New Zealand may be preparing for a more radical track toward a central bank digital currency than Australia, with the Reserve Bank of New Zealand on Wednesday saying it was “continuing its exploration” of this topic
A key point of difference is that New Zealand, for now, is promoting any Kiwi CBDC as a retail product with wide appeal alongside use cases in commerce and trade.
If all goes to plan, the RBNZ CBDC schemers envisage “we would introduce digital cash to New Zealand. We expect this to be around 2030.”
Apparently written with accessibility for the general public in mind, Digital cash in New Zealand is a slender 38 page consultation document - and a curious basis for any “exploration” of one of the most challenging transformations of the fundamentals of the money and credit system any central bank could contemplate.
“We are calling this ‘digital cash’. It would be a new type of money in addition to the banknotes and coins we have today, and the electronic money in your bank account,” Ian Woolford, the RBNZ’s director of money and cash wrote in an overview of the project.
“It would be the first digital form of New Zealand currency backed by the government and available to the public.”
But the public isn’t being told all that much about it.
In a 23 word coda under the heading “Managed issuance” the RBNZ observes: “Future stages of work will explore the potential impacts of digital cash on the financial system and assess the benefits, costs, and risks.”
Risks abound in most schemes for any CBDC, whatever the jurisdiction - though very, very few countries have taken the plunge. Bahamas, the Eastern Caribbean Central Bank, Jamaica, Nigeria and the UAE have launched central bank digital currencies that are still in circulation.
So far, no advanced economy central bank has issued a digital form of money to the public, and at this stage Australia’s Reserve Bank appears hesitant to do so.
The RBNZ did devote one section to “impacts on bank funding” but, again perhaps with a general reader in mind, barely analysed the whopping implications.
“Commercial banks would face reduced deposit funding and profits” the RBNZ observed.
“[Banks] can choose how to respond to these reductions. They can get more funding from investors, reduce lending, or increase lending rates.
“We also need to consider the impact of issuing digital cash on wholesale funding rates. This is an important determinant for how banks would respond to fewer deposits.
“We will also consider whether we need to limit the amount of digital cash that people or businesses can hold. As well as what interest rate would be paid if any.
“We also need to test if there are any financial system stability impacts from issuing digital cash, including whether there are any transitional impacts on stability.”
The RBNZ took pains to make the case that the country’s payments system, especially, is in dire need of sharper competition. This is an approach fintechs will love and the Australian-owned banking oligopoly will contest.
“New Zealand’s payments landscape is dominated by a small number of large players.
“The barriers to entry are high and New Zealand’s payment services have become less innovative than other countries. Digital cash would help bring down barriers to entry to the payments system.
“Digital cash can improve efficiency through greater competition and innovation” the RBNZ argued.
The RBNZ said “after talking to firms in the payments and financial technology industry, we confirmed that many firms find it difficult to enter New Zealand’s payments landscape.
“This results in few new service providers entering New Zealand’s payments landscape. Low competition in payments means that New Zealanders are not getting the best deals and services.”
Consumers and business may be getting even more lousy deals when NZ banks curtail lending or radically transform their liability mix toward more volatile wholesale funding; that is, when deposits currently held by private banks progressively get sucked up onto the Reserve Bank of New Zealand’s balance sheet.
The schedule published by the RBNZ says this consultation on high level design options will be followed by work to further develop the design and policy requirements. The RBNZ expect to finish this by June 2025.
Then in 2026, the RBNZ will decide whether to develop and test prototypes, with actual testing slated for 2028 and 2029.
If the dreamers and the fintechs and the Kiwi public aren’t too baffled or too worried by any of this, a Kiwi CBDC may be in market in around six years’ time.