Banking lobby group lukewarm on central bank digital currency

Banking lobby group New Zealand Bankers’ Association (NZBA) says that as the Reserve Bank considers developing a central bank digital currency (CBDC), it is important to probe what public policy issue a CBDC is facing. would attack.

In an article on the future of monetary issues published last year, the Reserve Bank said a CBDC would be a useful development for central bank money, supporting both the value-anchoring role of central bank money and the ability of central bank money to act as a fair and equal means of payment and save.

A CBDC is a state-issued virtual currency that is official legal tender. A CBDC would allow households and businesses to directly make electronic payments using money issued by the central bank, which in New Zealand is the Reserve Bank. It could see an electronic record or digital token being used as the virtual form of a country’s fiat currency, which in New Zealand’s case is the New Zealand dollar. This against the background of a world flooded with cryptocurrencies such as bitcoin and the development of stablecoinsa type of cryptocurrency backed by a reserve asset, such as fiat currency or gold.

In a submission on the Reserve Bank’s discussion paper, the NZBA states that it supports the Reserve Bank to undertake further work regarding cryptocurrencies and a possible CBDC for New Zealand. The NZBA said it would welcome the opportunity to work with the Reserve Bank on emerging issues in this area, particularly given the potential impact on payment systems and banking operations.

However, NZBA’s submission questions whether a CBDC might be a problem looking for a solution.

“It is important to understand what public policy ‘problem’ a CBDC would be addressing, and any related discussion should include the possibility that this problem could be addressed more effectively through other means. We note that some central banks, notably the Federal Reserve, have suggested that CBDCs could be a “solution in search of a problem” and that even when there are problems in the payment system, there are more effective ways to solve them than a CBDC. “, said the NZBA.

In a speech last week Governor Adrian Orr noted that the Reserve Bank is aware of the challenges potentially posed by a CBDC.

“A CBDC is likely to affect the current business model of the banking industry. To what extent that would depend both on the design of the CBDC and how the public has used it,” Orr said.

“A CBDC should be, by design, operationally resilient to outages and cybersecurity risks and comply with all relevant laws and regulations. A CBDC should act as an enabler of innovation and competition in a broader monetary and payments ecosystem that supports, rather than crowds, private innovation,” Orr added.

He went on to say that a CBDC would take many years to design and implement.

“Future consultation will look at design and implementation details assuming the case continues to be assessed positively… We will soon begin design and proof-of-concept testing for a CBDC as part of of our assessment of the case for a CBDC in New Zealand,” Orr said.

Last year, the rating agency Fitch alerted to the potential for disintermediationor loss of business and relevance, for banks following the introduction of CBDCs.

“We believe that the introduction of CBDCs will inevitably involve households and businesses converting some of their commercial bank deposits into CBDCs. All other things being equal, this would force banks to reduce their balance sheets – a process known as disintermediation,” Fitch said.

“A potentially significant risk posed by the broader introduction of CBDCs is that disintermediation could occur at a destabilizing rate, for example by triggering a sharp contraction in bank lending. The potential for bank runs could even increase in stress scenarios .”

Meanwhile, the NZBA said it agreed that a CBDC could be seen as important to the sovereignty of the New Zealand dollar, and without a New Zealand dollar CBDC the currency could be adversely affected if, for example , online payments such as peer-to-peer are starting to use other digital currencies which are becoming mainstream via online platforms.

“We agree that the ability to manipulate the economy through the use of monetary policy could be significantly reduced if the majority of currency trading is not done with the New Zealand dollar. A CBDC could be a useful tool to mitigate this risk,” the NZBA said.

“The CBDC should be seen as part of New Zealand’s strategic planning to address declining cash usage. It could be designed to be more inclusive than other payment methods and valuable tools stored.”

“Some of the perceived benefits of the CBDC in the consultation document are based on the current state of the systems, for example peer-to-peer capability. It should be noted that these new systems are in many cases under development and may impact how the CBDC could benefit the financial system in the future,” the NZBA said.

The lobby group provides a list of questions it says need to be answered to determine the value and potential success of a CBDC. These include:

a) what need/problem a CBDC would address;
(b) what form would this take;
c) how would it be distributed and used;
(d) what infrastructure would be required; and
(e) how would this be funded.

“These issues require a detailed understanding of current and developing payment systems, technologies, business processes and business models, making it even more important for the Reserve Bank to work closely with banks and other service providers. payment services as it develops potential policy approaches,” NZBA said.

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