At a time when the currency circle is surging, digital currency, a new form of currency, is gradually being regarded as the possibility of replacing banknotes in the future. In April 2018, Fan Yifei, deputy governor of the People's Bank of China, stated at the 2018 National Monetary and Financial Work Video Conference that he would solidly promote the development of the central bank's digital currency. This news has also aroused widespread concern from all walks of life.

In fact, except for China, central banks around the world have accelerated research in the field of digital currency. On June 19, the Reserve Bank of New Zealand (the Central Bank of New Zealand) published an article on its official website discussing the pros and cons of issuing a central bank digital currency. This article makes six assumptions on the definition of the central bank's digital currency. Based on these six assumptions, it starts from its impact on the core functions of the Reserve Bank of New Zealand (the Central Bank of New Zealand) (currency distribution, payment system, monetary policy, and financial stability). , analyze the pros and cons. Its model undoubtedly has reference significance for global central banks, including China.

However, it should be reminded that the full text does not mention how to design a digital currency issued by the central bank, nor does it suggest that the New Zealand central bank issue its own digital currency.

Long text warning, the essence of the full text can be pulled down to the final conclusion.

The full text is translated as follows:

Over the past decade, a series of technological innovations have disrupted the financial services industry. Consumers are demanding instant and convenient banking and payment services, emerging technology companies have begun to provide banking services, private companies have begun to issue digital currencies based on encryption technology, and new technologies are also affecting the four core functions of central banks (distributing currency, running vital payment systems, setting monetary policy, and maintaining financial stability). This article discusses how each of the central bank's core functions would be affected if the Reserve Bank of New Zealand leveraged new technology and issued a digital currency to the public.

In order to investigate the pros and cons of central bank digital currencies, we first need to clarify what we mean by digital currency. Let's make six assumptions first:

1. Digital currency can be provided to the public unlimitedly

In this paper, digital currency issued by the central bank is defined as a digital currency that is freely available to the general public, similar to cash.

2. Digital currency can take different forms based on existing payment system technology or new cryptographic technology

This article defines digital currency as any form of money other than cash. The “currency tree” is used here to further classify digital currencies based on the technology they rely on (Figure 1). As shown in the diagram below, a central bank could issue a cryptocurrency that relies on cryptography (such as distributed ledger technology) for transactions, or a traditional digital currency that relies on existing financial market infrastructure for transactions.

figure 1

figure 1

In general, this article refers to central bank digital currency as an intangible form of money. However, in the "currency distribution" and "payment systems" sections of the article, it is necessary to distinguish the impact of cryptocurrencies from traditional digital currencies.

3. Digital currency circulates together with cash and other forms of digital currency issued by private institutions

Currently, central banks issue cash and private institutions issue digital currencies. This article assumes that these two forms of money continue to exist, and that the central bank additionally issues an official digital currency. This means that households and businesses can choose to use cash, private digital currencies or digital currencies issued by central banks.

4. Digital currency can be converted into cash at a fixed exchange rate (face value)

Existing private digital currencies such as Bitcoin are more volatile in value than cash - they do not have a fixed exchange rate. However, if an official digital currency can circulate alongside cash, it makes more sense to convert the digital currency into cash at a fixed rate. This would help foster trust in the value of the digital currency (as it would effectively be backed by cash) and avoid complicating central bank policy by introducing a dual currency system.

The independence of monetary policy is not compromised by the par value exchange rate of the digital currency. This is because central banks can maintain the supply of cash and digital currencies at a par exchange rate without involving monetary policy.

5. The public cannot borrow from the central bank (they cannot hold digital currency negative equity)

This assumption means that digital currencies issued by central banks will function like cash. The central bank will not facilitate lending to digital currency holders. Therefore, if the digital currency is based on accounts, the balances of those accounts cannot become negative.

6. The central bank will not pay interest on the balance of its digital currency

Again, this assumption means that digital currencies issued by central banks will operate more like cash, which does not earn interest.

first level title

Currency issued by the Reserve Bank of New Zealand to the New Zealand public, as well as international visitors, is useful, easy to read, difficult to imitate and must be safely distributed across the country and checked for quality when they are recirculated to the Reserve Bank of New Zealand. The costs incurred in these processes are beyond the reach of digital currencies. This section explores two advantages and four disadvantages of issuing a central bank digital currency from the perspective of currency distribution.

Proposition 1: Digital currencies may be safer and easier to distribute than cash

The first benefit of issuing digital currency is that it is easier to distribute than cash. Cash is a tangible form of money, which means it must move in and out of the central bank securely by means of a physical medium. New Zealand's geography makes cash flow inefficient across the country.

However, geographic characteristics do not impose any restrictions on the distribution of digital currencies. This is not to say that issuing a digital currency has no costs. To distribute digital currencies, central banks need to develop their own retail and customer service infrastructure, or outsource it. In either case, building the infrastructure will be costly. Further work is currently needed to understand whether developing and maintaining a secure digital currency network and delivering to the retail sector is less expensive than cash distribution.

Additionally, digital currencies may be more securely distributed than cash. The threat to personal safety of distributing and holding cash is extremely costly. For example, people working in corner dairies, gas stations, bank branches and cash delivery vans are at high risk of robbery at any time. While digital currencies may provide a form of central bank money that reduces risks to personal security, digital currencies do not eliminate all threats of theft or harm.

• Traditional digital currencies issued by central banks face similar risks of theft and fraudulent payments as existing electronic currencies. Furthermore, if the digital currency is token-based and stored on some form of hardware (i.e. a prepaid card), then it can actually be used.

• Cryptocurrencies may also face cyber risks, depending onDLT (distributed ledger technology, hereinafter replaced by DLT)how it was designed. Distributed ledger technology removes any possible single point of failure in the system, which makes the blockchain resilient to cyberattacks and operational errors. When elements of centralization are added to DLT, their defenses against cyberattacks are reduced.

Proposition 2: If cash is phased out, digital currency will be an alternative to legal tender

The second benefit is that a digital currency issued by a central bank will ensure that the public continues to have access to fiat money whether or not they have cash. Box A describes situations where cash may no longer be widely available to the New Zealand public.

BOX A

Why is cash disappearing?

Scenario 1: Cash requirements fall due to costs.

Demand for cash may decline to the point where it is not widely available to most consumers. Currently, New Zealand consumers generally use bank cards or mobile payment apps rather than cash for the vast majority of transactions. Figures show New Zealand leads other countries in credit card transactions. Cash can become a burden on retailers and bank branches due to the need to clear end-of-day cash receipts, the burden of transporting cash between bank branches, and the risk of theft. Therefore, retailers and bank branches may also lose sight of maintaining their cash infrastructure if demand for cash falls significantly.

Scenario 2: Cash is withdrawn due to negative external factors.

Cash is difficult to trace, making it attractive for tax evasion, money laundering transactions and illicit transactions.

Objection 1: Issuing digital currency will incur construction costs

One cost of issuing a digital currency is that central banks need to invest in new infrastructure to create, issue and maintain a digital currency network. This setup cost is unknown and likely high.

Objection Two: Central Bank Issued Digital Currencies Could Inflict Huge Consumer Losses

Central banks can issue token-based traditional digital currencies or cryptocurrencies. These forms of money will be stored on small devices, and consumers may hold very large balances on small devices that may be stolen or lost, potentially creating a higher risk of loss for consumers, whereas for cash, spending Individuals are less likely to carry large amounts of cash on their personal person or store large amounts of cash at home.

Objection Three: Issuing digital currencies may require additional monitoring and regulations

The second cost of issuing a digital currency is that it may require additional monitoring and compliance under the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) laws. Under the law, the central bank may need to monitor users of its digital currency and payments to prevent issues such as fraud. Traditional digital currencies are theoretically easier to monitor due to their centralized design, while cryptocurrencies may be more difficult to monitor due to the anonymity and decentralization in distributed ledgers.

However, the distribution of digital currency to the public, along with its compliance with AML/CFT laws and fraud monitoring, could be outsourced to the private sector. Dyson and Hodgson (2017) suggest that private banks can manage the central bank's digital currency through designated bank accounts, but the funds in these accounts will be held by the central bank, which will reduce the administrative burden on the central bank to issue currency to the public.

Objection #4: Digital currencies are vulnerable to power outages in emergencies (unlike cash)

payment system

The underlying technology that supports digital currencies has a significant impact on payment systems. Here we distinguish between: digital currencies based on traditional payment systems and digital currencies based on encryption technology.

1. Traditional digital currency

Traditional digital currencies issued by central banks may have three advantages: faster settlement, lower fees and greater anonymity than existing electronic payment methods.

Support 1: Use traditional digital currency to improve settlement speed

The first benefit of a traditional digital currency issued by a central bank is that it can increase the speed of settlement. Existing financial market infrastructures require clearing prior to settlement. Clearing is the process of sending transaction information to the issuing bank (the payer's bank) and the acquiring bank (the payee's bank) - communicating who should get paid what and who will pay. Settlement is the actual exchange of funds between banks. Currently, the end-to-end payment process can take hours or days to complete, depending on the payment type and when it is instructed. These delays in settlement not only increase costs for payees, but also present opportunities to improve payment efficiency. Not only does it benefit the recipient if the funds are received immediately, but there is also no additional cost to the sender. In addition, if a commercial bank fails, delayed settlement requires agreement to determine the outcome of the payment.

Traditional digital currency can improve settlement, because the entire payment process can be quickly resolved through the central bank updating the account amount. The central bank is both the acquirer and the issuer of funds and no longer requires any interbank coordination, similar to when the payer and payee use accounts at the same commercial bank. However, transactions between central bank-issued digital currencies and commercial bank accounts would require interbank settlements, which could similarly cause delays in current electronic payments.

Central bank digital currencies could also improve cross-border transaction processing. Currently, cross-border transactions require the coordination of a network of banks and payment systems to direct and resolve payments between countries. A central bank digital currency could improve settlement times by reducing the number of service providers required for at least one party in a transaction. If the transaction is between two central bank-issued digital currencies, then settlement may only require a currency exchange market.

Support 2: The use of traditional digital currencies may reduce transaction costs

Currently in New Zealand, domestic electronic credit card transactions (excluding point-of-sale electronic transfers) impose a fee of 1.2% to 1.6% on the merchant (payee), which is collected by the bank and which in turn is passed through a higher The commodity price or surcharge is passed on to the consumer (payer). Because it is not motivated by profit, central banks can charge lower fees for electronic transactions of digital currencies than existing electronic payment providers. But it still charges fees for providing the digital currency and its payment network (depending on its form).

Support three: Traditional digital currency has higher payment anonymity than existing commercial bank cards

A third potential benefit of traditional digital currencies is that payments are more anonymous than existing credit card payments and less anonymous than cash payments. This anonymity will depend on the design of traditional digital currencies.

Account-based money would be similar to electronic money in transaction accounts offered by commercial banks. Therefore, this form of central bank digital currency is not very anonymous.

However, token-based currencies can provide some anonymity. The payment settlement of the central bank digital currency based on the token does not need to verify the token holder user. But as mentioned earlier, token-based currencies are not truly anonymous. All digital currency transactions leave electronic records. Therefore, even payments with token-based digital currencies are less anonymous than cash payments (of which there is no record).

Partial anonymity could be beneficial for central bank digital currencies as it strikes a balance between being able to deter crime (because there is an electronic transaction record), and being a means of payment that satisfies the public's desire for anonymity (especially if cash is not widely available or used) balance. Rogoff (2016) suggested that the central bank issue a digital currency, which not only has a certain degree of anonymity, but also can prevent tax evasion, money laundering and illegal transactions.

2. Cryptocurrency based on distributed ledger technology

Evaluating the pros and cons of cryptocurrencies in terms of payment efficiency is more complicated. In general, cryptocurrencies rely on DLT for transactions. How cryptocurrencies affect the payment process depends on the underlying DLT design. Not all technologies bearing the "DLT" name are created equal. Wadsworth (2018b) argues that some forms of DLT can drastically change the payment process in existing systems, while other forms of DLT look similar to existing payment systems.

verify"verify"steps for faster settlement. In DLT, there is no separation between the sending of financial transaction information and the eventual exchange of money.

Pros and Cons of Distributed and Transparently Proven Cryptocurrencies

In order to understand the pros and cons of cryptocurrencies, it is necessary to evaluate a cryptocurrency similar to Bitcoin. Cryptocurrency based on blockchain technology has the following advantages:

• Blockchain enables greater transparency of accounts and transactions, provides a "single source of truth" and facilitates record-keeping.

• Compared with existing payment systems, single points of failure are eliminated, making blockchain more resilient to cyberattacks and operational errors.

• Clearing and settlement are combined into one step, eliminating the delays that can currently exist with electronic payments. This means that once the payment is verified, the recipient receives the payment immediately, which is beneficial for the liquidity management of personal assets.

• Payments are as anonymous as payments in traditional token-based digital currencies. On the blockchain, payments are only authorized when the owner provides their digital signature. But electronic transaction records mean that if a digital signature is traced back to a person, all their transactions are easily traceable.

• shortcoming:

shortcoming:

• Transaction verification on the blockchain requires a high energy input, which can lead to higher transaction fees than current domestic transaction fees.

• Settlement is only done when the transaction is confirmed, which can delay the release of goods and services, for example, settlement initiated via the blockchain usually has a 10-minute cycle delay, which means that the buyer and seller may have to wait for about 10 minutes , in order to distribute goods and services reasonably. In contrast, most current local electronic payments are settled legally after authorization (which takes place in a relatively short period of time).

• Based on the computing power and time delay required to verify transactions, blockchains cannot scale to relatively high payment volumes.

• Final payments are one-way (no refunds) and probabilistic (based on high probability that payment cannot be changed). The proof-of-work mechanism and the length of the blockchain make it difficult, but not impossible, for a malicious agent to alter historical transactions on the blockchain (and fraudulently spend money that has already been spent).

Pros and Cons of Centrally Verified Cryptocurrencies

The Bank of Canada and the Monetary Authority of Singapore have experimented with digital information management systems in an attempt to reap the benefits of blockchain while avoiding the drawbacks mentioned above. These experiments notably increase the speed of end-to-end payments, reducing the cost and scaling considerations of cryptocurrencies by introducing a central validator for transactions. Wadsworth found, however, that the resulting ledger becomes more similar to traditional digital currencies. This leads to three advantages similar to the advantages of traditional digital currencies:

• Faster settlement compared to existing payments.

• Cost reduction (subject to central bank fees).

• A degree of anonymity.

Objection #1: Central bank-issued cryptocurrencies are not borderless

A central bank-issued cryptocurrency cannot be borderless, as it is usually only accepted within the country of issue. As with traditional digital currencies, cross-border transactions using cryptocurrencies may bypass existing international payment service networks. These transactions require currency exchange. Cross-border transactions with central bank-issued cryptocurrencies can reduce payment settlement times from days to hours if exchange exists.

like bitcoinprivate cryptocurrencyMonetary Policy

The Reserve Bank of New Zealand's mandate is to use monetary policy to ensure price stability while supporting the maximum level of sustainable employment by targeting inflation at 1% to 3%. Among them, the Reserve Bank uses the official cash rate (OCR · the Official Cash Rate) tool. This section considers the question of "Are central bank digital currencies useful as an additional monetary policy tool?"

The Reserve Bank of New Zealand affects short-term interest rates in the economy by changing the OCR. Commercial banks' interest rates are based on OCR.

• Commercial banks are unwilling to provide loan services at a price lower than the interest (OCR rate) on their deposits in savings banks.

• Commercial banks are also reluctant to borrow more than they pay the Reserve Bank (OCR plus 50 basis points).

Therefore, the Reserve Bank of New Zealand can lower interest rates and stimulate inflation, or raise interest rates and curb inflation.

However, OCR as a monetary policy tool has two limitations. First, it relies on commercial banks to convert interest rate changes into deposit and loan rates. This creates a risk that commercial banks may not pass on the full change in interest rates if they need to guarantee a surplus. Second, cash is less binding on monetary policy, which means that bank deposit rates cannot fall below a certain level. This is because deposits can always be converted into zero-interest cash. Depositors may be willing to accept negative interest rates until the cost of storing, insuring and transporting cash equals negative interest rates on bank deposits. This is called the effective lower bound.

This section considers whether central bank-issued digital currencies, as an additional monetary policy tool, could ameliorate these constraints on monetary policy implementation.

Support 1: If there is interest, the central bank's digital currency can be used directly as a monetary policy tool

The first point of support for monetary policy is that central bank digital currency can be used as a monetary policy tool. This requires relaxing our baseline assumption that central bank digital currencies bear no interest. Central banks may want to relax this assumption, since an interest-free digital currency would raise the floor of monetary policy to zero, further limiting the effectiveness of monetary policy. In this case, depositors will not tolerate negative interest rates, because converting their deposits into a zero-interest central bank digital currency will consume nothing.

It is also possible for central banks to issue interest-bearing digital currencies. Bordo and Levin (2017) suggest that the central bank could directly pay interest on digital currencies at the same rate as other funds held by the central bank. To stimulate inflation, the policy rate will be lowered, and to lower the rate of inflation, the policy rate will be increased. The policy rate would be passed directly to households and businesses holding digital currencies, and indirectly to the wider economy through the banking system.

However, an interest-bearing digital currency issued by a central bank would not remove the effective lower bound, as consumers would still be able to convert deposits into cash. To remove the effective lower bound, other methods need to be employed. Rogoff (2016) argues that central banks should eliminate large-denomination notes, Gesell (1916) suggests a tax on cash notes, and Agarwal and Kimball (2015) suggest a managed non-par exchange rate between cash and digital currencies.

Another point to note is that interest-bearing digital currencies may affect the par value assumption between digital currencies and cash. If households and businesses place a high value on the anonymity and physical properties of cash, they can treat cash as a digital currency with a comparable positive interest rate. However, Barrdear and Kumhof (2016) argue that interest-bearing digital currencies issued by central banks will be imperfect substitutes for cash and other financial assets. Therefore, further efforts are needed to understand digital currency dynamics and cash exchange rates.

Proposal Two: Central Bank Digital Currencies Can Ensure Monetary Policy Effectiveness If Private Cryptocurrencies Are Used Largely

A second potential benefit for monetary policy is that it provides a path for central banks to compete with private cryptocurrencies if necessary.

Central banks are observing the adoption of private cryptocurrencies by the general public. Private cryptocurrencies do not interact with the existing banking system and therefore are not affected by policy rates. Therefore, if cryptocurrencies become more popular, large deposits can be withdrawn at any time regardless of monetary policy. In order to maintain the effectiveness of monetary policy, central banks can either regulate the use of private cryptocurrencies or issue their own cryptocurrencies to compete with privately issued cryptocurrencies.

However, as private cryptocurrencies are not a stable form of money, they do not pose a risk to the effectiveness of New Zealand's monetary policy. Furthermore, private cryptocurrencies are based on DLT, it is not designed to facilitate lending. While lending can be done on a peer-to-peer basis, there won't be a central institution that collects large short-term deposits and turns them into long-term loans. Also, if a central agency is introduced to DLT for lending, it introduces a single point of failure and creates a target for cyber theft.

first level title

The Reserve Bank of New Zealand is responsible for the soundness and efficiency of the financial system. Therefore, we must consider the potential financial stability implications of issuing a central bank digital currency.

Digital currencies issued by central banks will be more secure for transactions and deposits. Compared with commercial bank deposits, the central bank's digital currency will have lower credit risk. This can be attractive to risk-averse households and businesses, and can be more efficient than storing cash privately. However, this could lead to three disadvantages that threaten the stability of the current financial system.

Objection 1: More reliance on wholesale funding markets

Money issued by central banks imposes some costs on financial stability. The first cost will be increased reliance on wholesale funding markets.

In New Zealand, commercial banks are likely to increase their reliance on offshore wholesale funding, exacerbating the sensitivity of our banking system to downturns in overseas markets. For example, if there were international shocks in European or US markets, these shocks would have a more severe attack on New Zealand markets because of increased bank funding costs (risk spreads) or reduced funding availability.

Objection 2: Banks become less resilient

A second related risk to financial stability is that central bank digital currencies could reduce the ability of commercial banks to withstand economic downturns due to increased competition and reduced profitability. If a large number of deposits are transferred from commercial bank accounts to the central bank's digital currency, then commercial banks will have to compete for deposits by raising interest rates. Furthermore, if central bank digital currencies offer cheaper domestic and cross-border transaction fees, payment fee revenues for commercial banks are more likely to be reduced. Even if interbank business competition means more efficient banking activity, if less profitable banks are less resilient to shocks, or if they seek out higher yielding (and riskier) assets to replace losing profitability , then it is likely to have a negative impact on financial stability.

However, it is also possible that additional competition from central bank digital currencies will not reduce banks' resilience. Commercial banks already compete in the deposit accounts and payments part of their business, for example, e-wallets and non-banks such as PayPal, Google Wallet and TransferWise offer alternatives to commercial bank transaction accounts. Moreover, history has shown that commercial banks can compete with other private competitors and central bank digital currencies, for example by offering attractive services or higher interest rates on deposits.

Objection Three: Increased risk of system-wide bank runs

in conclusion

Overall, the article finds a variety of pros and cons, and leads us to three conclusions:

First, the central bank's digital currency may have positive or negative impacts on monetary policy and financial stability. These are less dependent on the technology used by the currency and are more sensitive to how the digital currency will be used and the constraints, if any, which may include: whether the digital currency is interest-bearing, deposits in central bank digital currencies and bank deposits How easy it is to move between and whether it has the same value as cash.

Second, a central bank digital currency would result in a mix of pros and cons for payment efficiency and resiliency. It depends on whether the central bank is issuing a traditional digital currency or a cryptocurrency. These advantages and disadvantages can change with the design of a central bank digital currency, so it does not seem to spark a debate about whether such a currency should be issued.

Third, central bank digital currencies can save costs for money distribution, but also create new costs. It will also provide an electronic form of fiat currency, which is more valuable than saving fees.

Glossary

【Traditional payment technology】: Use a more typical hierarchical and centralized structure of the payment system to ensure trust and security.

【Cryptocurrency】: Digital currency that requires distributed ledger technology and encryption technology.

【Encryption (Digital)】: Convert data into codes for transmission over the network. Usually, the data text will be converted into an encoded text of an encryption algorithm.

【Network attack】: An attack by malicious hackers to steal information or destroy computer network systems.

【Digital (electronic) currency】: A broad term that covers all forms of currency that are not physical or tangible.

[Fiat currency]: a) The physical form of currency issued by the government and declared as legal tender, b) There is no promise of conversion into tangible assets, such as gold.

[Fixed traditional digital currency]: A fixed exchange rate digital currency that relies on existing financial market infrastructure for transactions.

【Fixed Cryptocurrency】: Cryptocurrency exchanged for fiat currency at a fixed exchange rate.

【Fixed Exchange Rates】: When the exchange rate between two currencies remains constant, it is often due to controlled supply and demand dynamics.

【Leader】: account balance and transaction history.

【Privately Issued Currency】: Currency issued by a private entity or non-central bank or government.

[Verification]: In DLT transaction verification, the process of ensuring that funds will not be reused and ledger balances are accurate and authentic.

[Variable traditional digital currency]: Traditional digital currency with flexible exchange rates and other currencies, including legal tender.

【Variable Cryptocurrency】: A cryptocurrency with a flexible exchange rate with other currencies including fiat currencies.