The role of the Reserve Bank of New Zealand (RBNZ) is to “maintain a sound and efficient monetary and financial system”. From producing New Zealand’s coins and banknotes to ensuring the stability of the financial system, the Reserve Bank's duties are vital. However, with fewer people using cash today, the question is: should the Reserve Bank begin issuing a new form of currency? In its consultation released on 17 April 2024 the Reserve Bank announced that it is considering issuing a digital currency. Although a decision has not yet been made it is important to note that the digital currency would not replace cash, EFTPOS or credit cards, at least not soon.

What could a digital currency offer, and how might it differ from the likes of Bitcoin and other cryptocurrencies?

Key differences

One of the major distinctions between a Reserve Bank-issued digital currency and cryptocurrencies like Bitcoin lies in stability. Crypto assets are notorious for their extreme price fluctuations, making them unreliable for everyday use as a stable medium of exchange. By contrast, any currency issued by the Reserve Bank will be linked to the New Zealand dollar so will only fluctuate as much as the New Zealand dollar does. As a stable currency, it does not have significant changes in value relative to other international currencies. Therefore, it is unlikely that a government-backed coin could be used for speculation in the same way as current crypto assets are.

A central bank-issued coin will not fluctuate in value at all relative to the local fiat currency. The most likely scenario is that the coin’s value would be the equivalent of one New Zealand dollar. So, if the value of our dollar goes up, the value of the coin also rises.

Many crypto assets also have an environmental impact. This varies enormously depending on the type of cryptoasset and the means of verification; however, in general, a certain amount of energy is needed to maintain verification. A central-bank issued cryptocurrency is unlikely to have the same environmental impact because it will be controlled by (in this case) the Reserve Bank, rather than having decentralised control and verification.

Advantages and disadvantages of a digital currency

One advantage of a digital currency would be the visibility over and traceability of transactions in the financial system. This could enhance regulatory oversight and help authorities combat financial crimes like money laundering and tax evasion. Inland Revenue, for instance, has recently made changes to the tax rules to deal with cryptocurrencies, signaling that in future they hope to be able to track down overseas data and crypto assets.

Also, a digital currency could result in faster payment times, provided the necessary infrastructure was in place. Such efficiencies could lead to a more streamlined economy, benefiting businesses and consumers alike. However, with greater transparency comes potential concerns over privacy. Some individuals may be wary of increased oversight of their financial activities. Despite its potential, the development and implementation of a central bank digital currency is a multi-year project. There are no quick solutions or easy choices. Still, it’s important to keep watching, and it will be exciting to see what happens next.