MPs struggle to understand Reserve Bank plan to issue ‘digital cash’

Thursday, 30 May 2024

ANALYSIS: MPs are struggling to get their heads around the Reserve Bank’s digital cash, or in te reo Māori moni-matihiko.

The Reserve Bank is pondering whether to launch a digital equivalent to cash.

It may never do it, but it thinks it might have to in order to preserve the very existence of the New Zealand dollar, and what it calls this country’s “monetary sovereignty”.

But the concept of a digital version of the physical cash issued by the Reserve Bank proved to be a head-scratcher for most MPs on the Finance and Expenditure Select Committee on Wednesday.

“I’m really struggling with conceptionalising this,” said Labour’s Deborah Russell.

Green Party leader Chlöe Swarbrick was concerned the Reserve Bank digital cash plan appeared to be just “replicating” the dollars people had in their banks.

Ultimately, it was select committee chair Stuart Smith who nailed it, telling his colleagues: “I do see how this can work. I think it can work quite well. And it can democratise money. You don’t have to be tied to a bank.

“I could have my salary all go into my digital card. I would therefore no longer need a bank, unless I want to borrow some money.”

What is the Reserve Bank’s digital cash?

A digital dollar would be the digital equivalent of a dollar coin. It would be issued by the Reserve Bank, but would have no physical form.

While that sounds like a dollar in a bank account, it is not.

A dollar in a private bank account is a debt the bank owes to the account holder.

If the bank goes bust, they may not get all of that bank dollar back. This is how Westpac describes it: “The money you deposit with us … is a debt that we owe you that is unsecured. This means that we don’t guarantee you’ll be repaid that money … and any repayments we do make may be delayed.”

By contrast to that dollar in a private bank account, one of the Reserve Bank’s digital dollars would be backed by the Reserve Bank, and that means the taxpayer.

Muddying the contrast a little is a separate plan for a depositor guarantee scheme, which would insure the first $100,000 someone has with a bank backed by a giant fund, and if that proves to be not enough, the Government would make up the shortfall.

Like the dollar coins in people’s coin jars, purses or wallets, the Reserve Bank would be paying the owners no interest for having it.

By contrast, private banks do pay interest, depending on the account someone has their money in.

Why do we need digital cash?

The Reserve Bank thinks a digital dollar would help maintain confidence in the New Zealand dollar.

Private actors overseas are creating new forms of “money”; the likes of Bitcoin beloved by speculators, and so-called stablecoins.

Central banks the world over are concerned that one day their citizens might stop using local currencies in favour of these global private forms of money. They could be cut out of the loop on issuing money, giving their countries less control over their economies. The term they use for this is “monetary sovereignty”.

“Monetary sovereignty is important because it means that New Zealand can independently manage its money, set interest rates, and make decisions without being overly influenced by external forces,” the Reserve Bank says.

When might I get the chance to use digital dollars?

In 2030, depending on the Reserve Bank deciding to go ahead with the plan.

Would I end up with an account at the Reserve Bank?

No. The idea is private banks and non-bank tech companies would create accounts and digital wallets and apps for people to use to hold, and spend digital dollars.

Some may even issue digital cash cards.

This is where Smith’s comments about not needing banks come in.

The essential thing here is digital cash payments must be instant, the Reserve Bank says, just as when people hand over actual coins and banknotes.

What are the risks?

There are concerns that digital cash could lead to the end of physical cash, and those who see themselves as in opposition to the state are especially worried.

Digital cash transactions, like transactions on people’s private bank accounts, would be traceable.

That’s different from actual cash, which can be spent with complete anonymity.

MPs on the select committee noted that Canadian Prime Minister Justin Trudeau had sparked distrust in banking by threatening anti-vax protestors in 2022 with the closure of their bank accounts.

The Reserve Bank has heard from some people who see digital cash as threatening more state control and surveillance.

It is fair to say that some people do use cash to do things they don’t want the state to know about.

The Reserve Bank has studied cash use, and it cannot explain it all. That’s almost certainly because people are using it to do things like buying or selling drugs, guns, or sexual services, but also in tax-dodging cash jobs for tradies.

The Reserve Bank’s head of cash and money Ian Woolford told the select committee its intention is for digital cash privacy to be legislated by act of Parliament.

“Cash is the only truly anonymous form of payment,” he said. “Digital cash is always going to leave a footprint.”

Is this a plan to kill real cash?

Woolford said the Reserve Bank was committed to keeping physical cash.

The Reserve Bank saw working to create digital dollars as “planning for a future in New Zealand that has less cash, but not one that is cash-less”.

It also says physical cash is not proving to be as helpful as desired in the immediate aftermath of disasters like Cyclone Gabrielle, or in the an event like a massive cyberattack that takes down the payment systems.

That’s because ATMs stop working. Shops are shut. And there’s precious little cash in people wallets any more.

The Reserve Bank believes that a “digital cash offline feature” on digital cash apps could mean people could make payments using locally stored balances on a device or card.

Woolford also noted that when there was a perceived threat of a banking crisis, people often rushed to take out cash from banks. In the first week of Covid panic, about $800m went out the door in a week, he said.

Even when a US bank called Silicon Valley Bank failed last year, some panicky New Zealanders rushed to take out cash in case it heralded the collapse of banks here.

In time, perhaps, people could take money out of private banks by buying Reserve Bank digital cash instead.

Digital cash could also give the banks a kick up the backside

Woolford said New Zealand’s banking system was the most profitable in the world, and pointed to the “glacial” pace of the development of open banking.

New Zealand was 10 to 20 years behind other developed countries on payments, the Reserve Bank says, most of which have instant payments.

The creation of Reserve Bank digital cash could be just the kind of thing to force private banks to invest and innovate, he told MPs.