Last week we reported on a bulletin from the Reserve Bank of New Zealand. It discussed how a digital currency could be issued by a central bank and what the pros and cons of this would be. See: RBNZ on Central Bank Digital Currency and Negative Interest Rates
Yesterday the Reserve Bank Deputy Governor Geoff Bascand delivered a speech and gave the RBNZ’s position on issuing an official digital currency. The verdict overall was “not now”.
The interestingly titled speech “In Search of Gold: Exploring central bank issued digital currency” was delivered to Payments New Zealand. The content was based upon the 3 Reserve Bank Bulletin on digital currencies which we have reported on extensively already.
The Deputy Governor said the RBNZ has been exploring whether a central bank issued digital currency would “better meet the needs of the public”.
“Issuing a central bank digital currency would ensure public access to legal tender money regardless of the presence of cash.”
An advantage would be that a digital currency is
“easier and faster to distribute around the country than banknotes because it doesn’t need to be transported, but there would be new infrastructure costs if a central bank digital currency were introduced.
“We’re also interested in whether a central bank digital currency could bring improvements to the payments system. Here the pros and cons very much depend on how the digital currency is designed. Digital currencies with central control can improve efficiency but potentially at the expense of reduced resilience. At this time, a blockchain-type of official digital currency would reduce the efficiency of the payments system.”
He also commented on the impact a digital currency would have on financial stability.
“One of the most important contributions a central bank makes to prosperity is supporting financial stability. We couldn’t issue a digital currency if it might undermine financial stability, and there are considerable risks on this front”.
The overall conclusion of the speech was:
“The payments industry is dynamic and the Reserve Bank is searching for ways to harness new technologies and do things better. Maintaining trust and confidence in our currency, and in the payments and banking system means that in a gold rush we must be a very considered prospector; we have New Zealand’s financial system at stake. Currently, it is still too early to determine whether a digital currency should be issued”.
You can read the full speech here.
What Wasn’t Said About Central Bank Digital Currencies
Reading through the full speech there is no mention of various points we noted last week.
Solving the “problem” of consumers being able to resort to cash in the case of negative interest rates wasn’t mentioned, unlike in the third RBNZ bulletin. Phasing out cash wasn’t mentioned anywhere in the speech, again unlike in the last bulletin.
For more on these point see: RBNZ on Central Bank Digital Currency and Negative Interest Rates
Reading Between the Lines
Of course all these discussions of central bank digital currencies are couched in the need to “better meet the needs of the public”.
But the removal of cash and the use of negative interest rates is not better for the public. But then again a monetary system based upon debt isn’t either. Nether is the requirement of yearly loss of purchasing power through inflation.
So can we do some reading between the lines to see where all this central bank digital currency talk may be heading?
The RBNZ has been a global trendsetter in the past. They were the first central bank to use “inflation targeting”. That is aiming for a set amount of inflation every year and to use monetary policy and interest rates to achieve this.
New Zealand was also the first to widely adopt Eftpos in the banking system.
However in the case of central bank digital currency it seems New Zealand may be more of a follower than a leader.
This is likely a good thing. Why?
Because we might get a heads up and a bit of advance notice by keeping an eye on what other nations are doing.
Clues From Elsewhere – What Are Other Central Banks Up To?
Some European nations have had negative interest rates in recent times.
Although this week the Reserve Bank of Australia also said that issuing a central bank digital currency “is not necessary within the existing financial system.”
Central banks across the planet have been issuing reports on digital currencies lately.
The Norwegian central bank has also been looking into its own digital currency stating:
“Further analysis is needed to assess the purposes of a CBDC, the types of solutions that best achieve these purposes and the benefits measured against financial and other costs. This is a long-term undertaking.”
While the US central bank Governor Brainard has stated that:
“there is no compelling demonstrated need for a Fed-issued digital currency,” adding that “most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network.”
The Bank of England (BoE)also recently stated:
“that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed.” Said principles are that “CBDC pays an adjustable interest rate,” that “CBDC and reserves are distinct, and not convertible into each other,” “No guarantee [of] on-demand convertibility of bank deposits into CBDC at commercial banks,” and that “The central bank issues CBDC only against eligible securities.”
Like the recent RBNZ report the BoE notes that the digital currency would need to pay an adjustable interest rate. Likely to ensure consumers don’t have an escape from negative interest rates.
Eswar Prasad, a professor of economics at Cornell University, noted that:
“a central bank digital currency would have major implications both for the running of monetary policy and for financial stability. Central banks may find it easier to implement a range of unorthodox policies, such as “helicopter drops” or “negative rates.” These policies would be applied directly in each individual’s central bank account, which would make them more powerful than if they had to go through the banking system.”
…While the Bank of Japan and the European Central Bank teamed up to study the technology underlying digital currencies, before concluding this was not mature enough to power the world’s main payment systems. The Bank of Canada and the Monetary Authority of Singapore have chosen to collaborate on a study, too. The Bank for International Settlements — of which 60 central banks are members — is spearheading the international efforts into the analysis of digital currencies.
So the consensus overall seems to be it is too soon to say.
However Sweden’s Riksbank seems to like the idea of issuing its own digital currency a little more than the rest of its central banker peers.
Could this be because Sweden’s use of cash payments in the retail sector as a proportion of overall payments has dropped from 40% to 15% from 2010 to 2016? Source.
Watch This Space
Overall it seems we just need to keep watching what other countries are up to. It would be highly unlikely that a central bank would issue a decentralised or anonymous digital currency. More like the exact opposite!
But it does seem we are heading slowly but surely towards the removal of cash. Then the implementation of helicopter drops or negative interest rates becomes much more effective. A directly issued central bank digital currency would also make these central planner control tools much easier to manage.
Sign up below to be kept informed of global developments in the monetary system.