The Reserve Bank has a consultation document out inviting public feedback on the idea – to which they express themselves sympathetic – of the Bank possibly, at some stage in the future, issuing a new central bank digital currency, to which members of the general public would have access (unlike their existing wholesale digital currency – exchange settlement accounts – that only (some) banks currently have).
I wrote a post last week on Barry Eichengreen’s recent seminar for the University of Auckland and some of my own ideas, notably the idea that there is little reason to suppose there would be much demand for such a product (unless subsidised or underpinned by other distorting regulation).
Submissions close on Monday – at the curious hour of 10am. I spent a few hours this afternoon jotting down some thoughts as a submission. No doubt various bankers will make longer, more detailed, and more bureaucratically expressed, submissions on various points (and perhaps some academics might make some more mathematical ones), but I suspect my submission will still offer a reasonably distinctive angle.
The full submission is here
My summary ran as follows:
The case for a possible future central bank digital currency is not persuasively made, and seems to rest on very weak (some simply inaccurate) analytical foundations and characterisations of history, inflated with overblown claims about the role of central bank money. There may be a case, at some point in the future, for a very basic form of digital central bank-issued New Zealand dollar to be available for use by members of the general public. But I would expect that demand for any such product (so long as fairly-priced and not supported by regulatory restrictions on other forms of money) would be quite limited, both in normal times and perhaps even in (extremely rare, by construction of prudential policy) systemic financial crises. This is consistent with the experience with physical central bank money, which is used largely only because private issuance is outlawed. In the shorter-term, and whether or not the Bank ever issues a general purpose CBDC, a much more liberal approach should be taken to allowing
access to the Reserve Bank’s exchange settlement account system.
And here are a few paragraphs
The weaknesses in the consultation document start early. For example, there is the grossly overblown claim on page 6 that “central bank money can be considered systemic in all societal domains [whatever that means] – it underpins people’s …. environmental, social and cultural wellbeing”. There is no analysis presented in support of a claim that seems almost laughably inconsistent with the fact that most countries didn’t have central banks until 100 or so years ago. Central bank money has a useful, indeed important, potential role to play in macroeconomic stabilisation – the reason the Reserve Bank of New Zealand was established – but the implied suggestion that without their new central banks our grandparents (or the greatgrandparents of Americans) somehow had impaired cultural or environmental wellbeing [again, whatever either phrase means] seems, at best, a stretch.
Weaknesses pervade the consultation paper. For example, the Bank claims the issuance of a CBDC would “support the ability of central bank money to act as a fair and equal way to pay and save in our modern and inclusive economy”, and has a lot of handwaving rhetoric around “financial inclusion” without (a) any serious attempt to document the nature and scale of any such issue or (b) any serious analysis of alternative options, if there is an issue. As far I could see, for example, there was no data in the paper outlining the percentage of the New Zealand resident (and legal) adult population that (a) does not have a bank account, and (b) would like one. Since even welfare benefits are (almost?) exclusively paid by direct credit to a bank account, it seems hard to believe that – for now anyway – there is a problem in New Zealand. We are not the United States. And when the Bank attempts to suggest that a CBDC might help those who are not just unbanked but those who are “underserved by the private sector by offering basic services at low or subsidised prices”, there is no attempt to rigorously analyse who might be “underserved” (or even how that might be defined) let alone why Crown subsidies, via the Reserve Bank, might be desirable. Similarly weak, in the same section of the paper, is the claim that provision of a general purpose CBDC would be a “public good”. Being issued by a public agency does not make something a “public good”.
The consultation paper expresses some unease about the possibility that a retail CBDC could either (a) disintermediate banks (or other private deposit-takers), and/or (b) destabilise the banking system in periods of stress by making it (a little) easier for retail depositors to run. The former is unlikely, and if it were to happen would have to revealing something about either (a) public confidence in the soundness of the financial system or (b) the pricing of the product. As the Bank will be well aware, one can generate a demand for almost any instrument if the price is right (or rather, wrong). Retail government inflation-indexed bonds were very popular in New Zealand for several years in the late 1970s and early 1980s, but only because they paid such a high yield (especially after-tax) relative to anything else the market could offer. Pricing of any CBDC instrument could relatively readily be set to keep demand to quite modest levels, if in fact there was revealed to be much demand at all.
There is some discussion of issues around so-called “monetary sovereignty” in the Bank’s papers. Whatever this actually means, there is no serious discussion as to how private payments developments might threaten the ability to conduct an effective monetary policy in New Zealand, or how a CBDC might materially limit any such risk. There was talk of the risk of “global stablecoin” somehow displacing New Zealand dollars, but there was no analysis – grounded in how use of individual national currencies has changed over time – of why such an offering would materially affect anything about the ability of the Reserve Bank to conduct an effective monetary policy. As the Bank will know, much about the usefulness and effectiveness of national monetary policy rests in the stickiness of domestic non-tradables prices and wages. As long as, for example, labour is contracted for in New Zealand dollars, and New Zealand wages are sticky, monetary policy will, in principle, be able to undertake countercyclical stabilisation policy. And if ever that contracting in the real economy changes – as to currency or flexibility – New Zealand monetary policy will no longer be effective (or perhaps necessary). But short of hyperinflations I think the Bank would struggle to identify examples where domestic monetary policy has become so attenuated, or to explain how an offshore stablecoin, backed by some
other national currency, could be likely to displace the NZD for the vast bulk of transactions,
occurring onshore in the same currency as almost all of us earn.
For those who want some more reading on this, I can recommend a thoughtful speech given a few months ago by Federal Reserve Governor Waller, headed CBDC: A Solution in Search of the Problem. Hard to disagree with that sentiment.