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The Reserve Bank of New Zealand has recently announced plans to consult the public on potentially introducing a Central Bank Digital Currency (CBDC). The introduction of a CBDC would work alongside cash to combat its declining use, availability and acceptance in New Zealand. A CBDC would be used to support the future development of central bank money and act as a fair and equal way for citizens to pay and save.
CBDCs are digital currencies, issued by a country’s central or reserve bank and pegged to their fiat currency. A CBDCs purpose is to act as a store of value for fiat currency, that can be used to pay for goods and services. Payments made with a CBDC typically occur on a private blockchain, allowing for faster and more secure transactions.
CBDCs have grown in popularity due to the significant decrease in physical currency and its use in developed countries. Governing bodies and central banks can use CBDCs to introduce new monetary policies that minimise inflation.
One notable country that has begun to roll out a CBDC is China. China’s central bank has begun developing its own Digital Yuan (E-CNY) which can be used as legal tender to pay for goods and services. The E-CNY first debuted at the Beijing Winter Olympics in 2022 and has since seen widespread adoption across China, with a transaction volume of 87 billion digital Yuan made in 2021.
Featured Article: Guide to Central Bank Digital Currencies (CBDCs)
Both CBDCs and cryptocurrencies utilise blockchain technology, however, CBDCs are designed to be a digital version of an existing fiat currency. Cryptocurrencies are designed to be unregulated and decentralised; they are not governed by a central authority. The main purpose of cryptocurrencies, like Bitcoin (BTC), is to be a new store of value that would replace existing fiat currencies.
The price of a cryptocurrency will also fluctuate based on supply and demand, and investors’ interest in the asset, a CBDC will mirror the value of its fiat counterpart and is designed to remain stable. CBDCs, on the other hand, are regulated by central banks.
The rise of cryptocurrencies in the last decade has more than likely been the biggest contributor to the recent research and development of CBDC’s around the globe. As CBDCs grow in popularity, we will likely see new crypto regulations be put in place as governments push to adopt CBDCs. New regulations on cryptocurrency could stunt their overall growth and development, reducing the number of investors.
CBDC’s will also provide stability within the cryptocurrency market as their price will remain unchanged during turbulent times in the market. This is similar to how stablecoins were developed to minimise the volatility of crypto.
CBDC’s will utilise blockchain technology but they will not be decentralised and instead controlled by a governing body. The key draw of cryptocurrency is that they will remain decentralised, trustless and private.
The introduction of a CBDC can be greatly beneficial to the prosperity of New Zealand’s financial system. A CBDC will ensure that the NZD remains New Zealand’s single unifying currency. Providing individuals and businesses with the option to convert their privately issued money into a digital form would ensure that central bank money remains valuable. This is because there would theoretically be an increase in transactions made with central bank money.
The technology used to establish a CBDC could ensure that the Reserve bank of New Zealand’s money remains relevant and useful in the future.
The implementation of a CBDC gives New Zealanders access to a fair and equal way to pay for goods and services. A CBDC supports financial inclusion by providing citizens that do not have access to a bank account and who are reliant on cash with greater storage and payment options. This would also give New Zealanders an opportunity to save money out of the banking sector, allowing for greater freedom over their spending and saving.
Establishing a CBDC is not without its challenges, the complexity of setting up a CBDC can present cyber-security issues and potentially destabilise the financial system.
Cyber security threats, operational issues and data breaches are some of the biggest challenges faced when establishing and maintaining a CBDC. Any breaches in security could have a significant impact of the public’s trust of the CBDC.
There is also a high cost involved in developing a CBDC due to the technology and payment infrastructures that are required. During the development stage, the Reserve Bank of New Zealand needs to consider key design factors including how the digital currency is distributed, its use offline and the availability of the digital currency. The Bahamas faced several distribution problems when releasing their own CBDC, the Sand dollar. A survey of the countries’ economic and financial policies found that only 0.1% of the Sand dollar was being used by Bahamian citizens.
If there is a high level of demand for a CBDC, there could be several negative impacts on the banking sector and potentially New Zealand’s financial system. If the CBDC becomes more popular than traditional banking, then banks could lose a large portion of their funding. This could result in banks losing profitability, causing them to increase the price of lending or reducing credit options.
The Reserve Bank has already acknowledged this risk and is taking steps to minimise any risks to the banking sector.
Developing a CBDC is a complex process that requires a well-thought-out design and policy plan. A CBDC has the potential to support the value of central bank money and give New Zealanders a fair way to pay and save.
CBDCs can potentially create an innovative payment system in New Zealand that brings improvements to the efficiency and strength of the country’s currency.
For a CBDC to be successful the Reserve Bank of New Zealand will need to consider all the operational and security risks that could arise from creating a digital currency. However, through proper planning, a multi-stage approach and public outreach, a CBDC could potentially become the future of money in New Zealand.