Investors are drawn to bitcoin as a way of diversifying investments when markets are especially volatile. Once an outlier in the investment universe, bitcoin seems to be becoming more mainstream. However, it comes with significant risks. Bitcoin is a privately offered form of exchange which bypasses banks, is not government guaranteed and can be extremely volatile.

Yet, digital cash seems to be the way of the future and the RBNZ is carefully considering a government-backed digital currency in New Zealand. The government backing is what would set the new digital cash apart from bitcoin.

New Zealand is not alone in considering this, with most developed countries, including our major trading partners, also looking at some form of central bank digital currency. In fact, the RBNZ already issues digital currency, but only to banks.

The plan is to eventually make it available to the general public for transactions. This doesn’t mean that notes and coins will no longer be available. Digital cash will simply provide an alternative payment mechanism. While it will be a stable, low-risk store of value, its price stability will mean it won’t offer the same investment potential as bitcoin.

The digital cash project is part of a Reserve Bank programme called The Future of Money, which is looking at several ways of improving the monetary system. Other areas of focus include allowing people to withdraw cash from retailers in rural areas, facilitating real-time payments between people with different banks, and monitoring private innovations such as cryptocurrency.

Public consultation on the digital cash proposal closed at the end of September 2024 and the Reserve Bank is now working through feedback and deciding whether to proceed to the next stage.

It’s simply a means of payment which is government backed through the Reserve Bank. It can be accessed by an app on your phone, a digital wallet, or a physical card. It could be used by someone without a bank account, but they would need a service provider such as a bank to access the funds.

Perhaps the key advantage of digital cash is that it can be used offline. That means that if there’s a power outage, a problem with other electronic payment systems such as EFTPOS and internet banking, or a civil defence emergency, you could still make payments, just as if you had notes and coins.

Another advantage is that transactions made with digital cash are private, leaving no traceable record visible to other parties. In this way, it is similar to notes and coins. Digital cash can also be used with smart or AI driven solutions to help with automating payments and keeping track of expenses.

Safety and security will be of paramount importance when designing a digital cash system. It won’t be as vulnerable to theft or loss as notes and coins, however there is a potential threat from hackers.

It is likely that digital cash will incur fees, but the RBNZ’s intention is that these will be lower than other forms of payment.