Adopting an official crypto-kiwi would have significant effects on both sides of the financial system ledger, a just-published Reserve Bank of NZ (RBNZ) paper has found.
The RBNZ think-piece, authored by senior economic analyst Amber Wadsworth, concludes moving to a central bank-controlled digital or crypto-currency (two slightly different concepts) would have far-reaching consequences across all of the bank’s four core functions.
“New technologies offer both benefits and costs that can affect all four of the central banks’ core functions: providing banknotes and coins (cash) to the public, operating systemically-important payments systems, setting monetary policy, and maintaining financial stability,” the paper says.
But while the effects – both negative and positive – of digitising the dollar would be relatively marginal for the RBNZ’s currency distribution and payments functions, central bank monetary policy and financial stability controls could be significantly disrupted by crypto-tinkering.
“These [monetary policy and financial stability effects] are less dependent on the technology used for the currency and more sensitive to the how the digital currency is used and what constraints, if any, are placed on it,” the RBNZ analysis says. “These could include, whether a bank digital currency is interest bearing, how easy it is to move between central bank digital currency and bank deposits, and whether it has a par value with cash.”
In particular, the paper says the risks to financial stability from a central bank-issued digital currency could include:
- Reduced bank resilience to economic downturns and greater search-for-yield behaviour;
- Increased commercial bank reliance on overseas wholesale funding and subsequent greater exposure to downturns in overseas markets;
- Higher probability and severity of bank runs during periods of system-wide instability.
However, the central bank could impose monetary policy directly on households if its digital currency was interest-bearing, the study says.
An interest-bearing digital central bank currency could also compete with “private crypto-currencies to improve monetary policy effectiveness, in event of large take-up of private crypto-currencies”.
‘The pros and cons of issuing a central bank digital currency’ report says the government needs to carry out further research on the viability of going crypto with the kiwi.
“In particular, policy makers should investigate the implications of central bank digital currencies for monetary policy and the financial system by examining whether a central bank digital currency could be issued to the public while mitigating the cons that could arise,” the paper says. “If a central bank digital currency posed large and significant costs on financial stability and monetary policy, then it could be impractical to issue one.”