Money and Cash Policy Manager Robbie Taylor and Senior Policy Analyst JC Somers step through the structure and main points made in the issues paper consulting on a proposed approach to the opportunities and challenges from new forms of private money such as cryptoassets, including stablecoins.
Sections 1 to 3 of this paper introduces our stewardship role regarding private money, including the objectives, approach, focuses and scope.
Section 4 covers the fundamental opportunities we see in a level playing-field for money and payments, for both existing and new forms of money.
Section 5 describes the risks we think would need to be managed if new forms of private money become more widely used.
Section 6 outlines our proposed response given the current state.
The appendices include background material.
This Issues Paper explores Private Innovation in Money with a focus on opportunities and risks this may offer New Zealand, and our ability to meet our objectives as the steward of money.
By private innovation in money, we mean novel arrangements that claim to provide new forms of money or associated services, using new technologies, financial models or organisational forms. Cryptoassets, including stablecoins, are key examples of these arrangements, but they are not the only ones. The use of the Distributed Ledger Technology (DLT) to tokenise bank deposits, for instance, would be another example. Therefore, we intend to take a technology-neutral approach to innovations.
In this Issues Paper, we are seeking feedback on our assessment of:
Private innovation in money involves complex issues ranging from financial stability, to consumer protection, to anti-money laundering and other contentious policy areas.
We are working with other members of the Council of Financial Regulators (CoFR) to address cross-cutting risks and shared challenges — for example — regulating Decentralised Autonomous Organisations.
Read the statement of CoFR's position on cryptoassets | Council of Financial Regulators
This Issues Paper is written from the perspective of the Reserve Bank as a steward of money. This perspective means we are primarily interested in the application of innovation to money, or things that are used like money. This stewardship role is derived from section 9(1)(c) of the Reserve Bank of New Zealand Act 2021, and our central banking objective. One of our statutory functions in this area is to monitor technological developments in money under section 116(c)(iv).
Our high-level stewardship objective is that New Zealand has reliable and efficient money and payments systems that support innovation and inclusion.
While central bank money is at the heart of what we do, we also have a strong interest in how the money and payments system works with new and existing forms of private money. At the heart of this system is a longstanding relationship between central bank and private bank money that we often take for granted.
The emergence of cryptoassets using new technology is now challenging the way people think about this relationship. This is happening alongside a range of broader developments in the money and payments system, including:
These developments draw into question our response and what tools we need for that response. We approach this question with some priors (or assumptions).
Currently, our core tool to influence the provision of private money is our ability to issue central bank money and its relevance as a value anchor, a vehicle of monetary policy, and a lender of last resort. This is not just about producing banknotes and coins and is distinct from the Reserve Bank’s longstanding prudential regulatory functions. In the future we may also have a central bank digital currency, which would be another form of central bank money. The stewardship role and monitoring function under the Reserve Bank of New Zealand Act 2021 mentioned above will enable the Reserve Bank to respond more effectively to changes.
Still, more may be needed to encourage competition, choice and trust in money products available to New Zealanders. We also need to take a proactive approach to address risks that, once they emerge, could be difficult to reverse. Such an approach should be technology-neutral and technical matters themselves (for example, the relative merits of different types of cryptographic methods) are outside our scope. However, we should not be blind to the implications of technology.
As the steward of money, cryptoassets used simply for speculative investment are outside our scope. However, we are conscious that assets used as money on a smaller scale may also pose risks to consumers and may lead to further uptake. In the latter circumstance, market discipline and a ‘buyer beware’ approach is insufficient to deliver efficiency and other stewardship outcomes.
Other risks posed by private innovation in money, such as to financial stability, are within the scope of existing legislative regimes, in particular, the Financial Markets Infrastructure Act 2021.
Our current assessment is that the uptake of cryptoassets for use as money is limited. However, cryptoassets appear to be embedded as an asset class, and wider use may occur over time. It is therefore timely to reflect on the opportunities and risks related to new forms of money more generally.
In terms of opportunities, we consider that beneficial innovation in private money using new technology may help broaden access to the money and payment system from outside the banking sector. Broadening access supports competition, which is key to delivering efficiency and supporting further innovation.
At the same time, we see a range of general risks that new forms of money could pose to users, even if they are not widely used. These include fraud and theft, Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT), and technology and cyber risks. Some forms of cryptoassets, particularly stablecoins, also pose a range of further risks related to the stability of the asset's value, the ability and costs of redeeming the stablecoin for fiat currency, and the solvency of the issuer of the stablecoin. It is important that these risks are adequately managed, including through regulatory measures where needed.
In addition, several risks also need to be managed if new forms of money become significant. These risks are often associated with externalities resulting from strong network effects which constrain market efficiency and impact consumers.
The first possible risk is the potential for new forms of money to be bundled with other products or services offered by dominant players in other markets, such as technology or commercial platforms. Some of these platforms operate dominant networks, allowing money issued by them to scale quickly, recreating barriers to entry, and extracting excessive rents.
Secondly, new forms of money should not fragment trust in private money or efficiency benefits to the wider economy that are currently achieved through 1:1 convertibility and prudential regulation. Therefore, our regulatory framework needs to remain robust. Any changes to promote competition and further innovation should deliver the same level of trust and efficiency.
Thirdly, significant uptake of new forms of money not denominated in New Zealand Dollars (NZD) could potentially undermine our monetary sovereignty or, at the very least, complicate the implementation and transmission of monetary policy. It may be desirable to have safeguards against this so that beneficial innovation in money can occur without constant vigilance over monetary sovereignty concerns.
In response to emerging opportunities and risks, we are developing a monitoring framework to understand how the market for new forms of money is developing and the implications for the monetary system, so we can act if necessary. This framework will use a wider range of metrics to assess the significance of new forms of money to New Zealanders, such as the extent of use for day-to-day payments or concentrated use within some communities.
Provided that the risks can be managed, we consider that regulators should be open to alternative business models for the issuance of money. Internationally, the stances of regulators range from proposing to heavy regulation of innovation in money to openness to new forms of money with a lighter regulatory touch. Overseas experience will provide useful starting points to explore what alternative regulatory models may be required and what they might look like.
Further work could explore how providing regulatory certainty might enable beneficial innovation to emerge. This would allow society to benefit from the innovation provided by new forms of money and the technology that underpins it, while addressing the risks described above.
We are offering 2 webinars on our issues paper.
Date: Monday 27 March 2023
Times: 2pm to 3pm and 7pm to 8pm
Duration: 1 hour
You will have the opportunity to ask questions, while will we will also keep and consider comments as feedback on the issues paper.
We welcome your views on the issues and proposed approaches outlined in this paper. Please indicate whether you are providing general comments or specific responses to the questions above.
You can:
Alternatively, you can call us on 04 474 8693 between 10am to 4pm Monday to Friday and we will arrange a time to call you back.
Please note, we are closed from Friday 24 December 2022 to Monday 10 January 2023.
We intend to publish a summary of responses to the Issues Paper by mid-2023. Your name and submission will be released publicly, unless you request otherwise.