The Reserve Bank’s paper The Future of Money – Central Bank Digital Currency is the second in a series planned as part of its consultation on the Future of Money (our notes on the first paper are here). Below are a few notes and pointers from Positive Money’s National Spokesperson Don Richards that will help you to understand the issues and make your own submission. We’ll keep you posted on ours.


  • As with the Stewardship paper, it was written in easy-to-understand terms and was free of jargon.
  • The Central Bank Digital Currency (CBDC) proposal is a step in the right direction to that advocated in our Sovereign Money proposal and I endorse the move to change our reference from Sovereign Money in our documents to CBDC.
  • Annex A on page 41 (see below) is scathing of our current payments system.
  • I am surprised that there has not been a strong reaction to the paper from the powers that be, as it looks to reduce the influence of Commercial Banks, albeit not to the extent we would want.  In the past the Commercial Banks have objected to any hint of a reduction in their powers or influence.

From the Executive Summary

The focus for the CBDC is for it to be

  1. A stable anchor of value and confidence and convertibility in our money.
  2. A fair and equal way to pay and save in our modern and inclusive economy.

Developing a CBDC will require a long lead in time and will take a multi stage approach.

A CBDC could be used

  • to provide monetary stimulus.
  • to support wider financial inclusion and wellbeing efforts, including through partnering with government programmes.

Our comments on the key points in the paper

CBDC is available to everyone (page 7)

The paper mentions several times that the CBDC is to be made available to everyone – businesses and individuals.

Not to be used to raise revenue (page 8)

Figure 1 mentions that most (financial) transactions are made using privately issued money.  It also mentions the independence of the Reserve Bank ensures that the Government cannot issue money to raise revenue.

Transactional relevance (page 14)

In order for a Central Bank money to be an effective value anchor, it has to have transactional relevance.  As cash becomes harder to obtain and use, its scarcity negatively affects the value anchor aspects of central bank money

CBDC in other jurisdictions (page 15)

The paper mentions that the Bank of England has established a CBDC taskforce and the Federal Reserve is looking at CBDC to head off developments in private digital money. The Swedish Central bank is testing CBDC prototypes whereas the Chinese Central Bank has a pilot CBDC and the Bahamas has a CBDC up and running. Cambodia has issued a ‘quasi CBDC’ through a subsidiary of the Central Bank.

Private money is not legal tender and carries a higher risk (page 18)

Table 1 mentions that money in transaction accounts isn’t legal tender and that they have a higher risk rating than cash.

CBDC for person-to-person transactions (page 20)

Electronic peer to peer settlement such as at farmers markets would be possible although it does not mention honesty boxes.

Injecting money into the economy (page 21)

CBDC could be used as an intervention akin to the Large-Scale Asset Purchase (LSAP) programme through the Reserve Bank injecting money into the economy by buying government bonds from banks in exchange for electronically created money.

If the Reserve Bank charged or paid interest on CBDC balances to households and businesses, it would provide a more direct transmission of monetary policy (compared to relying on commercial banks to pass on rate changes) but could be unpopular. (It does not mention who it would be unpopular with — at a guess I would say the commercial banks.)

People unserved by commercial banks (page 21)

A CBDC could directly provide basic savings and payments for those who are unbanked or underserved by the private sector by offering basic services at low or subsidised prices. This would recognise the positive benefits that are generated for all of New Zealand when everyone is included in the financial system. Providing CBDC as a public good would set it apart from private digital monies and payment systems.

Financial inclusion in India (page 22)

India’s Unified Payments Interface provides an example of how financial inclusion can be enhanced when national digital identity and open-data frameworks are coupled with the public provision of financial market (payment) infrastructure. Through its unified programmes, India was able to increase the number of banked adults from 30 per cent to almost 80 per cent in three years, an increase that it is estimated would have taken up to 45 years had India relied on traditional or private-sector-led growth processes.

Direct Government to person payments (page 23)

CBDC could be used to make direct government-to-person payments for individuals affected by crises (such as a natural disaster), paying benefits to individuals without bank accounts and paying out account holders who are affected by a banking failure.

Risks to the current banking system (page 27)

It starts off by saying that while CBDC would reduce the too-big-to-fail problem, it could cause financial instability if the take up of a CBDC was widespread. Due to the low credit risk nature of Central Bank Money, the risk of a large-scale run from deposits in transaction accounts to a CBDC might be increased, especially during times of financial uncertainty.

Banks could be less profitable (page 28)

Transaction accounts represent the lowest cost form of funding available to commercial banks. We question this assertion. We understand the Commercial Banks are not permitted to lend out funds in transaction accounts. It could be that they are talking about using the money in their transaction accounts as part of their reserves that enables the banks to create money.

If banks lost a large portion of their funding to a CBDC they would need to increase their funding through more expensive means (such as offshore wholesale markets or by increasing remuneration on transaction accounts). As their cost of funding increased, banks could become less profitable.

This is less significant for financial instability, as New Zealand banks have robust profit buffers and (incoming) higher capital requirements. However, a greater reliance on wholesale funding could result in New Zealand banks being more susceptible to downturns in overseas markets. It could also reduce their ability to comply with the Reserve Bank’s prudential liquidity policy.

Reduce the attractiveness of CBDC (page 29)

The Reserve Bank could limit the volume of CBDC that can be issued to wholesale customers or it could impose negative interest rates on large holdings of CBDC.

Water down the design of the CBDC (page 29)

Most central banks are considering a model where the central bank issues a CBDC and the private sector provides front-end and some back-end service. The Reserve Bank does favour a system where they issue and govern the CBDC.

Conclusion (page 34)

Amongst other things a CBDC should be:

  1. Uniform: A CBDC should be exchanged 1:1 with cash and support the NZD as our single unit of account.
  2. Universal: A CBDC should provide low-cost, basic saving and payments to all households, including those that are financially and digitally excluded.
  3. Cash-like: A CBDC should facilitate autonomy and privacy in paying and saving, provide a personal back-up form of payment, and enable peer-to-peer payments.

Inefficiencies in New Zealand’s payments system (page 41)

The front end of the payments system consists of a series of additional overlay and standalone payments systems that are owned and operated by commercial banks and payment service providers, including payment messaging services, card issuers and acquirers, point-of-sale technology providers and digital wallet providers.

In New Zealand, the prevalence of proprietary owned (closed-source) point-of-sale technology and commercial-bank-owned payments systems makes it difficult for new retail payments platforms, service providers and business models to enter.

Due to the network effects and benefits of vertically bundling services, incumbent service providers are better off when a larger number of users interface with their platforms, and consequently may not be inclined to allow competing providers to access their systems. Any competitor must establish its own network of users in order to gain traction.

The lack of competition in New Zealand’s payments system has contributed to low incentives to address front-end pain points and frictions, or to service low-volume customers, and has resulted in high card-interchange fees. For example, the vast majority of payments in New Zealand are not settled instantly, and although the risk of settlement failure is very low and the system is suitable for many if not most transactions, certain use cases such as peer-to-peer payments would benefit from 24/7, seamless and near-instant settlement. Such solutions have been provided in other jurisdictions supported by faster payments systems.

Additionally, high card-interchange fees are predominantly borne by small merchants that have little bargaining power, and this has resulted in some merchants refusing certain card payments.

Questions posed by the paper

(PMNZ will provide its answer to these questions at a later date.)

  1. Do you agree with the motivations for considering a CBDC, as set out in Section 3? Which motivations are more compelling to you (the declining cash use, innovations in private money or the Reserve Bank’s stewardship objective to preserve the fairness and equality afforded by central bank money)? Please rank them in order.
  2. Are there other motivations not discussed in this paper that should be considered?
  3. Do you agree that the scope of work should focus on a general-purpose CBDC in the first instance?
  4. Do you agree with the multi-step process for the development and implementation of a CBDC as outlined in Section 3.1 and illustrated in Figure 8?
  5. Do you agree with the description of the opportunities presented through the implementation of a CBDC?
  6. Are there other opportunities that should be considered?
  7. Do you agree with the design principles that have been developed to capture the opportunities, described in Section 4?
  8. Are there other design principles to capture the opportunities that should be considered?
  9. Do you agree with the description of the challenges and risks in Section 5?
  10. Are there other challenges and risks that should be considered?
  11. Do you agree with the design principles that have been developed to harness the opportunities and to address the challenges described in Sections 5 and 6 respectively?
  12. Are there other design principles that should be considered in respect of the opportunities and challenges described in Sections 5 and 6 respectively.

Read more from Positive Money on our Future of Money consultation page.