New Zealand rejects digital currency—for now

Cash use is declining in New Zealand—nonetheless, the country’s central bank says it has no plans to launch its own digital currency in the near future.

Christian Hawkesby, the assistant governor of the Reserve Bank of New Zealand, told a conference on Oct. 19 that a central bank digital currency (CBDC) won’t be released imminently.

However, he stressed the country is “well connected” on the matter and continues to monitor developments closely. In other words, New Zealand wants another country to jump in first.

“We acknowledge there is much work to be done,” Hawkesby told the Royal Numismatic Society of New Zealand’s conference. “We do not yet have all the answers, nor do we expect to find them alone. However, by working together with New Zealand we want to be ‘on the money’ now and in the future.”

He added that New Zealand is among 80% of central banks that have been actively researching CBDCs—and said they could be the “defining challenge” of the 2020s… just like inflation was in the 1990s, and financial stability was in the late 2000s.

That puts New Zealand roughly in the same boat as the U.S. On Oct. 19, Federal Reserve Chair Jerome Powell said during an IMF panel that “it’s more important for the United States to get it right than it is to be first,” to launch a CBDC. Which is a good thing, as China is far ahead of every country except The Bahamas (which has the Sand Dollar), in launching a CBDC. In a test lottery in Shenzhen last week, more than 95% of 50,000 winners spent about $30 worth of digital yuan renminbi, which was usable at nearly 4,000 merchants.

Keeping cash as king

Reading between the lines, it seems New Zealand wants to maintain the status quo until the dust settles. (It’s especially fitting that, in another act of continuity, Jacinda Ardern secured a second term as prime minister in the weekend before Hawkesby’s remarks.)

In his remarks, Hawkesby argued that cash provides “important benefits” to many New Zealanders—and said the central bank “is taking on the role of steward of the cash system.”

Among the reasons many central banks like the RBNZ are reticent about CBDCs is how these digital assets are being built on technology that is yet to be proven en masse, as well as concerns that they could exclude vulnerable groups from the financial system as increasing numbers of merchants refuse to accept paper money. In Sweden, which has one of the most developed CBDCs on the international stage, shops are legally allowed to reject cash.

But it’s a situation that remains fluid—and there’s little doubt that New Zealand is closely watching developments because it fears being left behind. Hawkesby candidly admitted: “In the years ahead, some of the biggest questions facing central banks could well be around the future of money itself.”

Some will question whether Wellington should be paying attention to CBDCs with a little more urgency, not least because of how statistics show how the monetary landscape has changed. Already in New Zealand, banknotes make up just 7% to 9% of liquid money, with the “vast majority” of money balances digitally represented. Just 6% of the population relies on cash for their everyday needs.

Keeping the kiwi?

The Reserve Bank of New Zealand also argues that there are compelling reasons for keeping cash in use.

Hawkesby pointed to a vicious cycle where dwindling numbers of users causes per transaction costs to increase—meaning cash providers either have to reduce the services they offer or increase their charges. In some cases, this has made it near impossible for New Zealanders in some areas to access a free ATM (between the rural communities of Wanaka and Hokitika, a distance of 260 miles, there’s just one cash machine.)

All of this comes despite demand for cash actually surging during the early days of the coronavirus pandemic back in March. Over the course of the month, NZ dollars worth $800 million were issued—substantially more than the $150 million issued in March 2019. “It is not unusual for cash holdings to increase during periods of uncertainty,” Hawkesby added.

And then there’s the argument that cash has some advantages that CBDCs are struggling to match: privacy, instant settlement, and emergency offline backup payments.

“These benefits of cash have so far been not well replicated by electronic money in commercial banks,” he said.