Reserve Bank Assistant Governor Karen Silk raises the possibility of cryptocurrency regulation, in part so it doesn't 'undermine our monetary sovereignty'

By Matt Skinner & Gareth Vaughan

The Reserve Bank will publish a consultation paper in December looking at the possibility of regulating private crypto-assets, or cryptocurrencies, Reserve Bank Assistant Governor and General Manager for Economics, Financial Markets and Banking Karen Silk says.

Speaking at Payments NZ's “The Point” conference in Auckland, Silk highlighted technology-driven innovation in new forms of money and the potential entry of "Big Tech" companies.

"Such innovations may deliver money or payments instruments more efficiently and at lower cost, and could serve niche use-cases that are not commercially viable or strategic fits for banks," Silk said.

"There are also potentially significant risks to consumers arising from some of this innovation, and gaps exist in regulatory tool kits to address these. From our perspective as a central bank, it is important that new forms of money, whatever their size: reinforce trust in our money, neither reduce competition nor the reliability and efficiency of our money and payments system, and that they don’t undermine our monetary sovereignty."

"The time is right for us to ask what, if any, additional regulatory powers are needed to appropriately balance the risks and opportunities, and to provide regulatory certainty in support of beneficial innovation. It is also important to understand how we can meet cross-cutting challenges of existing regulation, such as AML/CFT [anti-money laundering and countering the financing of terrorism] issues, in a consistent and holistic manner," said Silk.

"Today we have published a paper describing the current state of the New Zealand payments system, and will publish another early next month consulting through until March 2023 on the potential need to regulate private crypto-assets."

This will be an issues paper on private innovations in money, Silk said.

CBDC work continues

Silk also said the Reserve Bank continues to explore the potential introduction of a Central Bank Digital Currency, or CBDC. A CBDC is the digital form of a country’s fiat currency. That means a Reserve Bank issued CBDC, like the physical New Zealand dollar, would be a liability of the Reserve Bank, backed essentially by trust in the Government and its institutions. 

"We have now embarked on the second stage of our CBDC exploration. In this phase, we are expanding beyond the desktop research to explore various aspects to design of a potential CBDC. We are undertaking thematic research on how a CBDC might support wider digital financial inclusion and wellbeing, and also enable an open, innovative and competitive payments ecosystem whilst maintaining user privacy. Alongside our thematic CBDC research we will be undertaking proof of concept experiments to better understand what is possible and feasible," Silk said.

"We will continue to engage with stakeholders across the payment system and society as we investigate a CBDC."

(There's more on CBDCs in this episode of our Of Interest podcast with Reserve Bank Director of Money and Cash Ian Woolford).

'An outlier amongst OECD countries'

Silk also criticised the slowness of the development of digital payments in NZ through the likes of open banking.

"Once fully implemented, open banking has the potential to support innovation and inclusion by opening up consented access to both existing payments capabilities and to the customer’s financial data. Whilst digital innovation is beginning to occur both on top of, and in competition with, traditional payment rails we do not yet have scalable electronic, instant, peer-to-peer payments, and our lack of real time systems for retail payments positions us as an outlier amongst OECD countries."

"This slow pace of implementing promising developments is an issue for our economy, because we could become more digitally competitive, including by nurturing our home-grown fintechs in this space. And as a society, we may see significant benefit through increased domestic competition and efficiency savings in the payment space and in the wider financial system," Silk said

Open banking should give customers greater access to and control over their own banking data, and require banks to give competing third parties access to their systems.