There was, during the global rush by governments to help Covid-affected businesses survive, a problem which graphically showed why a digital money system controlled by central banks (not commercial banks) is a good idea.
Power Finance CEO Dave Corbett says his fintech is “extremely supportive” of the Reserve Bank of New Zealand’s discussion paper on a central bank digital currency (CBDC) – and offers the example of aid to people during the pandemic.
New Zealand and the US adopted different approaches. In the US, it became apparent that the only reliable way to get relief money to Americans was by Pony Express…no, we’re kidding, but the reality was almost as old-school: cheques.
Called Economic Impact Payments, the cheques were sent out to 35 million American businesses. Somehow, they all had the words “Donald J. Trump” printed on them – almost as if the businesses were being gifted funds from the Trump coffers, as opposed to the state.
The cheques did not find their way to all the intended recipients. Addresses had changed in many instances and bank account numbers were wrong or non-existent. There were other obstacles – including the IRS insisting that some people would not receive theirs until they had filed tax returns.
In New Zealand, the Reserve Bank created the Funding For Lending programme in 2020, making $28 billion available to commercial banks at lowered cost so they can lend to businesses at very low rates. However, only $6 billion has been drawn down so far. A similar situation occurred when the Business Finance Guarantee Scheme was introduced during the March 2020 lockdown.
Corbett says both scenarios would have been hugely successful had the method of delivery been via a digital currency, controlled by central banks: “It creates a direct relationship between the state and citizen,” he says. “Our current franchise model in New Zealand, where RBNZ acts through commercial banks, is not very effective when it comes to the state helping citizens. There was difficulty persuading the commercial banks to play their part.”
That’s just one example. Corbett says CBDC is part of the future of money and enables some “great advantages involving nimbleness and connectivity with citizens”. The Reserve Bank consultation paper advises that a CBDC “has the potential to act as a catalyst for innovation and competition”.
CBDCs will be a catalyst for a great leap forward in financial evolution and customer experience – Corbett says think telegraph replacing the Pony Express, also comparing it to the financial system shift from metals and coins in days of yore to a paper-based cash system.
Your bank, he says, would effectively be in your mobile phone – enabling a whole raft of innovations and new technology, following on from how Covid-19 has created an environment of growth for companies pivoting to online operations while many brick-and-mortar establishments have suffered.
CBDCs can also help change the world by supporting a new type of green finance. Helping to finance the green transition and monitor climate change is the world’s biggest issue – achieving positive climate change is estimated to cost about US$100 trillion – and CBDC technology is part of the solution.
CBDCs enable money and data to connect, speak the same language. They provide the base digital money that allows the creation of financial instruments to literally connect payments with measured environmental outcomes. This inter-operability will enable people to be part of rebuilding finance as a better version of itself, he says.
Corbett says the US, the world’s financial markets leader, is moving closer to a CBDC with President Joe Biden’s Comptroller of Currency nominee, Saule Omarova, an avowed hawk regarding central bank digital currencies. China is already moving towards a digital renminbi and more than 80 per cent of the world’s central banks are considering launching digital versions of cash, including the Bank of England.
A CBDC is not like Bitcoin – the cryptocurrency which has also shaken up the financial world. While Bitcoin is a semi-private technology, CBDCs are expected to be linked with digital identities which improve transparency, meaning less chance of money laundering or financing of terrorism.
A CBDC will not come with the environmental challenges of Bitcoin as it will not have to rely on energy intensive ‘mining’ to allow the currency to function – but can instead adopt improvements in blockchain technology since Bitcoin was launched more than a decade ago.
“We are delighted the Reserve Bank is looking at this whole question now,” says Corbett. “We think it is timely and that they are preparing New Zealand to be able to take advantage of this shift in financial thinking.”
Among features of a New Zealand CBDC in the Reserve Bank consultation paper are:
- People would be able to make payments using RBNZ digital dollars, which would sit alongside cash, not replace it.
- It would defend New Zealand’s monetary sovereignty against, for example, the rise of stablecoins by giant overseas technology companies which could displace the New Zealand dollar for day-to-day transactions, lessening Reserve Bank ability to influence interest rates, inflation and employment.
- Tax avoidance and money laundering would be more difficult.
- It would impact the private banking system, especially in times of financial uncertainty when some people panic and look for safer places to store their wealth, causing a run on banks.
- Lower income people are on average higher users of cash, and the Reserve Bank said digital dollars could provide a basic and cheap way to pay and save.