In the UK last year, e-commerce grew to such an extent that its share of total retail sales increased more than four-fold. In the US, digital sales ballooned by 3.3 times 2019 volumes. Driven by the pandemic, the rise of online shopping put significant pressure on electronic payment systems and led governments to further assess the future of physical cash.
But what does the future look like? In July 2021, the Reserve Bank of New Zealand (RBNZ) announced that it will look at the potential for a New Zealand Central Bank Digital Currency (CBDC). The RBNZ is not alone in its exploration for a replacement of physical cash with China, France, and Canada amongst some of the countries already in a ‘pilot’ stage of a CBDC. Many other countries are in the ‘research’ stage, like New Zealand.
What is a Central Bank digital currency?
Simply put, a CBDC is a digital form of cash, and a digital form of the country’s fiat currency, such as the New Zealand dollar. One of the key differences between CBDC and current forms of digital payment is what backs them up. A CBDC, like cash, is backed by the country’s central bank, such as the RBNZ. Whereas, current forms of digital payment, like credit and debit cards, are backed by commercial banks.
CBDC will also be governed and controlled by a centralised authority, again such as the RBNZ, which gives central banks control to implement monetary policy. Cryptocurrencies are decentralised through blockchain, which means that a distributed network (the community) governs transactions. This decentralised feature of cryptocurrencies has been a primary reason for its increased popularity. Supporters of cryptocurrency would argue that blockchain reduces the reliance of trust between parties, because trust is not required in any one person or organisation. In a country like New Zealand that has a relatively stable and well-functioning economy, most people would trust the RBNZ to keep their money safe. However, in economies that are more volatile, a CBDC wouldn’t necessarily give the population more confidence in its currency.
The good and the bad of CBDCs
There are many advantages to the adoption of a CBDC. These include: a safer and more efficient distribution of money; improved settlement times domestically and internationally; lower transaction costs; and controlled anonymity, where payments would be anonymous but illegal activity could be identified.
On the other hand, the increased efficiency of storing and withdrawing CBDCs could impact the stability of commercial banks during financial crisis. Depositors could easily withdraw money from standard bank accounts without the restrictions on the availability of physical cash that we have today. Some may choose to hold all their cash in CBDC, reducing the availability of money to commercial banks. However, people are unlikely to have the option to invest in or borrow CBDCs through central banks. This will enable commercial banks to continue their role in society as lenders and borrowers of money.
As with anything digital, there is also the risk of data leaks and hacking, and with an increase in this type of illegal activity recently, this is a significant concern. There is also apprehension around the reduction in privacy and the possible misuse of power by governments.
The real advantages and disadvantages won’t be clear until the finer details about CBDC emerge. Each country looking at a CBDC is likely to take a different approach, so how it will affect New Zealand is yet to be decided. However, initial feedback suggests that CBDC will increase access to financial markets and make transacting more efficient. Early indications suggest that, while New Zealand is likely to adopt a CBDC, it will not replace physical cash anytime soon.
Any views expressed in this article are the personal views of the author and do not necessarily represent the views of BNZ, or its related entities.
This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Neither Bank of New Zealand nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, information, representation or omission, whether negligent or otherwise, contained in this article.