Reserve Bank seeks consultation on regulating new forms of money

  • Legal update

    07 December 2022

Reserve Bank seeks consultation on regulating new forms of money Desktop Image Reserve Bank seeks consultation on regulating new forms of money Mobile Image

Today the Reserve Bank of New Zealand (RBNZ) has published an issues paper (Issues Paper) on their proposed response to the opportunities and challenges arising from new forms of private money such as cryptoassets. The Issues Paper is aimed at enhancing regulation to achieve a healthy level of competition in private money and safeguard the interests of users. 

Links are available for the Issues Paper and Issues Paper webpage.

Who needs to read it? Why?

The Issues Paper is relevant to payment system providers, banks, fintech and defi companies, and those involved in the payments or private money industries. The Issues Paper outlines the opportunities and risks the RBNZ associates with the development of new forms of private money, and its proposed regulatory approach. The purpose of the Issues Paper is to invite feedback with a view to ensuring industry insights are taken into account in the process of regulatory development.

The Issues Paper is therefore an exciting opportunity to engage with the RBNZ on the future of money, and what regulation should look like.

What does it cover?

This Issues Paper continues the work done last year with three Issues Papers launched by the RBNZ on its role as the steward of money, the investigation of a central bank digital currency and a redesign of the cash system. 

The Issues Paper begins by describing and defining the RBNZ’s role as the steward of money and its legislative mandate to monitor technological developments in money. While central bank money is the RBNZ’s core focus, it still has a broader interest in money and payments given that central bank money is impacted by developments is impacted by developments in those areas. 

The RBNZ’s core drivers for considering innovation in private money were: 

  • concerns about existing inefficiencies in private money (e.g. in cross-border payments);
  • perceived needs for and benefits offered by new forms of money in an increasingly digitalised economy (e.g. web3 and the metaverse);
  • claims of cryptoassets to be ‘money’ and the potential for them to be used in this way, which purports to address those new or existing demands above;
  • market growth of such assets without the central bank money anchor or regulatory safeguards; and
  • declining use of cash as the only public alternative to new and existing forms of private money and the potential impact on central bank money as the value anchor.

The Issues Paper seeks feedback on the three topics below.

Opportunities for greater competition and innovation 

Because of significant innovation in the area of cryptoassets, there is a significant opportunity to enhance competition and innovation as they remove users’ reliance on banks for banking services, such as lending and accessing the money and payments market. The RBNZ identifies that as a result, some banks have started to integrate new technologies in their service offerings. 

The potential downside to these developments is that consumers could be worse off if regulation does not adequately manage the risks associated with the increased use of new forms of private money. The RBNZ’s view is that the value of new forms of private money must be reliable in order to maintain a high level of public trust in the monetary system. 

The consultation question the RBNZ asks in relation to this topic is “do you agree that there is a significant opportunity to enhance competition and further innovation in a New Zealand context?” The views expressed in regard to this question will be used to inform how the RBNZ responds to the existing climate.

Risks with private innovation in money

The RBNZ identified four key categories of risks with private innovation in money: risks to holders and users of money, risks to competition with new dominant service providers, risks to trust across the monetary system, and potential risks to monetary sovereignty. 

For holders and users, the RBNZ emphasised that risks in the following areas must be fully understood: 

  • management of money laundering and terrorist financing risks;
  • weaknesses in technology that expose users to cyber risks; 
  • the need for value stability, as without reliable stable assets backing the value of a stablecoin, market conditions may cause rapid loss of cryptoasset value;
  • the ability to redeem stablecoin quickly; and
  • the financial strength of stablecoin issuers, which is currently unclear.

For new dominant service providers, the RBNZ considers that a proactive stance must be taken to enable service providers entering the market to compete with those currently dominant in the social media and online shopping areas, termed ‘Big Techs’. These Big Techs can generate strong network effects, two-sided market issues, and reduce competition in money and payment systems. 

Finally, it was identified that the level of understanding of cryptoassets and lack of high quality information available on them means that consumers could struggle with volatile values, associated costs and unpredictable networks. The RBNZ also expressed concern that significant adoption of non-New Zealand Dollar denominated money could threaten monetary sovereignty and potentially financial stability. The RBNZ did note that the risk of this was low, though the consequences would be significant. 

In relation to this topic, the RBNZ asks whether readers agree with the key risks to the stewardship of money identified and whether other risks should be considered. 

The RBNZ’s proposed response

The RBNZ proposes to develop a monitoring framework to determine how urgent regulation of new forms of private money is. Metrics to be monitored includes the extent of use in day-to-day transactions and savings, as well as non-economic factors including the wider ecosystem of technology. 

The framework will ask the following key questions about new forms of private money:

  • Is it used as money?
  • How significant is it?
  • What are the underlying risks?
  • Are the risks managed or regulated already?
  • Are there any meaningful alternatives?

The RBNZ will approach these questions with a view to promote inclusion, central bank money as a value anchor, trust, efficiency, competition and innovation. 

If certain innovations are of significant interest to the RBNZ, it will further assess the relevance, nature and magnitude of the opportunities and risks of that innovation to develop formal assessment criteria. These criteria may include the risk to customers, competition, trust, reliability, and monetary sovereignty, as well as enhancing efficiency and innovation, 

The RBNZ stated that it is open to considering alternative models, noting that “while current regulatory frameworks may be useful starting points on a ‘same risk, same regulation’ basis, there are likely to be limits.” Decentralised Autonomous Organisations (DAOs) were identified as a source of regulatory design challenge, which has implications far beyond the money and payments system. 

In regard to its proposed response, the RBNZ asks whether readers agree with the proposed monitoring approach and whether it should be open to alternative models of money. A final general question is what issues readers think the RBNZ should prioritise in developing further regulatory responses, for example, issues about the rights of stablecoin holders, or the use of DAOs.

Our view

The Issues Paper has a broad scope that captures some of the most pressing and exciting questions on the future of money. They are questions which those within the industry or industry advisors are well placed to engage with and have invaluable insights on. The Issues Paper is a chance to shape the way new forms of money and payments are regulated and promote a monetary system that is efficient and inclusive.

The RBNZ has asked for submissions by 3 April 2023, with the aim of publishing the responses by mid-2023.

What next?

If you have any questions in relation to private money and payment systems or want advice on making a submission on the Issues Paper, please contact one of our experts. 

This article was co-authored by Elise Plunket, a Law Clerk in our Financial Services team.