By Alicia Maher
A paper on Central Bank Digital Currency (CBDC) was published by the Reserve Bank of New Zealand (RBNZ). The paper details use of Central Bank Digital Currency, possible designs, advantages and disadvantages. The paper by the Central Bank of New Zealand provides a window into the perspective of the Central Bank on CBDC.
Paper On CBDC
The paper discusses CBDC for general purposes, implying that the digital currency is available to any individual or business that are interested in using the digital currency. It’s conceptualization of CBDC is a digital currency that can be used freely for various kinds of transactions. This kind of CBDC described by the Reserve Bank of New Zealand will be close in function to the traditional cash currency and can then be used as a central bank money. This is in contrast to a wholesale CBDC which the central bank does not think can fulfil the role it envisages for CBDC.
The Reserve Bank of New Zealand was emphatic that any potential CBDC in New Zealand would actually be Digital money that the central bank will issue alongside cash. The bank also noted in the paper that the proportion of transactions done with cash in the country is reducing. This is despite the fact that the amount of cash known to be in circulation has been increasing in the country.
Christian Hawkesby, assistant governor of Reserve Bank of New Zealand, reassured the public that the bank does not plan to do away with cash, as there are important roles it plays. Hence, for people still interested in using cash for their transactions, it will still be available.
‘Account Based’ or ‘Token Based’ CBDC
The paper also discusses the two main technological designs for CBDC. A design approach is the “account based” CBDC which depends on the conventional account based structures. A “token based” CBDC is another design approach that is based on technologies such as blockchain and public-private key cryptography.
There are benefits of using a token based Central Bank Digital Currency, one of which is the automatic execution of certain transactions such as payment of bills using smart contracts. This has the advantage of minimizing the need for a third party involvement in the transaction. Another benefit, according to the Reserve Bank of New Zealand in the paper, is that a CBDC based on token can help develop new payment services.
The Reserve Bank of New Zealand is proposing a CBDC which it thinks will provide a form of money that can balance the competing interests of privacy and traceability. This is important because of the discordant interests of the users and government. Users prefer to have privacy while doing their transactions whereas the government will want to retain records of transactions on Central Bank Digital Currency, this is to prevent tax avoidance, financing illegal activities or money laundering.
In 2020, Christian Hawkesby, assistant governor of Reserve Bank of New Zealand, said that the bank has no immediate plan to release a CBDC. This year however, New Zealand is taking concrete steps to release CBDC. The Reserve Bank of New Zealand announced in July that it would open up public consultations as regards CBDC. In addition to the paper released, it indicates New Zealand might be close to developing and issuing its own CBDC.