Reserve Bank is seeking views on whether regulatory changes may be required for new forms of 'private money' such as cryptoassets

The Reserve Bank says it's going to establish a "monitoring framework" to watch and assess developments in new forms of 'private money', including cryptoassets.

And the central bank has launched a round of consultation, which among other things will seek views on whether regulatory changes may be needed for cryptoassets.

This is a continuation of extensive work the RBNZ has been doing as part of its Future of Money programme. Part of this also includes work by the RBNZ on potential development of a central bank digital currency (CBDC). The latter work is still continuing.

In a new issues paper titled: The Future of Money - Private Innovation the RBNZ has outlined a number of issues around the development of cryptoassets. 

(The term 'private money' means just that as it includes the money you and I have in banks.)

RBNZ's Head of Money and Cash Ian Woolford says cryptoassets are currently used for high-risk and speculative investments.

"Nevertheless, some cryptoassets may become more widely used as money in the future and it is the Reserve Bank’s responsibility to prepare for this. As part of our response we are developing a monitoring framework to watch and assess developments." 

The issues paper says that in terms of opportunities, the RBNZ considers 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," the paper says.

But there are risks.

These include fraud and theft, anti-money laundering and countering financing of terrorism , 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."

The RBNZ paper says that 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."

It says 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 the 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 NZD could potentially undermine our monetary sovereignty or, at the very least, complicate the implementation and transmission of monetary policy. 

The paper says that in the event of a non-NZ dollar new form of money becoming popular, this potentially could have significant impact when the RBNZ is changing the level of the Official Cash Rate - the main means through which it operates monetary policy and controls inflation.

Overall, the effect of a change in the OCR "could be reduced and unevenly borne", because those using NZ dollars would be effected directly but those using the new currency might not.

"We might have to increase the OCR more aggressively to achieve the same effect, with greater costs, more complex economic flows, and more unintended consequences. Such complication would not occur, should the stablecoin be backed by the NZD," the paper says.

Woolford says the central bank's objective is for New Zealand to have a reliable and efficient money and payments system that supports innovation and inclusion.

"We certainly think that competition in private money is healthy. But, we need a level playing field where regulation matches risk across all technologies, consumers have real choice in how they pay and save, and trust in private money is preserved," Woolford says.

New forms of private money can also pose risks to users and to the economy more generally, he says.

"We may need to address private forms of money that don't appropriately safeguard the interests of users, or which misuse market dominance. We need to ensure neither the stability of the financial system nor our ability to influence the economy through the likes of interest rates are lost."

Woolford says there is wide range of regulatory approaches being taken around the world. The RBNZ's focus will be on striking the right balance between enabling innovation, treating all private money forms fairly, and managing the risks for users and the broader economy.

"Our consultation is asking for feedback on where that balance lies and the role of regulation in achieving this."

The issues paper The Future of Money – Private Innovation in Money and background information is available online.  The RBNZ will be offering stakeholder webinars and other opportunities to discuss the paper in February and March, with feedback closing on April 3, 2023.

The issues paper indicates that the RBNZ will work with other regulators to develop the monitoring framework. Along with the Financial Markets Authority, Commerce Commission, Ministry of Business, Innovation and Employment and The Treasury, the RBNZ has formed the Council of Financial Regulators (CoFR), which in September issued a definitive statement on cryptoassets.

While the paper's non-specific about what's exactly involved with this framework and when it will be up and running, it says the framework will be "in line with our new monitoring mandate and the CoFR statement".

"This framework will also help us determine the size and urgency of further work.

"This framework could include key measures, similar to those used to assess systemically important financial market institutions (e.g. interconnectedness, substitutability, concentration, complexity and size).

"We also propose to monitor a wider range of metrics relevant to assessing whether or not a new form of money may become widely used."

The paper said this  would include the extent to which they are used:

• by New Zealanders for day-to-day transactions and savings;

• for key economic functions, e.g. paying wages/setting prices/interbank settlement; or

• as part of a bundle of services, e.g. media platforms.

"Additionally, we may need to consider non-economic factors. For example, suppose new forms of money become more widely used within some communities for cross-border remittance and have a material or even disproportionate impact on these communities."

The paper says some "start-ups" in New Zealand have been exploring such use cases, "given the existing inefficiencies in this area".

"In that case, these new forms of money would be a matter of concern."

In terms of specific "innovations" the RBNZ outlines the questions that can be asked to assess whether further responses are necessary as per this graphic, below.

The paper goes on to say that if certain innovations "are of significant interest"  the RBNZ will assess further the relevance, nature and magnitude of the opportunities and risks to develop formal assessment criteria. These criteria might include the likes of the following:

The issues paper stresses that the RBNZ is not proposing to ban the use of certain coins or to limit how people choose to pay and be paid.

"There is currently no restriction, for example, on opting to have one’s wages paid in bitcoins, foreign currencies, community ‘currencies’ or other tokens, provided such choices do not affect others.

"In fact, we generally welcome well-grounded innovation that increases diversity in the forms of trusted money and payment options, as this supports choice and competition."

The RBNZ says while the uptake of new forms of money in New Zealand is currently small, the absence of a regulatory framework effectively addressing some of those risks "could undermine trust" in these new forms of money and the opportunities they could present.

"An alternative argument could be that as uptake is currently low and limited largely to speculative investment, we should not consider regulation at this point and instead rely on ‘buyer beware’."