The Future of Money - Digital Cash?

Cryptocurrency, the decline of cash, the COVID-19 pandemic, increased online purchasing - these trends and more are changing the way all of us, our communities and organisations use money. It is unsurprising then, that almost 80% of countries are exploring, developing or experimenting with the idea of a Central Bank Digital Currency (CBDC). It sounds complex, and it is, but essentially a CBDC is a form of Digital Cash. 

The Reserve Bank of New Zealand | Te Pūtea Matua, has recently released a series of issues papers that explore the future role of Central Bank money, which includes exploring whether a CBDC would be appropriate here in Aotearoa New Zealand, and what it might look like. You can find links to those issues papers here. The Reserve Bank wants feedback on these issues papers before 10am, Monday 6 December 2021, and we encourage all our members to read on and submit their responses where appropriate.

After reading these, the team at CNA were interested, a little confused and had a lot of questions. So we organised a meeting with Peter Northcote and Bronwyn Kenna from the Reserve Bank who are working on the Future of Money – Te Moni Anamata. Peter and Bronwyn were keen to hear feedback and questions from the community sector, so we recorded what they told us as a way to introduce and simplify this issue for our kaimahi in community organisations around NZ. 

Central Bank Money vs Private Money

The main thing to understand before discussing what the future of money might look like, is that there are two different types of money in our country. That is: central bank money and private money. Central bank money is cash, distributed by our central bank (the Reserve Bank) and backed by the Government. Private Money is the money in our bank accounts, which is backed by private entities - banks. At the moment, physical cash is the only form of central bank money, but a CBDC would introduce a new form of central bank money which would be digital. Unsurprisingly, private money is currently much more common than central bank money, because most people use their bank accounts and bank cards a lot more than they use cash. However, around 6% of New Zealanders use cash for every single one of their transactions - that's around 305,040 people. 

The Reserve Bank is exploring a CBDC for a multitude of reasons, including the decrease in cash use. Central bank money is meant to act as a 'value anchor' for private money; because it is backed by the Government, it is the most reliable, stable and safe form of money. It is also meant to be a tool of social and financial inclusion, because it can be used by anyone and everyone. However, it can't do these things if it is irrelevant or not widely used. 

Financial innovation like cryptocurrencies and other forms of digital money have also motivated the Reserve Bank to look at how they can keep up with these trends. 

The current situation implicates a lot of issues that CNA, alongside other community organisations, is already concerned about. The principal two being the Digital Divide and Banking issues. As more and more financial services, agencies and payment methods move online, those without internet access or bank accounts are left behind, and services can become inaccessible for many communities. Evidently, the future of money provides both solutions and complications to these issues, which we hope the community sector will be able to speak to in their responses to these issues papers. 

What a CBDC Would Look Like:

As an electronic/digital form of cash, CBDC would work just like cash - as a means to save and pay. It would need a payment instrument - likely a card or a phone app - but it would not require a bank account. This is a key difference - as it allows CBDC to be accessible to people who don't want to or can't open a bank account, and it removes the associated costs of doing so. 

So, people would have cards with digital cash loaded onto them - they could choose to deposit actual cash onto their card, get paid onto their card or transfer money from a private bank account to their card. In practice, it would work like a bus card, but with lower risk as the money is backed by the Government. 

Other than keeping central bank money relevant and potentially fostering social and financial inclusion, the Reserve Bank also believes a CBDC could:

• act as an additional monetary policy tool, for example, by providing monetary stimulus or paying interest
• support financial inclusion, wellbeing and the provision of government services, such as by partnering with government programmes. This could look like providing benefits and calculating tax through the use of CBDC.
• involve New Zealand in global initiatives that use CBDCs in cross-border payments