The Future of Money –Central Bank Digital
Currency
Te Moni Anamata –Aparangi ā Te Pūtea Matua
An issues paper inviting public feedback
before 6 December 2021

Ref www.rbnz.govt.nz/futureofmoney#X027715 v1.0

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Navigating this issues paper

Sections 1-3 provides background material to theissues discussed in this paper and to enable readers
to engage fully with the rest of the paper. It
includes descriptions of key terms used in thepaper and our thinking on whether a CBDC would
support our role as steward of money and cash,
particularly in a digital future.

Introduction
What is a CBDC
Motivation and process for considering a
CBDC

Sections 4-7 outlines some of the opportunities
presented by the CBDC, as well as challenges andrisks posed. It then proposes a set of high-level
CBDC design principles.







Opportunities of a CBDC
Challenges and risks of a CBDC
Developing CBDC design principles
Conclusion and next steps
Have your say

A primer on the inefficiencies in New
Zealand’s payment system
Account-based vs token-based digitalmoney
Reserve Bank balance sheet
Wholesale CBDC

Consultation questions are listed in Section 8.
The Appendices provide additional materials,
including a primer on the current state of our
payment system, a discussion on the features fromdifferent design choices, and the impact of CBDC
on our bank balance sheet.

September 2021
futureofmoney@rbnz.govt.nz
Money and Cash Department – Tari Moni Whai Take

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Contents
Executive summary ____________________________________________________________________________ 4
1

Introduction _______________________________________________________________________________ 6

2

What is a CBDC? __________________________________________________________________________ 9

3

Motivation and process for considering a CBDC________________________________________ 12

3.1 Process and scope for our CBDC investigation

16

3.2 Focusing on a general-purpose CBDC

16

3.3 Taking a technology-agnostic approach

17

4

Opportunities of a CBDC ________________________________________________________________ 18

4.1 Monetary anchor

19

4.2 Fair and equal way to pay and save21

4.3 Payments efficiency and resilience24

5Challenges and risks of a CBDC _________________________________________________________ 26

5.1 Operational complexities and risks

26

5.2 Risks to the banking system

27

5.3 Design complexities

29

6

Developing CBDC design principles _____________________________________________________ 31

7

Conclusion and next steps _______________________________________________________________ 34

8Have your say ____________________________________________________________________________ 36

References ____________________________________________________________________________________ 38

3Annex A:A primer on the inefficiencies in New Zealand’s payments system ____________ 41

Annex B:

Account-based vs token-based digital money __________________________________ 43

Annex C:

Reserve Bank balance sheet _____________________________________________________ 45

Annex D:

Wholesale CBDC _________________________________________________________________ 47

Future of Money – Central Bank Digital Currency

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Executive summary
At the Reserve Bank of New Zealand – Te Pūtea Matua (the Reserve Bank) we characterise ourmandates, roles and responsibilities in terms of the Tāne Mahuta narrative (depicted in thefollowing Introduction). In this metaphor, central bank money forms part of te Toto, the sap of thetree representing our financial system (Tāne Mahuta). We have a role in ensuring that te Toto ishealthy and resilient, thereby supporting the rest of the Reserve Bank’s strategic roles andmandates as represented by other parts of Tāne and his ecosystem.
As kaitiaki o te toto – the steward of money and cash in New Zealand – we aim to ensure that
central bank money contributes to a sound and dynamic monetary and financial system by being:
1.

A stable anchor of value and confidence and convertibility in our money.

2.

A fair and equal way to pay and save in our modern and inclusive economy.1

This objective reflects the fact that central bank money (whether in physical or digital form) plays
an underpinning role in ensuring that all prices are set in New Zealand dollars and that people canconfidently expect to be able to make payments and settle debts in New Zealand dollars now andinto the future.
Trends in cash use and innovation in money present an opportunity for the Reserve Bank toconsider broadening central bank money to include a widely available digital form, and socontinue to meet the needs of New Zealanders. The declining use, acceptance and availability of
cash in New Zealand, and emerging innovations in private money, namely stablecoins, make thisan opportune time to consider a central bank digital currency (CBDC).
The Reserve Bank’s initial CBDC considerations are focused on the public policy case for, or
against, a CBDC that would be available to all individuals, communities and businesses. We refer tothis as a ‘general-purpose’ CBDC, which we will shorten to CBDC in this paper.
Following on from Future of Money – Stewardship paper, this issues paper sets out the Reserve
Bank’s view of the high-level policy opportunities and challenges that a CBDC may confer. In thissense it can be thought of as a discussion on the in-principle case for a CBDC. In practice the exact
costs and benefits of a CBDC will depend very much on specific design details that we are not yetat the point of considering. Instead, this paper is intended to explain to the public how we see theabstract advantages and disadvantages, costs and benefits, and risks and opportunities that a
CBDC might offer. It is intended as the starting point for a conversation with stakeholders on thepotential role of a CBDC for New Zealand.
Developing a CBDC would require long lead times given the inherent complexities, multiple design
choices and policy choices to be made. This means we will need to take a multi-stage approach topolicy development, with this Issues paper being the first of many should we confirm our positionon the case for a CBDC.
The Reserve Bank’s overall belief is that a CBDC would be a useful development for central bankmoney, because it would both support the value anchor role of central bank money, and support
the ability of central bank money to act as a fair and equal way to pay and save.

____________
1

4

See The Future of Money - Stewardship issues paper (September 2021)

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A CBDC directly supports the role of central bank money as a value anchor by:Providing individuals and businesses with the option of converting privately issued money intoa digital form of central bank money (ensuring the long-term convertibility of private money
into central bank money).

Improving the technological form of central bank money to ensure it remains relevant in adigital future.

Providing an additional monetary policy tool (by it being either issued to provide monetarystimulus, or interest bearing).

A CBDC both directly and indirectly provides a fair and equal way to pay and save by:

Directly providing a basic form of paying and saving to all at a low cost, and acting as agateway to the formal financial sector.

Supporting wider financial inclusion and wellbeing efforts, including through partnering withgovernment programmes.

Providing individuals with freedom and autonomy in saving and paying by giving them greater
choice, and providing a personal back-up in times of uncertainty.

Finally, a CBDC and its ecosystem (including the distribution model) have the potential to act as acatalyst for innovation and competition in the wider money and payments ecosystem. This could
bring improvements to domestic payments’ efficiency and resilience, as well as enable New
Zealand to take part in global initiatives that use CBDCs to improve cross-border payments.
However, a CBDC is not without challenges:
1.

How a CBDC may affect the banking sector requires careful consideration.

2.

As with other forms of digital money, a CBDC must be operationally resilient to outages andcyber security risks, maintain data privacy, and it would need to comply with all relevant
regulation.

3.

Similarly, while a CBDC has the potential to act as a catalyst for innovation and competition in
the wider money and payment ecosystem, we will have to consider the potential for it to
crowd out innovation.

Given its assessment of policy issues, the Issues paper proposes a set of high-level designprinciples that would need to be incorporated in a CBDC issued to all. The Reserve Bank invites
your feedback on the CBDC policy analysis and design principles.

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Introduction

The vast majority of money and payments in New Zealand are digital. New Zealanders
overwhelmingly prefer to pay and save using digital forms of money. At the same time, private
innovations in digital money are emerging domestically and globally, and many central banks areactively considering central bank digital currencies (CBDCs) of various forms.
Cash is the main form of central bank money in New Zealand.2 In New Zealand, as is the case inmany other countries, there is a ‘cash paradox’ where the amount of cash in circulation continues
to grow but it is used proportionately less for transactions by most people (although some people
are wholly or largely reliant on cash to transact).3
The importance of cash can be traced back to its role as central bank money that is available toeveryone. In fact, central bank money can be considered systemic in all societal domains – itunderpins people’s financial, economic, environmental, social and cultural wellbeing. The Reserve
Bank of New Zealand’s (the Reserve Bank’s) holistic stewardship of money and cash reflects theunderpinning role of central bank money.4
Figure 1: The Reserve Bank’s strategic elements represented in Tāne Mahuta____________
2 The Reserve Bank also issues digital money to commercial banks in its Exchange Settlement Accounts. See https://www.rbnz.govt.nz/markets-and-payments/nzclear/the-reservebank-in-the-payments-system-its-roles-and-responsibilites
3 RBNZ (2021a)
4 See The Future of Money - Stewardship Issues Paper (September 2021)

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The interactions between our new role as steward of money and cash and our purpose to support
economic prosperity and wellbeing can be understood using our Tāne Mahuta narrative. The
Reserve Bank is the guardian of our financial system, as represented by the total health of Tāne
Mahuta. This includes acting as guardian or kaitiaki of its key elements: te Toto (money, cash andour foreign reserves), te Tariwai (payment and settlement systems), te Pekenga (regulated entities)
and ngā Pūtake (our legislative mandate). We are kaitiaki o te toto, the lifeblood of Tane Mahuta,
which underpins the Reserve Bank’s functions and the financial institutions we regulate.
As steward of money and cash, the Reserve Bank is considering the public policy case for a New
Zealand CBDC. That is, a digital representation of New Zealand’s central bank money issued toeveryone. As a CBDC is still an abstract concept, this Issues paper considers the high-level
opportunities for and challenges of a CBDC. It proposes basic CBDC design criteria that reflect our
stewardship objectives to guide further work. We are seeking your views on the opportunities andchallenges a CBDC may present and whether the design principles adequately capture allconsiderations.
We are considering a CBDC now because as steward we must be forward looking and preparedfor future money and cash needs, and not because we intend to issue a CBDC in the immediate
future. Any decision to issue a CBDC will follow a thorough assessment of a policy case thatweights all considerations appropriately. We expect that any assessment will require designing
CBDC prototypes, experiments and testing, and extensive stakeholder engagement. Further
legislative powers may be required.
The rest of the paper is as follows. Section 2 defines CBDC and central bank money. Section 3
describes the motivation and process for considering a CBDC. Section 4 describes theopportunities presented by a CBDC and Section 5 explores the challenges and risks of
implementing a CBDC. Section 6 summarises the high-level design principles that would need tobe considered in future work on a CBDC. Section 7 concludes and Section 8 asks for yourfeedback.
Box A: The history of money – private money versus central bank money
Central bank money is government backed and issued by the central bank. To
understand the role of central bank money, it is worth exploring how the monetarysystem came to be what it is today, and the role of the Reserve Bank in providing,stewarding and stabilising money.
Most definitions of money focus on what it does – that it provides a single unit of accountin which to set prices, a commonly accepted medium of exchange, and a store of value.
However, beyond its practical functions money is a social institution that depends ontrust.5 As a social institution, money represents the credit an individual enjoys with all ofsociety by virtue of its acceptance as a form of payment for future goods and services. It’s
also a mechanism for settling obligations or the extension of credit by others.6
Over time, various institutions and mechanisms have been used to build trust in moneywith varying degrees of success. Two mechanisms have proven resilient throughout
history: 1) commodity-backed money, where trust is based on underlying assets such as
precious metals and 2) ‘fiat’ money, where trust is based on legal and political institutions____________
5 See Martin (2014) and Gianni (2011) for a detailed analysis of money and its history.
6 Carstens, A (2018).

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and anti-counterfeiting mechanisms. In New Zealand, all central bank money is fiatmoney.
Over time, central bank money has proven more robust than commodity-backed money.7
However, governments without trustworthy and stable institutions have been unable tomaintain stable forms of money and fallen back to commodity-backed money, barteringor taken on the money systems of other (larger) countries.8
Figure 1: Pete has private and central bank money

In New Zealand, most transactions are made using privately issued money. However,these forms of money leverage off the stability provided by central bank money to thebroader money system. By and large, individuals and businesses have confidence incommercial bank deposits because they can be exchanged for Reserve Bank money inthe form of cash. In turn, confidence in Reserve Bank-issued money (cash and wholesale)draws on the fact that it represents a claim on the Reserve Bank, the independence of theReserve Bank from the New Zealand government (to ensure the government cannot
issue money to raise revenue), parliamentary controls (such as on government
expenditure) and the ability of the government to raise revenue.
As shown in our Tāne Mahuta narrative, other functions of the Reserve Bank also
contribute to the stability of our money: monetary policy ensures that prices are stable;market operations ensure sufficient liquidity and provide a safe and liquid portfolio of
foreign currencies to support the New Zealand dollar (NZD); and financial regulation andsupervision work to ensure that the financial system, including banks and payments, aresound and efficient.

____________
7 In contrast, commodity-backed money has two downfalls: it is expensive to produce and generates additional opportunity costs as commodity resources must be acquired, and if
the supply of the commodity is not sufficiently flexible to keep up with demand it can result in deflationary pressure.
8 In early historical examples, trust in money was provided by a common knowledge of each person’s creditworthiness among close-knit community members (such as Yap Island).
However, these systems can break down as they grow or as the issuers of credit become more removed from the borrowers. Martin, F (2014) and Gianni, C (2011).

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92.

What is a CBDC?

To understand a CBDC, it is worth first refreshing our understanding of money itself.
Money is defined as a store of value (useful for holding wealth), a unit of account (prices are set init) and a medium of exchange (useful for payments). Central bank money (introduced in Box A andfurther explained in Box B) comes in two forms – physical (cash) or digital (held on an electronic
ledger). A CBDC can be defined simply as digital money issued by a central bank.
A CBDC is digital money issued by a central bank that represents a legal claim on that centralbank.

Like cash, a CBDC represents a legal claim on the central bank, and its ultimate value is based ontrust in the government and its institutions. This is what makes a CBDC different from other typesof digital money, such as commercial bank transaction accounts (transaction accounts).
Transaction accounts represent a claim on the issuing bank and are backed by the capital reserves
and prudent operation of the bank to ensure they can fulfil their promise of 1:1 convertibility withcash (Figure 3).
From a user perspective, many forms of digital money are already accessed and used by similar‘payment instruments’. For example, we use cards, mobile applications and online platforms tocheck balances and spend our digital money.
Most forms of digital money in New Zealand can be exchanged 1:1 with each other.9 This 1:1
relationship between different forms of digital money (i.e. between private money issued bydifferent banks, credit unions and non-bank deposit takers) and cash means that most people do
not realise there are differences in the forms of digital money that they hold and use.10 11 This
reflects the fact that we have an effective single unit of account in New Zealand (the NZD).

____________
Transaction accounts have 1:1 convertibility with cash and therefore with each other. Other forms of money, such as private reward schemes, might not make this promise. See
Wadsworth (2018a) for more details on different forms of digital money.
10
In particular, that money issued by private firms or banks is not free from the risk of being lost if those firms or banks fail.
11
Non-bank deposit takers include finance companies that raise funds from the public, as well as most building societies and credit unions. A full definition is provided in the NonBank Deposit Takers Act 2013.
9

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Figure 2: Pete would have two options for central bank money if there was a CBDC

Figure 3: Conceptual difference between a CBDC and transaction accounts

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Box B: Types of money
Cash is currently the only type of central bank money available to anyone. Cash is also the
only physical money available in New Zealand. All private money exists digitally (as anelectronic record). The chart below shows the different types of money that exists – or
could exist – in New Zealand. The brown boxes relate to possible types of central bankmoney. The pink boxes are private money.
Figure 4: The money tree taxonomyThe first tier of the money tree describes money as either physical or digital. Since
the Reserve Bank has the monopoly right to issue banknotes and coins, there is only
one form of physical money and that is cash.12

The second tier separates digital money by whether it is issued by the private sector
or by the Reserve Bank.



The final tier of the money tree distinguishes money by its technological forms(account based or ‘token based’).13 This distinguishes between different types ofprivate money. For example, transaction accounts are account based, while ‘crypto
assets’ like Bitcoins and stablecoins are token based. It also allows a consideration of
two possible forms of CBDC: those that are account based i.e. wholesale settlement____________
12 Cheques are privately issued instruments that represent an order to transfer money held in a bank account. For this reason they do not meet the definition of money.
13 Some have rightly pointed out that the terms ‘token’ and ‘account’ may be misleading, as crypto-assets can employ account structures at a fundamental level. However, thedistinction still holds from the user experience and its implications. See Kahn, C and W Roberds (2009), Garrat, R, Lee, M, Malone, B and A Martin (2020) and Kahn, C (2020) for areview of the token- versus account-based money terminology. This paper takes the approach of Wadsworth (2018c) and classifies digital currencies as using either account-based
conventional infrastructure or token-based, distributed-ledger technology infrastructure.

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accounts at the central bank14 or new accounts at the central bank, and those thatinvolve a new type of token-based money.15
The distinction between account-based and token-based money can be summarised byconsidering the features offered to the end user (see Annex B). One important distinction
relates to ownership: the ownership of money held in accounts is proven by identity,
whereas the ownership of token-based money is proven by possession.

3

Motivation and process for considering a CBDC

The Reserve Bank is investigating whether a CBDC would support our role as steward of money
and cash, particularly in a digital future. As steward we aim to ensure that central bank money
contributes to a sound and dynamic monetary and financial system by being:
1.

A stable anchor of value and confidence, and convertibility in our money.

2.

A fair and equal way to pay and save in our modern and inclusive economy.

This objective reflects the fact that central bank money in both physical and digital forms plays anunderpinning role in ensuring that all prices are set in NZD and that people can confidently expect
to be able to make payments and settle debts in NZD now and into the future.
To be clear, the Reserve Bank is not considering replacing cash with a CBDC. The Future of Cashreview16 revealed that cash has unique features and benefits that New Zealanders continue tovalue. A CBDC is not intended to replace these benefits; instead, we are considering whether a
CBDC is an opportunity to provide these (and other) benefits digitally. This would provide New
Zealanders with a choice of central bank money in physical and digital forms.
More broadly, the Reserve Bank is considering whether a CBDC is needed to ensure that central
bank money is resilient and fit for the future. There are two overarching trends that havemotivated our CBDC considerations.
First, most people in New Zealand prefer to pay and save in digital money rather than physicalmoney. Electronic transaction accounts (which hold digital money issued by commercial banks)
make up over 90 percent of outstanding liquid (M1) money balances (Figure 5). Meanwhile, theuse of contactless card payments has been increasing (Figure 6), and our 2020 cash use survey
found that contactless card payment was the most preferred payment method (36 percent of New
Zealanders). The COVID-19 pandemic accelerated these trends towards digital money andpayments, with lockdowns and social distancing requiring a greater use of e-commerce, remoteand contactless payments and internet banking.

____________
14 ESAS is the Reserve Bank of New Zealand's Exchange Settlement Account System (ESAS) which is used by banks and other approved financial institutions to settle their
obligations on a Real-Time Gross Settlement (RTGS) basis.
15 Bascand, G (2018) and Wadsworth, A (2018c). A group of central banks define CBDC as a “digital payment instrument, denominated in the national unit of account, that is a direct
liability of the central bank” and that therefore carries neutrality and liquidity benefits. Bank of Canada et al. (2020). Central bank money is neutral and highly liquid relative to privatemoney. The CPMI and MC (2018) and Boar & Wehrli (2021) exclude existing balances in reserve or settlement accounts from the definition of CBDC due to their long establishment
within money systems.
16 RBNZ (2019).

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Figure 5 Cash in circulation and transactional balances as a share of M1 money

Source: Haver Analytics

Figure 6: The rise of contactless card payments in New ZealandMonthly value of transactions.

Note: This chart shows card transactions by instrument technology rather than by whether they are debit or credit cards.
Source: Payments New Zealand

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Cash appears to be useful to people as a store of value, particularly in times of uncertainty. Cash incirculation in New Zealand increased by approximately $800 million at the beginning of thepandemic. However, in 2020 only nine percent of New Zealanders preferred to use cash as theirmain way of paying (down from 12 percent in 2019), and its distribution model is becoming more
fragmented.17
The important point here is that in order for a value anchor to be effective it has to havetransactional relevance.18 As cash becomes harder to obtain and use, its scarcity negatively affects
the value anchor aspects of central bank money.
Secondly, private innovations in new forms of money are emerging globally. Some of these newforms of money might sit outside current financial sector regulations or be denominated in newunits of account (i.e. not NZD). Notably, large technology companies have proposed issuing global
stablecoins. These instruments promise more efficient and innovative means of paying and mightobtain rapid global adoption due to the market power of their issuers. Central banks andregulators around the world have responded to the prospect of global stablecoins by making clear
their potential risks,19 issuing statements requesting that these risks be managed and investigating
the potential for CBDCs as alternatives.
If a global stablecoin were issued successfully in New Zealand, the Reserve Bank could face a
scenario where a potentially large number of transactions and savings would be conducted
outside NZD and offshore. This could limit our ability to use monetary policy to influence interest
rates and therefore inflation and employment targets, which would mean a loss of monetary
sovereignty for New Zealand.
These two trends motivate us to consider ways for central bank money to also innovate to better
meet the future needs of New Zealanders. In considering a CBDC, we are motivated primarily by
our stewardship mandate and broader role as caretaker of New Zealand’s monetary system,
payments system and financial institutions.
The Reserve Bank is not alone in its investigations – an increasing number of central banks areresearching CBDC20 (Figure 7). The specific motivations for this research differ by country. Broadly,
central banks in advanced economies are motivated by monetary sovereignty objectives due toemerging innovations in private digital monies (such as global stablecoins) and declines in the useof cash. They are also motivated by opportunities for increased payment safety and efficiency,
including for cross-border payments.
For example, the Bank of England has established a CBDC Taskforce to explore a CBDC issued tohouseholds and businesses, citing a range of potential use cases for a CBDC and the fundamental
benefits of providing central bank money digitally.21 The United States Federal Reserve Board has
stated it is stepping up its public engagements and research on the potential benefits and risks of
a CBDC, including one that is issued to households. It is motivated by developments in private
digital money, the migration to digital payments from cash, plans to use a CBDC in cross-border
payments, and financial exclusion.22 Sweden’s central bank, the Riksbank, facing low cash use, hasbeen actively investigating CBDC since 2017 as a complement to cash. It has released three reports____________
17 RBNZ (2021b).
18 See The Future of Money – Stewardship (2021) for a detailed explanation of the value anchor.
19 Group of seven working group on stablecoins (2019).
20 Boar C and A Wehrli (2021) survey central banks on whether they are investigating CBDC, and Auer et al. (2020) categorise the central bank research on CBDC.
21 BoE (2021), Cunliffe, J (2021), Mutton, T (2021).
22 Brainard, L (2021).

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on CBDC and is now engaged in testing CBDC prototypes.23 Each of these central banks is clearthat it does not intend to replace cash with a CBDC.
Meanwhile, central banks in emerging economies are considering the opportunities that CBDCs
might provide to reduce high operation costs, increase payment safety and efficiency, and lead togreater financial inclusion. Research in these economies tends to be focused on testing pilots andprototypes. The People’s Bank of China is testing CBDC pilots24 while the Central Bank of The
Bahamas has already issued a CBDC25 and the National Bank of Cambodia has issued a ‘quasiCBDC’ via a wholly owned subsidiary.26
Figure 7: Central banks are investigating CBDCs

Total central banks researching CBDCs

Central banks also engaged inexperiments/proof of concept

Central banks also engaged indevelopment/pilot arrangements

2017

0%

20%

40%

2018

2019

2020

60%

80%

100%

Note: A proof of concept usually refers to early-stage testing; a pilot is usually later-stage testing and more targeted at
testing practical implementation. Source: Boar et al (2021)____________
23 Riksbank (2021).
24 pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf.
25 Central Bank of The Bahamas (2021).
26 Shen, A (2020).

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3.1

Process and scope for our CBDC investigation

The Reserve Bank expects to take a multi-stage approach to considering and developing a CBDC
that includes assessments of the policy opportunities, risks, use cases and design options as
illustrated in Figure 8 Future stages of work are likely to involve designing a prototype, assessing
the prototype, seeking feedback, redesigning if necessary and undertaking practical trials. Any
decision to issue a CBDC would only be made following consultation with the Government, thepublic and other stakeholders.
Figure 8: A multi-stage approach to CBDC

3.2

Focusing on a general-purpose CBDC

A CBDC can take many forms, but this issues paper focuses on a CBDC that would be issued toany individual or business that wants to use it. Such a ‘general-purpose’ CBDC27 would be closer infunction to cash and better placed to fulfil the role of central bank money than a ‘wholesale’ CBDC.
The rest of this paper refers to CBDC and general-purpose CBDC interchangeably.
A general-purpose CBDC is digital money issued by a central bank that is available to any
individual or business that chooses to use it.
Future work (outside the scope of this paper) will consider whether a new type of ‘wholesale’ CBDC
is needed. The distinction here is that a general-purpose CBDC could be used by anyone in New
Zealand, conceptually, whereas a wholesale CBDC would only be available to certain large financial
institutions that deal directly with the Reserve Bank. For example, the reserves held in the Reserve
Bank’s Exchange Settlement Account System (ESAS) to settle interbank payments and implementmonetary policy represent a conventional wholesale CBDC.28 Future investigations can consider____________
27 Also referred to as a ‘retail CBDC’.
28 This paper takes the approach of earlier Reserve Bank work and considers the funds currently issued by the Reserve Bank via Exchange Settlement Accounts as a conventional
wholesale CBDC.

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17whether a new form of wholesale CBDC, such as one that is token based, could bring efficiency
and resilience benefits to wholesale settlement (described further in Box B).

3.3

Taking a technology-agnostic approach

The policy discussion considers an abstract CBDC, which is simply digital money issued by thecentral bank to all, alongside cash. The Reserve Bank’s intention is to let a policy discussion informthe technological design of a CDBC rather than the other way around.
Abstracting from the CBDC’s form allows the Reserve Bank to develop high-level design principles
that a CBDC should achieve to deliver its desired benefits and minimise its challenges. These
principles are developed through the opportunities and challenges sections of this paper (Sections
4 and 5) and summarised in Section 6. Subsequent policy development and consultations would
consider the use case for CDBC options and, therefore, important technological design features.
Box C: International principles for CBDC
A CBDC is an abstract concept. Internationally, a group of central banks with the Bank forInternational Settlements (BIS) released three foundational principles to guide CBDC
considerations.29 These are summarised as:
1. Do no harm to wider policy objectives.
2. Ensure coexistence and complementarity of public and private forms of money.
3. Promote innovation and efficiency.
These principles are then translated into 14 core features in three categories: instrument
features, system features and institutional features.
This Issues paper takes a similar approach by building a set of CBDC design principles(summarised in Section 6) based on the Reserve Bank’s purpose to support New
Zealand’s economic wellbeing and prosperity and given its financial stability, monetary
policy and central bank objectives. The starting point for the Reserve Bank’s policy
analysis of a CBDC was its Future of Cash review and new role as steward of money andcash.
One key distinction of the Reserve Bank’s CBDC design principles is that they are lessdetailed than the set of 14 core features. We have chosen a higher-level approach toensure this can provide public insights into the scope and direction of its CBDC work,
while allowing public feedback to inform the detailed elements of any future CBDC
design, including details of the CBDC instrument, supporting system and legal structures.

____________
29 See Bank of Canada et al. (2020).

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4.

Opportunities of a CBDC

The opportunities of a CBDC can be understood by comparing the features of a CBDC to those of
predominant existing forms of money, namely cash and transaction accounts.
At the most basic level, a CBDC appears to be a useful digital complement to cash. As both areforms of central bank money, CBDC and cash offer similar features. For example, they both have
low credit risks and have legal protections for payments made in that money. In addition, a CBDC,
by its digital nature, can also offer the features of other forms of digital money such as transaction
accounts. For example, it can be scalable to high volumes, and payments would not be dependent
on location.
Table 1 summarises the unique features of CBDC, cash and bank transaction accounts. It showsthat a CBDC has features of cash and transaction accounts.
Table 1: Features of CBDC, cash and bank transaction accounts
CBDC

Cash

Transaction accounts

Yes

Yes

No

Holder or personal ID

Holder

Personal ID

Instant and final settlement

Possible

Yes

Possible for within-banktransfers (3)Peer to peer

Possible

Yes

No

Dependent on location

No

Yes

No

Scalable to high volumes

Yes

No

Yes

Lowest credit risk

Yes

Yes

No

High storage and transport costs

No

Yes

No

High risk to physical safety

No

Yes

No

Cyber security risks

Yes

No

Yes

Easy to lose/misplace

Possible

Yes

No

Legal tender or legal finality (1)Proof of ownership (2)Payment characteristics

Savings characteristics

Notes: (1) Legal tender is a tender of payment that, by law, cannot effectively be refused in the settlement of a debt
denominated in the same currency. Legal finality relates to whether the payment legally cannot be reversed or
unravelled after it has been made. (2) Relates to whether the money is bearer pays or requires proof of identity to be
spent. (3) May be bank dependent.

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19This section describes how a CBDC that is issued to all generates benefits to our stewardshipmandate and our overarching purpose to support the wellbeing and prosperity of New Zealand.
1.

First, a CBDC (like cash) directly supports the role of central bank money as a monetary valueanchor by providing a digital alternative to privately issued money.

2.

Secondly, a CBDC directly provides a fair and equal way to pay (like cash) because it is central
bank issued and would deliver benefits that have the attributes of public goods.30 A CBDC also
has the potential to indirectly support wider inclusion goals by addressing some barriers toboth financial and digital inclusion through its design and implementation programme.

3.

Thirdly, a CBDC and its ecosystem (including the distribution model) has the potential to act asa catalyst for innovation and competition in the wider money and payments ecosystem. This
could bring improvements to domestic payments’ efficiency and resilience. It may also enable
the Reserve Bank to take part in global initiatives that use CBDCs to improve cross-border
payments.

These opportunities are discussed in more detail in the following sections.

4.1

Monetary anchor

A CBDC can support the value anchor role of central bank money into a digital future by ensuringthat the NZD remains our single unifying unit of account and medium of exchange. How it does
this is explored in more detail below.

(a) A CBDC supports the continued use of NZD as our unit of account
The NZD is currently the ‘single unit of account’ in New Zealand. That means all prices aredenominated in NZD. The concept and acceptance of the NZD as our single unit of account issomething that many take for granted, or do without even thinking about it. It works because ofpeople’s trust in the value and stability of the NZD, and the convertibility of that value across thedifferent forms the NZD can take – banknotes and coins, transaction accounts, and ESAS accounts
at the central bank.
The 1:1 convertibility of central bank money to private money is primarily enabled by prudential
regulations and liquidity support through market operations, and also by the ability to convert
private money into central bank money, confidence in the price stability of central bank money
and the fiscal position of the government.
Having a single unit of account means that people know the value of the goods, services andassets they are buying with their money (for example, they do not need to apply an exchangerate), and that the money they hold in transaction accounts is worth the same as it would be ifthey transferred it to accounts in other commercial banks or private money issuers (like PayPal).
Currently the risk of losing New Zealand’s single unit of account is very low. However, this risk
could be heightened in a crisis where a private money issuer faces financial trouble. For example,
firms might impose fees or penalties for accepting payments from ‘more risky’ banks. Alternatively,
the single unit of account could be at risk if a new denomination of money issued by a global
stablecoin became popular. If either risk became widespread, New Zealand could risk losing
uniformity of money, which would be destabilising for price and financial stability.
____________
30 See The Future of Money – Stewardship (2021) for a more detailed explanation of the public good attributes of central bank money.

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20

A CBDC would support New Zealand’s single unit of account by providing individuals andbusinesses with the option of converting privately issued money into digital central bank money(Figure 9). The ability for privately issued money to be exchanged for central bank money at facevalue underpins its stability as a form of money. For example, if people or firms refused torecognise the value of private money balances, that money could be converted into central bankmoney and then used. A CBDC would ensure that this benefit is available to those who do nothave easy access to cash or who choose not to use cash.
Figure 9: Central bank money underpins commercial bank money(b) Improving central bank money to meet future needs
A CBDC could provide the Reserve Bank with an opportunity to improve the technological form ofcentral bank money to ensure it continued to be relevant and useful in the future. An important
form of relevance is transactional relevance, which is threatened by emerging innovations inprivately issued money and declining cash availability and use.
For example, a CBDC could increase the transactional relevance of central bank money byproviding instant electronic peer-to-peer settlement—a service that is currently not provided by
the private sector (see Annex A for further detail on the inefficiencies in New Zealand’s payment
system). Instant settlement is both more convenient (it reduces the need to wait for payments toshow up) and safer (it reduces the likelihood of payments failing to be settled after they have been
instructed). Electronic peer-to-peer settlement would be particularly useful for in-persontransactions such as at farmers’ markets and in marketplace trades.
Beyond that, a CBDC could also be designed to capture more advanced technological benefits,
such as those being proposed by stablecoin developers. For example, a token-based CBDC could
enable the execution of contracts or certain actions to be ‘programmed’ into the money itself,
thereby reducing the need for manual or third-party processing and generating efficiencies.

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21

The point of innovating central bank money is not to crowd out private innovation in money, but
to secure our value anchor in the digital future and provide a platform that supports wide accessto the benefits of innovation. A future-proofed CBDC would allow individuals and businesses tobenefit from technological innovation by providing a platform for new payment services that use
CBDC as the settlement asset. This would reduce the need for people to use new forms ofprivately issued money, such as stablecoins, that might not be regulated or denominated in NZD
and that could undermine our single unit of account.31(c) Additional monetary policy tool
A CBDC could be used as an additional monetary policy tool (used to influence interest rates) if
the Reserve Bank issued it as an intervention akin to the Large Scale Asset Purchase (LSAP)
programme, which aims to lower borrowing costs to households and businesses through theReserve Bank injecting money into the economy by buying government bonds from banks inexchange for electronically created money,32 or if the Reserve Bank charged or paid interest on
CBDC balances. Charging or paying interest on household and business CBDC balances would
provide a more direct transmission of monetary policy (compared to relying on commercial banks
to pass on rate changes) but could be unpopular. It may also be technically challenging to chargeinterest on a token-based CBDC without New Zealand losing its single unit of account (see Annex
B).

4.2

Fair and equal way to pay and saveCentral bank money offers New Zealanders access to a fair and equal way to pay and save andcan support New Zealand’s financial and social inclusion goals by being issued in a way that
reduces barriers to financial inclusion (including some digital barriers).33 The rest of this section
describes these opportunities in more detail.

(a) Improving financial inclusion with a CBDC
A CBDC could directly provide basic saving and payments for those who are unbanked orunderserved by the private sector by offering basic services at low or subsidised prices. This would
recognise the positive benefits that are generated for all New Zealand when everyone is includedin the financial system. Providing CBDC as a public good would set it apart from private digitalmonies and payment systems.
As a digital form of money, a CBDC could also act as a gateway to formal financial inclusion for
those who are cash reliant or face barriers to the banking sector. Access to electronic payments iscited as an important first step towards financial inclusion and the use of other financial services.34
Electronic transaction accounts that enable users to meet their payment needs and store valuesafely can lead to an increased use of other financial services. For example, The Bahamas has
issued a CBDC to encourage its cash-reliant communities to switch to digital saving and paying.35
Households in these communities might then be encouraged to open bank transaction accounts
and access other services such as small-business loans and investments.
____________
31 The Chief Economist of Diem, Christian Catalini (a stablecoin arrangement supported by Facebook) noted that the issuance of CBDCs would remove the need for a Diemstablecoin. Catalini noted that Diem does not want to replace the role of central bank money but rather wants “to build on and take advantage of that infrastructure to accelerate
use cases for consumers both domestically and also globally” King, R (2021).
32 See rbnz.govt.nz/monetary-policy/monetary-policy-tools for more information on large-scale asset purchases.
33 This includes people who are not banked or have limitations to accessing the banking system, such as people without identification and proof of address, people with convictions,people with disabilities, illegal immigrants and children. It also includes people who face barriers to digital inclusion, such as people with disabilities, senior citizens, people with low
socio-economic status, people who live in rural communities with low internet service, migrants and refugees with English as a second language, Pasifika, and Māori. See RBNZ
(2019).
34 CPMI and World Bank (2020).
35 Central Bank of The Bahamas (2021).

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22(b) Supporting broader inclusion goals
A CBDC that is coupled with key policy enablers could support New Zealand’s wider financial andsocial inclusion goals – financial and social inclusion in the payment systems is an issue ofimportance in our broader stewardship objectives.
An ability to prove one’s identify can be a key barrier to financial inclusion. To hold a CBDC or any
transaction account, an individual or business must prove their identity to satisfy anti-money
laundering and countering financing of terrorism (AML/CFT) requirements. A New Zealand CBDC
could be a powerful national vehicle for providing or supporting services that make it easier for
people to prove their identities. For example, a CBDC could support the uptake and use of RealMeor the digital identity trust framework being developed by the Department of Internal Affairs.36
A CBDC could also be issued in conjunction with other government programmes to improvefinancial inclusion – for example, to support the Safer Credit and Financial Inclusion Strategy37
inclusion goals.38
India’s Unified Payments Interface provides an example of how financial inclusion can be enhanced
when national digital identity and open-data frameworks are coupled with the public provision offinancial market (payment) infrastructure. Through its unified programmes, India was able toincrease the number of banked adults from 30 percent to almost 80 percent in three years, anincrease that it is estimated would have taken up to 45 years had India relied on traditional or
private-sector-led growth processes.39
Another barrier to accessing the formal financial sector can be difficulty in accessing or using
digital services. For example, people may live in rural areas without reliable internet access, beunable to afford smartphone or data plans or be unable to navigate online technologies. Digital
exclusion is particularly relevant given current trends in bank services from in-person services toonline services.
The private sector has already developed some solutions to promote digital inclusion in banking,such as providing bank account access points and transfer services via telecommunication
platforms (text or calling) instead of internet platforms. Further, many technology firms areinvestigating (and some have developed) digital currency with a robust and secure offlinefunctionality that allows it to mimic the back-up payment role that cash provides, for example
payments between devices that rely on Bluetooth.
A CBDC solution could use technology that provides offline functionality to make the CBDC
accessible to those that have limited access to electricity, telecommunications or the internet.
However, a CBDC is likely to require at least intermittent access to these.40 The extent to whichbarriers to digital inclusion can be addressed by a CBDC remains to be seen.

____________
36 See realme.govt.nz.
37 The Safer Credit and Financial Inclusion Strategy is a cross-government and financial sector initiative jointly led by Te Puni Kōkiri, the Ministry of Business, Innovation and
Employment and the Ministry of Social Development. See msd.govt.nz/documents/what-we-can-do/providers/building-financial-capability/safer-credit-and-financial-inclusion/safercredit-and-financial-inclusion-strategy-summary.pdf.
38 The Ministry of Business, Innovation and Employment’s open banking and retail payment system work may also support inclusion goals to the extent it reduces costs and allows
greater choice.
39 D’Silva, D, Filkova, Z, Packer, F and S Tiwari (2019).
40 A digital currency must require access to a central agent via internet or telecommunications due to the double-spend problem. In order to ensure that digital money is not spent
more than once, or that counterfeit digital money tokens are not created, they must be verified in some way. The method of verification differs depending on whether the money isaccount-based or token-based money and whether there is a central or distributed ledger underpinning it, but at some point electronic messaging is typically required.

22

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23

Finally, a CBDC provides an opportunity to advance other government inclusion or fiscal
objectives. For example, it could be used to make direct government-to-person payments. This
could be useful in supporting individuals affected by crises (such as a natural disaster), paying
benefits to individuals without bank accounts and paying out account holders who are affected bya banking failure (i.e. as a fast and secure pay-out mechanism for the Government’s incoming
deposit insurance).
Going further, a token-based CBDC could take advantage of the programmability of tokenised
money to build in certain actions or criteria – for example, to enable the automatic execution ofrent or bill payments.

(c) Personal freedom, autonomy and back-up in paying and saving
The public have told us that freedom and autonomy in saving and paying is important to them.41
This includes the ability to withdraw their money from the banking sector, pay and save off-grid,and have personal privacy and autonomy over their spending and saving. Trends towards cash
holdings during times of uncertainty support our finding that this choice and the ability to exit thebanking sector continue to be valued by many (Figure 10). A CBDC would provide individuals withfreedom and autonomy in saving and paying, primarily by giving them greater choice.
Figure 10: Cash in circulation increases during periods of uncertainty

Quarterly year-on-year percentage growth

Notes: The grey bars denote (in order) the year 2000 (“Y2K bug”) period, great financial crisis period and the COVID-19
pandemic. Source: Haver Analytics

Privacy is an important aspect of freedom and autonomy and is currently conferred by the
anonymity of cash payments and balances. A CBDC cannot be completely anonymous, as intheory all digital transactions would leave a record on either a central ledger or a distributed
ledger (due to the need to avoid the double-spend problem).42 However, a user’s privacy can be____________
41 In the form of feedback collected in our Future of Cash review and subsequent public research. See RBNZ (2019).
42 Cash has physical security features that people can check to make sure it is not counterfeit. For conventional digital money, some kind of digital ‘authentication’ must take place;i.e. for bank accounts this involves messaging to check that funds exist on a central ledger (i.e. transaction accounts).

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24

protected through the CBDC’s technological design, governance and supporting legal frameworks.
These frameworks could be similar to privacy protections for transactions using transaction
accounts or enhanced to closely resemble cash.
There are arguments for and against the traceability of transactions. Users may want to retain fullprivacy in transacting, for either legitimate or unlawful reasons. Meanwhile government agencies
may want to retain some traceability of CBDC balances or tokens to reduce tax evasion or
avoidance, or money laundering and financing terrorism.43 A CBDC offers an opportunity todesign a form of money that balances these interests.
Another key benefit of cash is that it provides a back-up form of payment in personal
emergencies. This is particularly true immediately after a natural disaster, but becomes less reliable
over an extended period of time without electricity and internet, as withdrawing money from ATMs
and cash tills also relies on electricity.44 A CBDC with offline functionality might also provide thisbenefit but would be limited in its ability to provide a means of payment during long periods
without electricity and internet.

4.3

Payments efficiency and resilience

A CBDC that encourages innovation and resilience in the wider payments ecosystem could be
used as a catalyst for competitive and interoperable payments services.45 In doing so it would
indirectly advance our stewardship objective of fair and inclusive paying and saving.

(a) Increasing innovation and competition in domestic money and payments
There is room for improvement in New Zealand’s domestic payments system. In particular, a lackof competition in retail services, enabled by high barriers to entry by incumbents, has resulted in
low incentives to address pain points and frictions (see Annex A). The Ministry of Business,
Innovation and Employment’s work on the retail payment system’s regulatory regime andpromoting open banking through a consumer data right will tackle some of these issues but will
not address them outright. A CBDC could help address some of these issues.
A CBDC could be provided on an open payments platform that achieves network efficiencies inmoney (as the CBDC is the settlement asset), but allows new middle and front-end payment
services by third parties. These services might comprise payment acceptance at point of sale,payments authorising, electronic wallet provision or customer on-boarding. In providing a CBDC in
this way, the Reserve Bank might help level the playing field (or even enable new players to get
onto the field) for new retail payment services.
An open CBDC payment platform might also drive greater interoperability in retail service
providers by enforcing common standards such as operating hours, rules, messaging conventions
and the use of open Application Programming Interfaces. A low-cost CBDC could put further
competitive pressure on fees charged by the private sector for making and accepting otherpayments, such as those charged by expensive incumbent card schemes.
Further, a token-based CBDC could support the development of new retail payment services. For
example, the Bank of England notes that a low-cost, token-based CBDC could make micro____________
43 RBNZ (2019).
44 See RBNZ (2019) for an explanation of the role of cash in a natural disaster or emergency.
45 Bank of Canada et al (2020).

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25

payments cheaper. This could pave the way for new business models such as per-use transaction
charges in streaming services rather than subscription charges.46
Creating a new payment platform could reduce the network effects enjoyed by existing payments
systems, including ESAS. However, most countries have multiple payment systems that cater todifferent market segments.47(b) Improving payment-system resilience
A CBDC provides an opportunity to improve payment resilience, and thereby financial stability, byallowing individuals and businesses to conduct transactions that are free from private-sector credit
risk. Electronic payments using bank deposits are exposed to that bank’s credit risk, at least until
they are considered final. Because electronic payments such as bank transfers are not settled
instantly, there is some risk that payments will not be made if issuing banks fail in the intervening
period. This risk is usually low in normal periods, but may be heightened during times of crisis or
uncertainty.
Further, an open and competitive CBDC might indirectly create changes that improve wider
payments system resilience. Firstly, it might encourage incumbents to improve their existing
systems and services (e.g. to provide instant settlement). Secondly, it might enable newparticipants to enter the payments system that are more adaptable to future payments shocks andneeds. Thirdly, it might reduce a reliance on some payment service providers (i.e. reducing central
points of failure in the New Zealand’s payments system).

(c) Addressing cross-border payments and remittances
Cross-border payments and remittances are fraught with cost and complexity. There is an impetus
for domestic jurisdictions to contribute to global coordination efforts to improve cross-border
payments. A CBDC may be well placed to support future cross-border payment arrangements as it
can be designed with innovative functionalities that are not available through existing cross-bordersystems. In particular, a CBDC could be designed to participate in future cross-border CBDC
payment arrangements that ensure 24/7 cross-border payment system opening times andfacilitate instant settlement.48 Globally, work is required to determine whether it is better toredesign existing cross-border systems or develop new systems based on CBDCs.49
A New Zealand CBDC would allow the Reserve Bank to participate in global cross-border payment
initiatives that involve connecting multiple CBDC systems together (referred to as CBDC bridges).
Banks have been very slow to enhance efficiencies and lower the costs of cross-border payments,
so a CBDC would act as a catalyst for improvement. At a minimum a CBDC issued in New Zealandmight improve cross-border payment efficiency by reducing the number of steps required tofacilitate international payments on the New Zealand side of the payments.
Careful consideration would also need to be given to whether a New Zealand CBDC should be
able to be used as a means to pay and save in other jurisdictions. A CBDC could reduce the costsof remittances earned in New Zealand and transferred to other countries. However, a widespreaduse of a New Zealand CBDC in other jurisdictions, such as Pacific Island nations, might challenge
the monetary sovereignty of those jurisdictions. That said, some Pacific Island countries already use
the NZD, and given that remittances are a presenting problem it is likely that these countries
would attach various degrees of weight to monetary sovereignty.
____________
46 Bank of England (2020).
47 CPMI Red Book Statistics, BIS (2020).
48 See Auer, R, Haene, P and H Holden (2021) for an analysis of potential cross-border CBDC models.
49 CPMI (2020).

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26

5

Challenges and risks of a CBDC

A CBDC is not without its challenges, of which some are inherent and some are more likely torelate to design decisions that could affect particular stakeholders.
This section describes, at a high level, the challenges and risks that a CBDC, or its implementation,
could present. As a CBDC has yet to be designed and tested, it is not possible to quantify exactly
the potential costs of a CBDC, therefore this section also outlines the areas that will need further
exploration.
The key challenge is to ensure that a CBDC will not be compromised operationally by, for example,
cyber-attacks. Another important challenge that is often cited is that the implementation of a
CBDC could be destabilising to the financial system if not managed correctly. Finally, thedevelopment of a CBDC would present operational costs and complexity. These policy costs andrisks are explored in more detail below.

5.1

Operational complexities and risks

A CBDC, like all electronic payment systems, would be exposed to cyber security threats,
operational outages and data privacy breaches. These risks could be elevated if the CBDC werebuilt on a new or untested system, such as a distributed ledger, or if it became a target of cybercriminals. The realisation of any of these risks could have significant impacts on public trust in the
CBDC and the Reserve Bank. The Reserve Bank has high requirements for the reliability, scalability,
throughput and resilience of its existing systemically important payments and settlement systems,
and these would also apply to a CBDC.
As a form of digital currency, a CBDC should not be able to be ‘double-spent’. This means people
should only be able to spend the CBDC that they own and it should not be possible tomanufacture fraudulent CBDC balances. This is similar to existing expectations of bank transaction
accounts and cash.
A CBDC would also need to comply with relevant regulations and restrictions. In particular, thedistribution of a CBDC would need to comply with AML/CFT requirements as well as financial
market infrastructure and consumer protection regulations.

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5.2

Risks to the banking system

Commercial banks are already facing competition for deposit funding from providers of new forms
of private money, such as stablecoins and other new products. A CBDC presents another form ofcompetition in deposit funding.
Competition and additional choice in financial services can benefit financial stability (not least by
reducing the too-big-to-fail problem), but an uncoordinated and large-scale disruption to
incumbent providers arising from implementing a CBDC could be disruptive to financial stability
and our monetary policy settings. This section explores the potential impacts of a CBDC on thecommercial banks’ funding model and the Reserve Bank’s monetary settings, and some of theways we could mitigate these risks.
We note that the important issue here is not whether a CBDC (or another form of private money)
affects bank services and profitability, but whether it does so in an orderly and non-destabilising
way that is welfare enhancing for New Zealand. Ultimately, what is important is that we have an
efficient, trusted, stable and reliable financial system, not one that is resistant to welfare-enhancing
innovation in order to protect the status quo.
It is also worth noting that the following discussion is in the abstract. Assuming that we proceed to
the next stage of policy development, there are some design decisions that in and of themselves
will have greater or lesser impacts on the banking and payment industries. And within these design
decisions there are calibration and operational decisions that can increase or decrease the degreeof impact. Future work will need to move beyond the abstract to more detailed design to further
analyse the potential impacts of a CBDC.

(a) Potential impacts of issuing a CBDC on commercial bank transaction accounts
To assess the impacts of a CBDC issued to all on the banking sector, the Reserve Bank would needto make assumptions about the size of the demand for the CBDC and where it came from (i.e. thetypes of asset that would be exchanged for the CBDC). Given that the CBDC would be issued toall, this paper assumes that it would be swapped for either cash or deposits in bank transaction
accounts. Therefore the CBDC might compete for bank funding in the form of deposits intransaction accounts at both household and wholesale levels.
Moderate demand vs high demand for a CBDC
If the demand for a CBDC were moderate, banks would be able to exchange money in transaction
accounts for CBDC with minor funding impacts for them. Given that commercial banks offer abroad range of services that include lending and investment, and are generally safe and reliable,
the Reserve Bank considers that a ‘moderate demand’ scenario is probable.50
However, if demand for a CBDC were high, banks might face runs on their transaction accounts for
CBDC. Due to the low-credit-risk nature of central bank money, the risk of a large-scale run from
deposits in transaction accounts to a CBDC might be increased during times of financial
uncertainty. This risk is not new; bank depositors can already run to cash or safer digital assets. But
a CBDC may increase the run risk if it is a) easier and faster to obtain than other safe bonds andassets, and b) there are no costs for, or limits to, holding large sums of CBDC established in the
CBDC’s design and operational rules.

____________
50 Deposits in transaction accounts are supported by a financial safety net that includes prudential regulation and supervision, access to central bank liquidity, the Bank’s ‘Open Bank
Resolution’ Policy, and the proposed Deposit Taker’s Bill, including provision for a deposit guarantee scheme.

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28

Potential impacts on banking sector of high-demand CBDC
A ‘high-demand’ scenario could have several negative impacts on the banking sector, andpotentially New Zealand’s financial system, if unmanaged. Importantly, the high-demand scenario
can be thought of as one that assumes a regulator is either indifferent to impacts on the banking
system, or does not calibrate the design or intervene effectively in the implementation oroperation of the CBDC. As such, the following discussion should be read as a stylised example ofwhat could happen in the absence of good design or effective intervention, and the sorts of
scenarios to be alert to.
First, transaction accounts represent the lowest cost form of funding available to commercial
banks. If banks lost a large portion of their funding to a CBDC they would need to increase theirfunding through more expensive means (such as offshore wholesale markets or by increasing
remuneration on transaction accounts).
As their cost of funding increased, banks could become less profitable. This is less significant for
financial instability, as New Zealand banks have robust profit buffers and (incoming) higher capitalrequirements. However, a greater reliance on wholesale funding could result in New Zealandbanks being more susceptible to downturns in overseas markets.51 It could also reduce their ability
to comply with the Reserve Bank’s prudential liquidity policy (BS13).
Banks might also respond to lost funding by reducing credit or increasing the price of lending. This
could have negative impacts on New Zealand’s real economy if it contradicted our monetary
policy setting. If households and firms find it very difficult to borrow it could ultimately lead to acredit crunch and a reduction in real economic activity.
Potential Reserve Bank mitigation and response
Further work is required to understand how large the demand for a CBDC could be, where thisdemand could come from (i.e. would a CBDC reduce cash holdings or transaction accounts?), how
it might change as the financial or economic environment changes (i.e. materially worsens), andwhat the likely responses might be from the private sector and consequently the likely impacts on
credit. These relationships would in turn depend on how the CBDC was designed and what limits
might have been put in place.
Given the identified range of risks to the banking system, the Reserve Bank would need to consider
how it would manage the issuance of a CBDC and ensure an orderly and non-destabilising
introduction.
Household deposits in transaction accounts make up a smaller portion of bank funding thanwholesale deposits, and would be less likely to be destabilising to commercial banks if they werelost. Further, household transaction accounts are less likely to be lost in a crisis scenario as theywould be protected by the incoming government deposit insurance.52
Conversely, wholesale deposits make up a larger portion of bank funding and will be protected toa lesser degree by deposit insurance depending on its design and limits.53 As such, there would be
an impact on bank funding, possibly a significant one, if there were a wholesale run to a CBDC.
This impact would need to feature heavily in the design and calibration of a CBDC.

____________
51 Wadsworth, A (2018c).
52 Deposit taking measures protect financial stability and New Zealanders | Beehive.govt.nz
53 Financial institutions, related parties of deposit insurance scheme members, large non-financial corporates and government bodies will be ineligible for deposit insurance scheme
coverage under the incoming government deposit insurance scheme. See Questions and answers: Review of the Reserve Bank Act – April 2021 (treasury.govt.nz).

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One important design and calibration issue for future consideration is whether and by how much
the Reserve Bank may want to limit the volume of CBDC that can be issued to wholesalecustomers, to reduce the possibility of a wholesale run on banks to a CBDC. In crisis scenarios wewould be able to quickly detect a run to a CBDC and halt these flows to provide stability to thebanking system if needed.
Alternatively, the Reserve Bank could impose negative interest rates on large holdings of CBDC.
This might replicate the storage costs of cash and reduce the attractiveness of switching moneyfrom transaction accounts to a CBDC in large quantities.
These are just some high-level examples of the types of mitigant that will need to be thought
through in the next stage(s) of CBDC development.

(b) Reserve Bank balance sheet
In addition to giving proper attention and consideration to the impacts of a CBDC on privatesector financial intermediaries, it is necessary to think through the impacts of the issuance of a
CBDC on the Reserve Bank’s balance sheet. This includes impacts on the size of the balance sheet
and on our monetary policy settings, which would depend on how great the demand for a CBDC
was, where it came from (i.e. cash, transaction accounts or other assets), and whether we satisfied
the demand for a CBDC (see Annex C).
These considerations are not new; the Reserve Bank already makes decisions on the supply ofmoney (in terms of cash in circulation and liquidity in the financial system), monetary policies andfinancial stability policies that all affect the value anchor and the financial system – it is just that thecurrent calibration, relationships, processes and policies of existing roles are more established thanthose for a CBDC.

5.3

Design complexities

The development of a CBDC would require a significant investment in technology and systems toengage in experimentation and, if a CBDC were to be issued, support a new CBDC payments
infrastructure.
As stated, the consideration of the form a CBDC should take includes whether it is token or
account based, whether it uses distributed ledger technology or conventional infrastructure, how it
can safely support offline payments, who can access it and how much can be made available.
Further consideration would also need to be given to its distribution. For example, there is aspectrum of distribution models to consider, ranging from a CBDC that could be distributed via a
direct model, whereby the Reserve Bank would provide end-to-end infrastructure and services, toa CBDC distributed via an intermediated model, in which the Reserve Bank would provide only
legal issuance and the private sector would provide all other services and infrastructure. There aremany possible variants along the spectrum (e.g. the central bank may provide core back-end
infrastructure and outsource the front-end services). The particular objectives of a CBDC and thedesign choices would all have a bearing on the array of distribution choices. Figure 11 illustrates
three stylised operating models. Most central banks are considering a model where the central
bank issues a CBDC and the private sector provides front-end and some back-end services.54____________
54 Auer, R and R Böhme (2020).

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Figure 11: Direct vs indirect distribution of a CBDC

Source: Auer, R and R Böhme (2020), author’s elaboration.

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6Developing CBDC design principles

The high-level opportunities and challenges of a CBDC discussed in the previous chapters canguide the general direction in which the further design and experimentation of a CBDC could go.
To summarise, Section 4 described the opportunities of a CBDC to directly support our
stewardship objective of ensuring that central bank money remains a monetary value anchor; andto indirectly advance our stewardship objectives by incentivising inclusion, innovation andresilience in the wider money and payments ecosystem. It noted that:
A CBDC could strengthen New Zealand’s monetary value anchor by:
1.

Ensuring the NZD remains our unit of account in a digital future by providing individuals andbusinesses with the option of converting privately issued money into a digital form of central
bank money.

2.

Improving the technological form and functionality of central bank money to ensure it remains
relevant.

3.

Providing an additional monetary policy tool (by it either being issued to provide monetarystimulus, or by being interest bearing).

A CBDC could ensure access to a fair and equal way of paying and saving by:
1.

Providing a basic form of paying and saving to all at a low cost and acting as a gateway to theformal financial sector.

2.

Supporting wider financial inclusion efforts, including through partnering with government
programmes.

3.

Providing freedom and autonomy in saving and paying by giving individuals greater choice,and providing personal back-up in times of uncertainty.

A CBDC could improve payments efficiency and resilience by:
1.

Increasing innovation and competition in New Zealand’s payments system.

2.

Improving payments system resilience, and therefore financial stability, by providing a lowcredit-risk form of payment, enhancing future resilience and having the potential to reduce
the number of single points of failure in the current payments system.

3.

Allowing New Zealand to participate in global cross-border payment initiatives that involve
exchanging CBDCs.

To achieve these opportunities, a future CBDC design would need to adhere to the following
design principles.

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Table 2: Design principles capturing the opportunities of a CBDC
Designprinciple

Summary

Opportunity

Uniform

A CBDC that is uniform would be exchanged 1:1
with cash and support the NZD as our single
unit of account.

A CBDC supports the continued useof the NZD as our unit of accountUniversal

A CBDC that is made available to all households
and businesses would:

A CBDC supports the continued useof the NZD as our unit of account

Provide access to the benefits of central
bank money – as a stable value anchor andlowest-risk form of money – to all.

Serving the financially and digitally
excluded with a CBDC

Cash-like

InnovativeSupport financial inclusion through support
for the unbanked and making directgovernment-to-person payments.

Provide resilience in payments systems byproviding an alternative in case othersystems fail.

A CBDC should facilitate autonomy and privacy
in paying and saving, provide a personal backup form of payment (including offlinefunctionality to the extent possible) and enablepeer-to-peer payments.

Serving the financially and digitally
excluded with a CBDC

A CBDC should be designed to:

Improving central bank money tomeet future needs





32

Improving payment system resilience
with a CBDC

Meet evolving needs and maintain thetransactional relevance of central bankmoney over time, including by supporting
electronic peer-to-peer payments and nearor instant settlement.
Drive innovation and cost efficiency for end
users, including through competition andopen access.

Be interoperable with other payments
services.

Support cross-border payments and beable to support low-cost remittances.



Provide the option of a new monetary
policy tool.

Future of Money – Central Bank Digital Currency

Providing autonomy in saving andpaying and a personal back-up with a
CBDC

Potentially providing an additionalmonetary policy tool
Increasing innovation andcompetition in domestic money andpayments
Improving payments system
resilience
Improving cross-border payments
and remittances

33

Meanwhile, Section 5 presented the challenges and risks that a CBDC could confer. To summarise:
1.

A CBDC would present challenges and risks that would need to be resolved before it could be
issued. A CBDC, like other electronic systems, would be exposed to operational and cybersecurity risks that, if realised, could have significant impacts on price and financial stability.

2.

The implementation of a CBDC could have potentially very large impacts on banking sector
funding and on the Reserve Bank’s balance sheet. This could be destabilising for the financial
system if not mitigated or managed appropriately.

3.

It can be seen that designing a CBDC that captures all benefits and mitigates all challenges
raises a myriad of issues that need to be considered and consulted on, which is why the
Reserve Bank sees the process of policy development for a CBDC as multi-dimensional andone that will take a considerable amount of time to work through.

Given these challenges, two additional design principles for future work on a CBDC should be
added to the four set out above.
Table 3: Design principles addressing challenges of a CBDC

33

Designprinciple

Summary

Challenge

Managedissuance

A CBDC should be issued and governed by the
Reserve Bank in a manner that avoids unnecessary
disruption to the cash system, wider financial system
and monetary policy settings.

Risks to the banking system

Integrity

Given the operational challenges and risks of a CBDC
as both a digital form of money and central bankmoney, a CBDC will need to have a high level ofintegrity. A CBDC should:

Operational complexities and
risks



Be unquestionably operationally resilient – that is,have a similarly low tolerance for system outages
and down-times as existing systemically important
payment infrastructure.



Not be able to be ‘double-spent’ or fraudulently
spent, similarly to the expectations of banknotes
and coins and of transaction accounts.

Provide near-instant and legally final settlement.



Have appropriate compliance and risk
management controls and comply with all
regulations.

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Design complexities

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7

Conclusion and next steps

As steward of money and cash, the Reserve Bank is considering the opportunities and challenges
of a CBDC that is issued to all.
This Issues paper describes how a CBDC could contribute to the Reserve Bank’s stewardshipobjectives but how it could also present several significant risks and challenges. The opportunities
and challenges of an abstract CBDC have led the Reserve Bank towards a set of high-level designprinciples. These principles provide an indication of what a future CBDC might need to look likeand can be used as a guide for future investigations. The principles are summarised below.
Table 4: CBDC design principles
CBDC design principles
1.

Uniform: A CBDC should be exchanged 1:1 with cash and support the NZD as our single unit ofaccount.

2.

Universal: A CBDC should provide low-cost, basic saving and payments to all households, including
those that are financially and digitally excluded.

3.

Cash-like: A CBDC should facilitate autonomy and privacy in paying and saving, provide a personal
back-up form of payment, and enable peer-to-peer payments.

4.

Innovative: A CBDC should be modern, be interoperable and drive innovation in New Zealand’s
money and payments ecosystem, and provide a potential new monetary policy tool.

5.

Integrity: A CBDC should be unquestionably operationally resilient, avoid double-spending, provide
near-instant final settlement and comply with all regulations.

6.

Managed issuance: A CBDC should be issued and governed by the Reserve Bank in a manner thatavoids unnecessary disruption to the cash system, the wider financial system and monetary policy
settings

Note: The shaded rows denote principles that on balance address the opportunities of a CBDC, and the white area
denotes principles that on net address the challenges of a CBDC. In practice, some principles address both opportunities
and challenges raised in this paper.

We are seeking public feedback on the opportunities, challenges and indicative design principles.
Following public engagement on the issues outlined in this paper, and subject to that feedback, wewill conduct a detailed design and scenario analysis to understand the performance and impacts
of different CBDC designs. This analysis will help us identify how the opportunities and challenges
identified in this paper might play out in practice and how the risks could be mitigated.

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Figure 12 The CBDC wheel
The CBDC wheel summarises the key elements of this paper. It sets out the opportunities, challenges
associated with a CBDC issued to all, and the resulting design principles proposed in this paper to guide
further work.

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8Have your say

We want to hear what you think about the issues and proposed approaches outlined in this paper.
We need your feedback by 10am, Monday, 6 December 2021.
If you can, please use the online feedback form available athttps://www.surveymonkey.com/r/Future-of-Money-CBDC . You do not need to answer every
question, there is an opportunity to give free-text answers, and you may attach documents if you
wish. Doing this online will assist with collation and analysis of all the feedback received.
If you wish to send us a letter instead of answering the questions then you can do so using theonline questionnaire. You just need to enter your details and attach the letter without answering
the questions. Or, you can email or post your letter to: futureofmoney@rbnz.govt.nz
Future of Money
Money and Cash Department
Reserve Bank of New Zealand
PO Box 2498
Wellington 6140
Or, if none of the above options are suitable then please phone us on 04 474 8693 between
10am-4pm Monday-Friday and we’ll arrange a time to call you back to take down your views.
We intend to prepare and publish a summary of responses to the three issues papers we arereleasing, and an outline of next steps, by 30 April 2022.
We would like your feedback on the following:1.

Do you agree with the motivations for considering a CBDC, as set out in Section 3? Whichmotivations are more compelling to you (the declining cash use, innovations in private moneyor the Reserve Bank’s stewardship objective to preserve the fairness and equality afforded bycentral bank money)? Please rank them in order.

2.

Are there other motivations not discussed in this paper that should be considered?

3.

Do you agree that the scope of work should focus on a general-purpose CBDC in the first
instance?

4.

Do you agree with the multi-step process for the development and implementation of a CBDC
as outlined in Section 3.1 and illustrated in Figure 8?

5.

Do you agree with the description of the opportunities presented through the implementationof a CBDC?

6.

Are there other opportunities that should be considered?

7.

Do you agree with the design principles that have been developed to capture theopportunities, described in Section 4?

8.

Are there other design principles to capture the opportunities that should be considered?

9.

Do you agree with the description of the challenges and risks in Section 5?

10. Are there other challenges and risks that should be considered?

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11. Do you agree with the design principles that have been developed to harness theopportunities and to address the challenges described in Sections 5 and 6 respectively?
12. Are there other design principles that should be considered in respect of the opportunities
and challenges described in Sections 5 and 6 respectively?

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Bank of England, Board of Governors Federal Reserve System, and Bank for International
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Bossu, W, Itatani, M, Margulis, C, Rossi, A, Weenink, H and A Toshinaga (2020) ‘Legal aspects ofcentral bank digital currency: Central bank and monetary law considerations’, IMF Working Paper,
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in payment systems’, August.
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CPMI-IOSCO (2012) ‘Principles of financial market infrastructures’, April.
CPMI and Markets Committee (2018) ‘Central bank digital currencies’, March.
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Institute, London, 13 July.
D’Silva, D, Filkova, Z, Packer, F and S Tiwari (2019) ‘The design of digital financial infrastructure:
Lessons from India’, BIS Papers, No 106, December.
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Technical background report’, 9 April 2020.
Garratt, R, Lee, M, Malone, B and A Martin (2020) ‘Token- or account-based? A digital currency
can be both’, Federal Reserve Bank of New York Liberty Street Economics, August,https://libertystreeteconomics.newyorkfed.org/2020/08/token-or-account-based-a-digitalcurrency-can-be-both.html.
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stablecoins’, October.
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Anamata’, Issues paper, June.
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RBNZ (2021a) ‘Cash and payments data update: Covid-19 special’.
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July 2021.
Robbers, S (2019) ‘The Fintech opportunity in personal finance’, a speech delivered at theSingapore FinTech Festival in Singapore, 13 November.
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Wadsworth (2018a) ‘What is digital currency?’, Reserve Bank of New Zealand Bulletin, April 2018,
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New Zealand Bulletin, June 2018, Vol 81, No 7.

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Annex A: A primer on the inefficiencies in New Zealand’s
payments system
New Zealand’s payments ecosystem is underpinned by ESAS, a real-time gross settlements system
responsible for settling all electronic interbank payments. It provides the core infrastructure(platform) on which a set of overlaying payment clearing and settlement systems is built. Thesearrangements form the ‘back end’ of domestic payments, are governed by an industry body, andsubject to Reserve Bank regulation and supervision.
Currently, access to wholesale accounts at the Reserve Bank is limited to a small set of regulated
financial institutions with business needs to access settlement services, and the holding of deposits
in accounts is not encouraged. New payment service providers, fintechs and non-bank deposit
takers that cannot access wholesale central bank money or settlement services must instead settle
their obligations via commercial bank services.
The front end of the payments system consists of a series of additional overlay and standalone
payments systems that are owned and operated by commercial banks and payment service
providers, including payment messaging services, card issuers and acquirers, point-of-saletechnology providers and digital wallet providers.55 In New Zealand, the prevalence of proprietaryowned (closed-source) point-of-sale technology and commercial-bank-owned payments systems
makes it difficult for new retail payments platforms, service providers and business models toenter.
Due to the network effects and benefits of vertically bundling services, incumbent service providers
are better off when a larger number of users interface with their platforms, and consequently may
not be inclined to allow competing providers to access their systems. Any competitor must
establish its own network of users in order to gain traction.
The lack of competition in New Zealand’s payments system has contributed to low incentives toaddress front-end pain points and frictions, or to service low-volume customers, and has resulted
in high card-interchange fees. For example, the vast majority of payments in New Zealand are notsettled instantly,56 and although the risk of settlement failure is very low and the system is suitable
for many if not most transactions, certain use cases such as peer-to-peer payments would benefit
from 24/7, seamless and near-instant settlement. Such solutions have been provided in otherjurisdictions supported by faster payments systems.
Additionally, high card-interchange fees are predominantly borne by small merchants that havelittle bargaining power, and this has resulted in some merchants refusing certain card payments,
such as contactless payments. Our 2020 survey revealed that 72 percent of New Zealanders
preferred to use credit or debit cards as their main way of paying, and 36 percent preferred to use
the contactless functions on their cards as their main way of paying.57 The Government hasannounced it is setting up a regulatory regime for the retail payment system. As part of thisregime, interchange fees for Visa and Mastercard products will be regulated.58____________
55 BIS (2020).
56 The time of day in which a payment in New Zealand will be settled is bank and system dependent. Most payments are settled within an hour but payments instructed overnight,
during weekends or on public holidays are not processed until the next business day.
57 RBNZ (2021a).
58 See mbie.govt.nz/business-and-employment/business/competition-regulation-and-policy/retail-payment-systems.

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Finally, cross-border payments are opaque, slow and expensive. These payments rely on a systemof correspondent banks and international messaging services to instruct and settle payments.
Frictions include fragmented data standards, a lack of interoperability, different compliancerequirements, varying operating hours and dated legacy payment system platforms.59 Remittances
to and from New Zealand and the Pacific are particularly costly due to a small number of providers
and AML/CFT costs.60____________
59 FSB (2020).
60 To address global cross-border issues, the Financial Stability Board, Committee on Payments and Market Infrastructures and other international organisations, initiated by the
G20, have been leading a roadmap to enhancing cross-border payments. The roadmap sets out a commitment to enhance the existing payments ecosystem and explore thepotential for new and emerging technologies to also improve cross-border payments. To support improved cross-border payments in the Pacific, the Reserve Bank is working forother government agencies in New Zealand, Australia and the Pacific to reduce the costs of complying with AML/CFT regulations in the Pacific.

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Annex B: Account-based vs token-based digital money
Broadly speaking, digital currency can be broken down into two categories: currency that relies on
existing technologies and conventional account-based structures, and currency that employs new
or different technologies such as distributed-ledger technology and public-private key
cryptography. These two groupings have been categorised as ‘account-based’ and ‘token-based’
money due to the different verification processes employed in making payments.

Conventional account-based money
The best example of conventional account-based digital currency is funds held in a transaction
account at a commercial bank. Ownership of the funds is proven by identity. To spend funds, aperson must prove they are the rightful owner of the funds. Auer et al (2020) characterise thisrelationship as “I am therefore I own”.
With account-based currency, a central agent manages a ledger of accounts; in our example it is
the commercial bank. The central agent arranges refunds and payment cancellations as necessary
in the case of payments made in error and fraudulent payments. Funds can be accessed through avariety of channels including online websites and payment cards. If passwords or cards are lost
they can be replaced upon verification of the owners’ identities as the rightful owners of the funds.
Other examples of account-based money include funds in ESAS, in digital wallets such as PayPal
and Apple Pay61 and credit card schemes. As interest is already paid in ESAS, it would beconceptually easy to pay interest on a new account-based CBDC.

Token-based money
The best examples of token-based currency are physical payment tokens like notes and coins. The
ownership of the cash is proven by physical possession (the bearer pays). There is no central agent
managing transactions of cash, and once a payment has been made with cash it cannot becancelled or refunded. Auer et al. (2020) define physical token ownership as “I possess therefore I
own” and digital token ownership as “I know therefore I own”.
Digital token-based money can be best understood by the example of cryptocurrencies, where
ownership is proven by knowledge of a private key that is used to sign transactions digitally.
Verification that the private key is correct can be performed by anyone (using public-private key
cryptography) and consequently, once payments have been made, they cannot be cancelled or
refunded.
A token-based CBDC could be programmable in that actions and rules can be embedded intomoney tokens, for example to execute contractual agreements after certain conditions have been
met. The choice to issue a CBDC as account based or token based would depend on which design
is considered the best to meet the CBDC objectives.
However, it may be more challenging to pay interest on token-based CBDC without affecting the
1:1 value of the tokens compared to other forms of fiat money. A token-based CBDC operates in amanner more similar to cash, whereby each token represents a specified face value. To pay
interest on cash would be to change its value, and has not been carried out in practice.
Conceptually, this could also hold true for a token-based CBDC.

____________
61 Apple, the Apple logo, and Apple Pay are trademarks of Apple Inc., registered in the US and other countries.

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The distinction between account-based and token-based money can be summarised byconsidering the features offered to the end user. These are summarised in Table A1. One
important distinction relates to ownership, where the ownership of money held in accounts isproven by identity, whereas the ownership of token-based money is proven by possession.
Table A1: Features of account-based and token-based digital money
FeaturesAccount-based money

Token-based money

Ownership (andability to spend)

Proven by identity, verified by acentral intermediary: “I am therefore I
own”.

Proven by possession of token, verified bydecentralised network of users with nocentral intermediary: “I know therefore I
own”.

Transparency

Only the central agent can view all
information. Central agent can choose
how widely information is shared.

Depending on the infrastructure, up to alltransaction information can be seen by
everyone, but it is not linked to individual
identities.

Programmability

Operational rules programmed on
actions pertaining to funds held in theaccount.

Operational rules programmed into thetokens.

Risks

Account can be hacked or identity
stolen. Centralised agent bears cost ofrisk management.

Tokens can be lost or private keys stolen.
Individual bears cost of risk management.

Ability to earninterest

Interest paid on account balances.

Interest paid on a token might affect theexchange rate between tokens and otherforms of money

Source: Auer, R and R Böhme (2020), Wadsworth (2018b), and author’s elaboration.

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Annex C: Reserve Bank balance sheet
The impacts of issuing a CBDC on the Reserve Bank’s balance sheet would depend on both thesize of the demand for a CBDC and whether and how that demand would be met.
Table A2 provides three scenarios to illustrate how the Reserve Bank’s balance sheet could be
affected.
In the first scenario, demand for the CBDC is moderate and the Reserve Bank only issues CBDC in
exchange for either cash or deposits in transaction accounts. The second scenario assumes
demand for CBDC is high and the Reserve Bank still issues CBDC in exchange for other assets(presumably because there are insufficient funds in transaction accounts to swap for CBDC). The
third scenario assumes the Reserve Bank issues CBDC as a monetary policy tool by exchanging it
for other assets only.
Scenarios two and three highlight that a run on commercial bank transaction accounts to a CBDC
could also increase the Reserve Bank’s balance sheet if the commercial banks used liquid and nonliquid assets to swap for CBDC. They also show that if a CBDC were to be issued in exchange forother non-liquid assets then a CBDC would provide some monetary stimulus, i.e. it could be issued
as a monetary policy tool or its issuance might conflict with monetary policy settings if that impact
were not intended.
Table A2: Stylised examples of Reserve Bank balance sheet impacts from issuing CBDC
Scenario 1: Demand for CBDC is low to moderate
AssetsLiabilities and equity
Cash in circulation – CBDC[a]Bank settlement accounts – CBDC[b]+ CBDC[a] + CBDC[b]Note: CBDC[a] represents transfers from cash and CBDC[b] represents transfers from transaction accounts.

Scenario 2: Demand for CBDC is highAssetsLiabilities and equity+ CBDC[c]Cash in circulation – CBDC[a]Bank settlement accounts – CBDC[b]+ CBDC[a] + CBDC[b] + CBDC[c]Note: CBDC[c] represents new CBDC balances being issued in exchange for other assets, similar to the LSAP
programme.

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Scenario 3: CBDC issued as monetary stimulus
AssetsLiabilities and equity+ CBDC[d]Cash in circulation
Bank settlement accounts+ CBDC[d]Note: CBDC[d] represents the central bank buying assets using a newly created CBDC, similar to the LSAP programme.

Scenarios 2 and 3 both illustrate that increases in CBDC[c] and CBDC[d] provide monetarystimulus.

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Annex D: Wholesale CBDC
While our current priority is to consider a general-purpose CBDC, this paper refers to another kindof CBDC: the wholesale CBDC. This annex provides background on the concept.
A wholesale CBDC can be thought of as a limited-purpose and limited-access CBDC that mightbring particular benefits to wholesale payment efficiency and resilience. The benefits of awholesale CBDC in New Zealand appear to result from broader access to wholesale money (notcurrently conferred by ESAS), and opportunities to improve wholesale payments and settlements,
including post-trade settlements. However, many of these benefits could also be achieved byrevising our ESAS rules, or reforming wholesale post-trade settlement infrastructures. Compared toa general-purpose CBDC, the challenges of issuing a wholesale CBDC are potentially less complex
due to the sophistication of the users and, owing to a limited number of participants, fewer use
cases to design for and solve.

Access to wholesale central bank money
A wholesale CBDC could expand access to wholesale central-bank money beyond current ESAS
members. Non-ESAS members are subject to higher payments and settlement fees and less choiceof settlement assets. Access to a new form of wholesale central bank money could encourage andsupport innovation – new providers could build payment services using the CBDC platform andconduct settlement in central bank money. The Committee on Payments and Market
Infrastructures (CPMI) recommends that central banks ensure that the provision of central bankmoney through wholesale deposit accounts and their corresponding payments systems is flexible
enough to allow for innovations in money and payments.62 The Bank of England and Swiss
National Bank have recognised the benefits to competition and the neutrality of central bankmoney by expanding access to their real-time gross settlement systems to non-banks andpayment service providers.63
There are two reasons why we might issue a new CBDC rather than expand access to ESAS. First,
expanded access to ESAS might pose challenges to the stability of the interbank settlement systemand our reputation if it were not accompanied by rigorous risk controls. However, such risk
controls could be too onerous for smaller firms. Second, a new, purpose-built CBDC could bedesigned to ensure that it is future proofed and optimised for new wholesale use cases, forexample by considering token-based technologies and an expanded purpose and functionality.

Post-trade efficiency
A new form of wholesale CBDC could also be designed to increase efficiency in post-trade clearing
and settlement. For example, a token-based CBDC could be used to facilitate faster and more
efficient post-trade securities or foreign exchange settlement. A token-based CBDC could be used
to settle the payment side of delivery vs payment transactions and payment vs paymenttransactions. Such tokenised settlement is beneficial, as it does not require the underlying ledgers
to interoperate for a settlement to occur, can reduce the costs and complexities of ownership
records and transaction histories, and can support the development of new structures in securities
settlement.64____________
62 CPMI (2003).
63 The Bank of England cited that expanding access would increase innovation in the payment system and reduce single points of failure in the payment system (see Bank ofEngland (2017)). The BoE’s expanded access was accompanied by a comprehensive risk management framework with which all members must demonstrate compliance. The Swiss
National Bank expanded access to its real-time gross settlements systems to non-bank firms, including cash-processing operators, licensed fintechs and FMIs[financial market
infrastructures?] in 2019. The Reserve Bank of Australia has also recommended that the new payment platform be open to a range of payment service providers, and the Reserve
Bank of India was scheduled to review the membership of its core payment systems (see CPMI and World Bank (2020)).
64 Bech, M, Hancock, J, Rice, T and A Wadsworth (2020).

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Future of Money – Central Bank Digital Currency