp up production of its Model 3 sedan, reports Bloomberg, citing its own data. At that rate, the news outlet estimates Tesla will deplete its current cash reserves by Aug. 6, 2018."

http://business.financialpost.com/transportation/autos/tesla-is-blowing-...

"its need for fresh cash came into high relief last week when Musk unveiled his latest plan to raise funds. He’s asking customers to pay him upfront to order vehicles that may not be delivered for years"

Yep when cars are fully automated there is no reason to have full sized vehicles for commutes - the only reason we currently do is for safety and because humans need lanes to drive in so there is no real efficiency of being smaller.

The caution I would offer is that back in 1900 the USA was actually something close to a capitalist economy, where entrepeneurs would invest their capital in productive enterprise rather than earn easier money through various forms of unearned income.

'caveat emptor'...Don't empty your nest egg.

Amen.

Over the last 100 odd years, the public has placed enormous trust on the monetary system, trust that surpasses religions in magnitude. This trust is shown to be beached year after year:
- Trust that Central Banks will not dilute our currency (0% inflation).
- Trust that there'll be sudden bank holidays with capital control (See Greece, Cyprus)
- Trust that there'll be no bail-in, bail-out that privatizes profits while socializing losses.
- Trust that a bunch of expensive suit wearing men knows better than everything, and let them fix the most important price of all - interest rate of money.

The argument for low (2%) inflation year after year is the most absurd of all. Let me put it this way - I'm a theft, and I steal 2% of your saving every year. Because of my stealing, you'll be encouraged to spend the money instead of saving it. So my act of stealing is good for the economy and my rights of stealing should be protected!

Instead, we have a fractional reserve banking system (built-in leverage) that is dependent on a very mild inflation to remain feasible. During a panic, if the central banks do nothing, the money supply collapsed to zero and social order breaks down. They created this dependency by monopolizing the supply of legal tender currency. This dependency is used to justify their continuous existence.

The giant gap between the cost of production of a currency and its market value is a source of power, combine that with monopoly over money supply means absolute power. Power corrupts and absolute power .......

Cryptocurrencies are based on cryptographic proof instead of trust. Block-chains cannot be tempered without redoing all the subsequent blocks behind it. There's no central authority or institution that controls its supply. The rules are hard-coded into the protocol and is open source for all to see. The value of bitcoin should be compared to the market value of fiat, instead of price per coin.

Bitcoins are not based on fractional reserve, nobody can print bitcoins and its supply is hard-capped at 21M forever. Because of the lack of central authority, anyone is free to copy its software (fork) and compete with it. It's the freest money of all. Whether this money survives and thrive, or some competitor takes over is up to the market to decide.

Finally - What's the market value of the function of money ?

"Whether this money survives and thrive, or some competitor takes over is up to the market to decide "
Doesn't that concern you? Your $10,000 bitcoin could be worthless tomorrow because the market decided that Jimbo Jones' crypto dollars are now better and that started a sell off?

And in terms of inflation, the flip side of this is having a currency where the people who buy in first get very rich, pyramid scheme style. Eventually the currency becomes almost unusable - we used to laugh about the number of zeros at the end of the Zimbabwe dollar, if bitcoin did become the defacto currency we would have the a similar number of decimal places in bitcoins. A loaf of bread could cost 0.000000000000001 bitcoins.

Great questions:

1) It does not concern me, my personal well-being has nothing to do with the greater good of the society. The community, market, developers support, infrastructure of a competing currency will not be built overnight. Any shift in market trend will happen overtime. It's just an asset class like any others. Risks is mitigated by staying on top of trends and adapt, just like anything else really.

2) Inflation - Early trend spotters will always be rewarded if they held on to their investments and ride the big trend. This is also true for early AAPL or AMZN investors, and yes there will be millionaires minted. Bitcoins are limited to 8 decimal places so the smallest unit will be 0.00000001, how much it will buy will depend on the market.

Completely agree Frostwind. The track record of Fiat currencies is abysmal - effectively they lose at least half their value per generation.

$172,000.00 worth of Bitcoins stolen over WIFI network!: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1194...

When the young Chairman Kim starts using bitcoins to pay for his ingredients (probably already using it). The Fed will try to shut them down very quickly

It's funny that people value bitcoin based on how many dollars you can buy with it.