Yesterday the Reserve Bank of New Zealand (RBNZ) launched its second central bank digital currency (CBDC) consultation. Since its first inquiry in 2021, it has put considerable effort into exploring how it plans to position and design the digital currency. The consultation will run until July 26. Based on feedback and the preparation of a business case, a decision will be made on whether to proceed to Stage three, the preparation phase.
CBDC positioning
Regarding positioning, the digital currency will be a retail CBDC targeting both consumers and corporate use cases, with consumers as the primary focus. It won’t be designed for wholesale usage, but it will be allowed. At this stage, cross border payments are very low priority.
The RBNZ carefully considered how it wanted to position its CBDC on two spectrums – control and functionality. It concluded that it prefers the UK and Swedish models of acting as an innovation enabler. Hence, its role is to enable the platform and set guardrails. This implies moderate levels of control and a relatively feature rich digital currency, with the private sector heavily contributing to innovation.
While the central bank’s approach to CBDC is upbeat and open, it is nonetheless cautious. Reviewing the international CBDC landscape it stated, “we consider that full scale issuance and wide user adoption is unlikely this decade.” It also considers the issuance of a CBDC will involve considerable effort, cost and complexity, and based on work to date, it believes consumer adoption will be cautious. Hence, it views a CBDC as a long term prospect.
CBDC motivations
As with most central banks, a key question is why should it issue a CBDC. Top of its list of motivations is the declining usage of cash. It’s concerned that if other currencies are available digitally, they could dominate in New Zealand, challenging its monetary sovereignty. Additionally, if cash usage declines, this could threaten financial inclusion for those dependent on cash.
That said, its survey showed that almost 60% of consumers said they still use cash regularly. Additionally, more than 98% have a bank account or similar. The central bank provided the example of someone who had been declared bankrupt as needing digital cash.
Complementing the declining cash usage is the increasing digital nature of economic activity. RBNZ wants to be able to provide a digital form of central bank money. Last but not least, it envisions a CBDC as playing a key role in financial innovation.
