Will we still be using cash in 10 years' time?

What is money? How do we use it now? And what is it likely to look like in the future?

The Reserve Bank of New Zealand is our central bank, and they're currently looking into what the future of money looks like in Aotearoa. We decided to chat to them about what's changing, and what it could mean for us.

What is money? 

Sounds like a pretty easy question to answer, right? Well, it's actually a bit more complex than you might think. Susan says:

"We think of as money as an asset that people drawn on for their everyday needs to make payments."

"So it's the bank account balance that you can access when you pay with a card, for example, or it's the cash you might have at home in the tool or in your wallet. It's an asset that has a particular role to play. So you could think of it as a liquid asset - it's something you can grab when you need it for an emergency or right away."

There are two types of money in the New Zealand economy: cash, and the balances of the bank accounts that you can access for spending. What's changed in recent years, is that money has become increasingly digitalised.

"What's new is really this digitisation of money, the fact that it's not a note issued by a bank or a note issued by a central bank, it's an account that exists electronically in somebody's electronic register, and when you access it, you wave a card at a machine and a digital message gets sent," says Susan. 

Has the concept of money changed as a result of Covid? 

When lockdowns hit Aotearoa and supermarkets and transport providers were only accepting contactless payments, the use of coins and notes suddenly became virtually impossible. 

Did the fact that we couldn't actually use physical currency speed up the process of digitilisation? Susan reckons it did.

"I think people suddenly realised that they were exchanging something physical with somebody else at a time where the message was 'stand two metres apart and don't touch anything.' So it has made people focus on on that aspect of cash."

Is physical cash on the decline?

The Reserve Bank has survey evidence from both New Zealand and around the world that shows for the last decade or so, people have been using cash less and less. 

"We think the transactional use of cash has definitely gone down," Susan says.

"And that's been going on for a long time, so it preceded COVID."

She says there are two drivers for that change. Firstly, there's user demand - a push from us as users of money. 

"...digital is really easy, it makes life so much simpler, you can transact very quickly, you don't have to carry a lot of stuff around your wallet," says Susan.

The other reason is that the places we buy things from are also turning more to digital options. 

In other words, the people that use money and the places that accept it as payment are both moving more towards the digital realm. 

Will anyone still be using physical cash in 5-10 years' time?

Although cash is on the decline, it doesn't mean that it's gone forever.

"I think that there'll always be a need for cash and certainly our work is predicated on the assumption that there will always be a role for cash, or physical cash," says Susan.

"It provides people with choice and flexibility at all points in their life. So on the demand side, I think there will always be a role for cash."

"I think that there'll always be a need for cash and certainly our work is predicated on the assumption that there will always be a role for cash, or physical cash."

Susan Guthrie

Who uses cash?

The Department of Statistics conducts a Household Expenditure Survey every three years, and has found that it's Aotearoa's poorer households that rely more on cash. 

According to Susan, those that rely more on superannuation or other government benefits also tend to rely more on cash. 

She also points out that there are certain cultures in which cash plays an important role. 

"If cash was to decline further, there would be an uneven impact ...[and] our more vulnerable families would be the most affected."

The Reserve Bank has also done research of its own into New Zealanders' attitudes towards cash.

Robbie notes that while the vast majority of people they spoke to don't use cash regularly, "they want to see the system maintained ... because they see the value it brings to others - the inclusion aspect of cash that people can empathise with, I suppose, even if it doesn't directly impact them."

What is a Central Bank digital currency (CBDC)?

Central bank money has an important value anchoring function. As Robbie explains: 

"The value anchor means that people have trust and confidence in all forms of money."

In other words, the fact that banks allow us to withdraw private money from their bank accounts and exchange this for cash reinforces the value of that money, and the trust and confidence that we have in it. 

So what's a Central Bank digital currency?

"A central bank digital currency would be a generally available form of digital currency that individuals and businesses could use and transact and pay with," says Robbie.

"But unlike digital money provided by a private bank, it would be provided by us the central bank."

"So a key characteristic of this is it would be a legal claim or an IOU from us and, by extension, the government of New Zealand, to the holder of that money. To be contrasted with the money people holding in their bank account, which is an IOU from the bank." 

"A central bank digital currency would be a generally available form of digital currency that individuals and businesses could use and transact and pay with. But unlike digital money provided by a private bank, it would be provided by us the central bank."

Robbie Taylor

"Banks, obviously, are well regulated and supervised and your bank account is pretty safe. Banks don't fail often. But it's still a degree of risk."

"Other new forms of money - stable coins and crypto assets - are issued by other private entities with less regulation, and so they involve a different range of risks. But the core feature of a central bank digital currency is a claim on the central bank."

A Central Bank digital currency could look much like a bank account, in which you would hold your "eNZD" and transact it. 

Another way it could work is that the Central Bank digital currency would be in a token form, meaning it would use similar technology maybe to crypto assets or cryptocurrencies.

Robbie says: "The central bank digital currency exists sort of as a distinct sort of digital representation of value. So think about having a piece of code on your phone or whatever that is a distinct e$20 note and that piece of code is different to every other e$20 note the same way that one banknote is completely different from another one - it has a different serial number and other things."

The Reserve Bank sees the potential for a Central Bank digital currency to drive innovation and get more efficiency out of existing payment platforms.

"It would be available to wallet providers, new payment providers, and FinTech organisations to use, so long as they comply with rules of the system," says Robbie.

"As we progress through the central bank digital currency, we'll be thinking about these different options and how they meet the needs of New Zealanders."

"...we see the potential for a central bank digital currency to really drive an opportunity to get more innovation, more efficiency out of existing payment platforms."

Robbie Taylor

Has a CBDC been developed anywhere else in the world yet? 

According to the Bank of International Settlements (the central bank for central banks!) 86% of central banks globally are actively working on Central Bank digital currency. 

Some countries are getting pretty close to rolling one out, Robbie explains: 

"China is an example where they have got a very advanced pilot in place and they've said they're going to roll out their central bank digital currency generally by the Winter Olympics next year which they are co-hosting. Watch this space, would be the message!"

The good thing about other countries being further ahead is that there are opportunities to learn from those who are pioneers in this space, as Susan points out:

"There are opportunities to work collaboratively with other central banks. So it's not a case of each Central Bank doing its own silo approach, there are lessons that we can learn from the other countries that are more advanced in their thinking so they can trial the vulnerabilities of the software and things like that in a collaborative way."

"There are lessons that we can learn from the other countries that are more advanced in their thinking so they can trial the vulnerabilities of the software and things like that in a collaborative way."

Susan Guthrie

Where is NZ in the process?

"We haven't put a specific timeframe on it to be honest," says Robbie. "I mean, there's a lot of work that we need to do, and we really want to consult with people and get feedback on it."

"You know, I've talked a lot about the opportunities, but  there are lots of challenges we need to work through before making a decision. These things need to be very operationally resilient, resilient to cyber attacks. We need to think about the impacts of Central Bank digital currency on other parts of the financial system, distinct financial institutions and things, so there's lots of work to do. But we have an enduring work program which aims to get some public feedback on on the idea. And that's what we're consulting on now."

After gathering feedback, the next phase is to move into a design testing phase. Robbie says there are a lot of questions the Reserve Bank needs to consider: 

"Should it be account based? Should it be token based? Should the Reserve Bank issue it directly to end users or should it be intermediated? Should we issue it through banks or other financial institutions? How do we think about privacy and autonomy in a digital world? We know people really value privacy, autonomy and cash. It's a bit more difficult to replicate in a digital world, but how do we deal with some of those key policy questions? That's the phase of work that we're getting into."

And there's more.

"If the Reserve Bank does make a decision at some point that it wants to proceed with a Central Bank digital currency, there's a lot of technical work that would need to be done. It's a very complex IT platform you're basically talking about that needs to be very resilient. So we have to do a lot of work. I think it's fair to say we're sort of positively disposed to it at this point, but haven't made any decisions."

What are the main challenges?

Research that the FSC has done found that when Kiwis are looking at digital platforms of all kinds of things, particularly ones that handle their finances, the privacy and security of their personal information is their top concern. This is something that the Reserve Bank are taking seriously.

"Security has a number of different dimensions," says Robbie.

"So there's the sort of cyber resilience, cyber security type aspect, you know is it going to be resilient to hacks and those sorts of things? That's a really important key challenge - one that we'll need to focus on a lot."

"There's also the other component of security, which is how do you ... deal with scams and people trying to get your password and all that sort of stuff? So that'll be an important component."

"The third aspect of security is, if this becomes a really important payments channel for New Zealanders, how do we make sure it is resilient to earthquakes and loss of power, and all those sorts of things? That's really critical in an operation, as we move into a more sort of operational design type phase of this work. We're really focused on those things."

Ultimately, it all comes back to the value anchor function of Central Bank money - it relies on the currency to be trusted by those using it. A platform that people are unable to use or that fails regularly "would undermine the trust of Central Bank money, and as a result, potentially undermine trust in other forms of New Zealand dollar that are issues", says Robbie. "So it's a really, really important thing for us."

Another challenge Susan foresees is the whole transition to a CBDC.

"So we've got cash, digital CBDC, and then the banks continue to provide private money. The transition, the new interest arriving in the background, has to be done quite carefully so that you're not unnecessarily causing chaos in the existing systems. So there's just a careful phasing, I guess, in the transitioning program, as well."

How is a CBDC different to cryptocurrency?

A CBDC is not the same as cryptocurrency. Despite some similarities, there are several important distinctions.

"Economists like to think about money as having three characteristics... it's a unit of account, store of value, and a medium of exchange," says Robbie.

"So you know, it holds its value, people can buy and sell things with it, and prices are denominated in it. If you think about something like Bitcoin, it doesn't have those characteristics, or all of those characteristics, and so it's not a form of money."

However, crypto assets like Bitcoin are often based on distributed ledger technology or blockchain and use cryptography to secure the asset. 

"Bitcoin as an example is that sort of traditional form of crypto asset, it's very volatile relative to currencies like the New Zealand Dollar. And so it predominantly tends to be used as an investment asset, not as a form of money."

"But there are some forms of crypto assets referred to as stable coins, which do try and stabilise the value of the crypto asset relative to currencies like the New Zealand dollar by say pegging the value to the New Zealand dollar or the US dollar or to a basket of commodities or something like that. Those crypto assets are much more like conventional forms of money because they hold their value, you know, you can see that people could could buy and sell things."

"I suppose the key difference between a stable coin and a central bank money or even money issued by a private bank is that there's not much regulation around those crypto assets and so they involve a different degree of risk."

"Digital currency could be using Blockchain or distributed ledger technology in the same way that Bitcoin or other crypto assets are, but that's sort of where the similarities begin and end."

Robbie Taylor

"Digital currency could be using Blockchain or distributed ledger technology in the same way that Bitcoin or other crypto assets are, but that's sort of where the similarities begin and end."

"I think that the key thing, the key distinction, is that Central Bank digital currency would be issued by the Reserve Bank, it would have a central issuer unlike say Bitcoin which has its distributed model. It would be issued in New Zealand dollars, it would represent the legal claim on us, and through by extension, the New Zealand government. The crypto asset is issued by the network, the legal claim is on everyone in that network. And so ... it involves potentially more complexity and a different range of considerations to central bank money."

Essentially, a lot of the distinction between a CBDC and crypto assets hinges on trust. 

"You know, one thing we think we have going for us as a central bank is that we are a trusted institution, and our functions rely on us being trusted," says Robbie.

"When you hear about a mining of crypto assets, that's all about the crypto system, your Bitcoin users trying to generate trust in their system by running these calculations, which verify that transactions that are made are real ones and that people can rely on me saying that I have so many bitcoins as being true and correct."

"We wouldn't have to do that as a central bank, because we have trust and confidence in us. But Bitcoin relies on those sorts of methods to build trust and confidence in that system."

"That's a long way of saying, yeah, the technology underpinning a central bank digital currency and a crypto asset could be similar... But... they're different from that point onwards."

Have your say on the future of money

The Reserve Bank is inviting feedback on a series of issues papers about how they should approach their new role as steward of the money and cash system and make sure that central bank money continues to do its job in light of significant changes affecting how New Zealanders pay, receive and save money.

"There'll be lots of public engagement and opportunities to talk and engage on these issues heading into the future," says Robbie.

"So we're really keen for peoples' feedback on our work. We really want to understand how not just financial institutions, but also the public think about money, and what they need from money going into the future. So we really encourage people to provide feedback and reach out to us to engage."

"We're interested in any experience that they've had with private money or with cash or anything that relates in their everyday life" adds Susan.

"We're not looking for technical feedback necessarily because this is actually a product that everybody uses that contributes to their everyday life, so we're trying to learn about that, so that we can plan a system that actually reflects how people use money and what they need from it."

"...this is actually a product that everybody uses that contributes to their everyday life, so we're trying to learn about that, so that we can plan a system that actually reflects how people use money and what they need from it."

Susan Guthrie

You can both read and give your feedback online for the two issues papers below by 10am, Monday, 6 December 2021:

• Future of Money – Stewardship (Te Moni Anamata – Kaitiakitanga) seeks your feedback on how the Reserve Bank should steward money and cash following a recent law change.
   
• Future of Money – Central Bank Digital Currency (Te Moni Anamata – Aparangi ā Te Pūtea Matua) wants your views on how the Reserve Bank proposes to explore whether a CBDC is right for Aotearoa. 

The below issues paper will be published in November 2021. Feedback will close in February 2022:

• Future of Money – Cash System (Te Moni Anamata – Pūnaha) will explain issues facing the cash system and explore options to achieve greater efficiency and resilience.

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