3. The Following Should Be Done When Insisting on Promoting Digital Cash
If the New Zealand government persists in promoting CBDC after fully considering the above risks, then we suggest that the following measures could be considered to regulate the above issues.
3.1 Technical Aspects
3.1.1 System Architecture
For the successful implementation of CBDC, New Zealand needs to undertake comprehensive technical preparations. Primarily, in terms of system architecture, an advanced distributed system design should be adopted, combined with cloud computing technology, to build a highly scalable and elastic CBDC infrastructure. This might involve the use of containerization technology and microservices architecture to enable flexible deployment and rapid scaling of the system.
For instance, leveraging container orchestration platforms such as Kubernetes, along with service mesh technologies like Istio, can help construct a highly dynamic and scalable system architecture. This architecture would be capable of automatically adjusting system resources in response to changes in transaction loads, ensuring optimal performance even during peak periods.
3.1.2 Establishing Data Centers and Redundancy Systems
In addition, it is essential to establish geographically distributed data centers and redundancy systems to ensure business continuity in the event of local failures or natural disasters. This might involve setting up multiple data centers in different regions of New Zealand and implementing real-time data synchronization and failover mechanisms. For example, data centers could be established in major cities such as Auckland, Wellington, and Christchurch, utilizing an multi-active data center architecture to ensure that the system can continue to operate even if one data center completely fails.
For disaster recovery, it is crucial to implement off-site backups and real-time data synchronization mechanisms, as well as conduct regular large-scale disaster recovery drills to test and refine emergency response procedures. These drills might include simulating various disaster scenarios such as earthquakes, floods, and cyberattacks to evaluate the system’s recovery capabilities and response times. By continuously optimizing disaster recovery strategies and procedures through these drills, the CBDC system can be prepared to respond quickly and effectively in the event of actual disasters.
3.1.3 Network Updates
On the network level, it is essential to optimize nationwide network infrastructure, particularly by enhancing network coverage and quality in rural and remote areas. This may require collaboration with telecommunications operators to deploy advanced network technologies such as 5G, while also considering satellite communication as a backup solution to ensure the widespread availability of CBDC services.
For example, partnerships with major telecommunications operators in New Zealand, such as Spark and Vodafone, could be considered to deploy small-scale 5G base stations or utilize low Earth orbit satellite communication technology in remote areas to provide stable network connections. This approach would ensure that all regions, including those with less developed infrastructure, have access to reliable CBDC services.
3.1.4 Security Systems
In terms of security, New Zealand needs to establish a multi-layered security framework. This includes employing strong encryption algorithms, multi-factor authentication mechanisms, and real-time threat detection systems. Given the advancements in quantum computing, it may be necessary to research and deploy post-quantum encryption algorithms to ensure the long-term security of the CBDC system. For example, adopting post-quantum cryptographic techniques such as lattice-based cryptography could provide long-term security protection for the CBDC system.
Additionally, a stringent key management mechanism and access control policies must be established to minimize the risk of internal threats. This might involve using Hardware Security Modules (HSMs) to store and manage encryption keys, and implementing role-based access control (RBAC) and the principle of least privilege.
To defend against DDoS attacks, deploying advanced traffic scrubbing devices and intelligent analysis systems can be considered. For instance, machine learning algorithms can be used to analyze network traffic patterns in real time, quickly identifying and filtering malicious traffic. Furthermore, utilizing Content Delivery Networks (CDNs) can help distribute traffic load and enhance the system’s DDoS resistance.
3.1.5 Utilizing Web3 Technology for Financial Innovation
(Technology and Application Scenarios)
3.1.5.1 Smart Contract Technology
Smart contracts are self-executing computer protocols on the blockchain that aim to enforce, verify, or execute the terms of a contract. They automatically execute transactions and agreements through code within a distributed network, reducing the need for intermediaries and enhancing transaction transparency and security.
The application of smart contract technology can bring more innovative possibilities to CBDC. New Zealand can consider integrating smart contract functionalities into the CBDC system to support more complex financial transactions and automated business processes. For instance, smart contracts could enable conditional payments, automated financial derivatives trading, or disbursement of subsidies based on predefined rules. Technically, a platform similar to Ethereum could be adopted for smart contracts, but it would need optimization to meet the performance and security requirements of CBDC. This might involve developing a dedicated smart contract execution environment to ensure efficient execution of contracts and overall system security.
Specific components of smart contract technology include:
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Smart Contract Programming Language: A specialized, secure programming language needs to be designed for writing CBDC smart contracts. This language should be user-friendly while preventing common security vulnerabilities.
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Contract Execution Engine: This engine interprets and executes smart contract code. It must be highly optimized to ensure high performance when processing large volumes of transactions.
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State Management System: This system stores and manages the state information of smart contracts. It needs to be highly scalable to handle numerous concurrent state updates.
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Contract Auditing Tools: Tools to automatically analyze smart contract code, detecting potential security vulnerabilities or logical errors.
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Contract Upgrade Mechanism: A mechanism to safely update and upgrade deployed smart contracts without service interruption.
Through these components, the CBDC system can support various innovative financial applications. For example, automated government subsidy disbursement can be implemented, where subsidies are automatically distributed to eligible citizens based on predefined conditions such as income level or age. Alternatively, the system could support complex financial derivatives trading, such as options or futures contracts, which can automatically execute when specified conditions are met.
3.1.5.2 Zero-Knowledge Technology
Zero-knowledge proof is a cryptographic technique that allows one party to prove to another that a statement is true without revealing any information about the statement itself. It ensures the privacy and security of data while verifying its authenticity.
The application of zero-knowledge proof technology can effectively address privacy protection issues in CBDC. With zero-knowledge proofs, it is possible to prove the legality of transactions and the compliance of fund sources without disclosing specific transaction information. This is crucial for balancing user privacy protection and regulatory requirements. Technically, mature zero-knowledge proof protocols like zk-SNARKs or zk-STARKs can be considered. These protocols need to be deeply integrated with the CBDC transaction processing flow to ensure privacy protection without compromising overall system performance.
Specifically, zero-knowledge technology can be applied to:
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Transaction Privacy Protection: Using zero-knowledge proofs to validate transactions without revealing the transaction amount, sender, and recipient details.
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Balance Proofs: Allowing users to prove they have sufficient balance for a transaction without disclosing the exact account balance.
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Identity Verification: Proving that users meet certain conditions (such as age requirements, credit scores, etc.) without revealing specific identity information.
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Compliance Proofs: Enabling financial institutions to prove to regulatory bodies that they comply with anti-money laundering (AML) and know your customer (KYC) regulations without disclosing detailed customer information.
Implementing these functionalities requires the integration of specialized zero-knowledge proof generation and verification modules into the CBDC system. These modules need to be highly optimized to ensure proof generation and verification are completed without significantly increasing transaction processing times. Additionally, it is essential to consider the secure management and updating of public parameters used for zero-knowledge proofs.
3.1.5.3 Distributed Ledger Technology (DLT)
New Zealand also needs to consider adopting Distributed Ledger Technology (DLT) to enhance the transparency and auditability of the CBDC system. Although CBDC is centrally managed, incorporating DLT can increase the system’s credibility and efficiency. For example, a permissioned blockchain can be used to record transaction history, allowing authorized nodes to participate in transaction verification and ledger maintenance. This approach can increase system transparency and tamper-resistance while maintaining control by the central bank. For technical implementation, enterprise-grade blockchain platforms such as Hyperledger Fabric or R3 Corda can be considered, with customization based on the specific needs of the CBDC.
DLT can be mainly applied to the following areas:
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Transaction Records: Using distributed ledgers to record all CBDC transactions, ensuring the immutability and traceability of transaction history.
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Consensus Mechanism: Designing a consensus algorithm suitable for CBDC that ensures fast transaction confirmation and maintains system security. Given the centralized nature of CBDC, efficient consensus algorithms like Practical Byzantine Fault Tolerance (PBFT) can be adopted.
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Smart Contract Deployment: Leveraging the smart contract capabilities of blockchain platforms to deploy and execute business logic related to CBDC.
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Cross-Border Payments:Utilizing DLT to achieve efficient and transparent cross-border CBDC transactions, potentially interoperating with other countries’ CBDC systems.
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Regulatory Audits: Allowing regulatory bodies to participate as special nodes in the network to monitor system operations and transaction flows in real-time while protecting user privacy.
When implementing DLT, performance optimization and privacy protection should be given special attention. For instance, sharding technology can be used to increase system throughput, and privacy-enhancing technologies like zero-knowledge proofs can be employed to protect sensitive transaction information.
3.1.5.4 Cross-Border Payment Solutions
Additionally, New Zealand needs to focus on the cross-border payment capabilities of CBDC. This may involve interoperability with CBDC systems of other countries or traditional cross-border payment networks. Technically, it is necessary to design flexible interfaces and protocols that support efficient conversion and settlement between different currencies and payment systems. This could require the development of specialized cross-currency bridging protocols or participation in the formulation of international CBDC interoperability standards.
When designing cross-border payment solutions, several specific details need special attention:
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Exchange Rate Mechanism: Designing a real-time, fair exchange rate determination mechanism, possibly involving real-time integration with international foreign exchange markets.
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Cross-Border Settlement: Developing an efficient cross-border settlement system, which may require establishing direct settlement channels with central banks of other countries.
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Compliance Checks: Implementing automated compliance checks for cross-border transactions, including anti-money laundering (AML) and counter-terrorist financing (CFT) reviews.
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Cross-System Communication Protocols: Establishing standardized communication protocols for cross-CBDC systems to ensure seamless interoperability between CBDC systems of different countries.
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Multi-Currency Wallet: Developing digital wallets that support multiple CBDC, allowing users to hold and use digital currencies from different countries.
When implementing cross-border CBDC payments, New Zealand could consider starting with pilot projects with major trading partner countries, such as Australia, China, or Pacific Island nations, and gradually expanding to more countries after gaining sufficient experience.
3.1.5.5 Technical Cooperation and Standardization
Finally, New Zealand needs to establish a comprehensive CBDC technology governance framework. This includes formulating detailed technical standards and operational protocols, establishing continuous security assessment and upgrade mechanisms, and defining clear data governance policies. Additionally, it is essential to build extensive cooperative relationships with financial institutions, technology companies, and academia to continuously promote the research and innovation of CBDC-related technologies.
Specific feasible plans include:
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Technical Standards Committee: Establish a dedicated committee responsible for formulating and maintaining CBDC-related technical standards to ensure system consistency and interoperability.
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Security Assessment Mechanism: Develop a regular security assessment process, including internal audits and external penetration testing, to continuously identify and address potential security vulnerabilities.
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Technical Roadmap: Create a long-term technological development plan, including the research, testing, and integration timeline of new technologies.
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Open Innovation Platform: Establish an open innovation platform for CBDC technology, encouraging participation from fintech companies and academic institutions in the development of CBDC-related technologies.
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Talent Development Program: Collaborate with universities to train technical talents related to CBDC, providing human resource support for the long-term development of the system.
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International Cooperation Mechanism: Actively participate in the formulation of international CBDC technology standards and establish technical exchange mechanisms with central banks of other countries.
By implementing these comprehensive technical preparations, New Zealand is poised to build a secure, efficient, and innovative CBDC system, laying a solid foundation for the digital transformation of the national financial system. However, the success of CBDC depends not only on the maturity of technology but also on the collective efforts of policymakers, financial institutions, technology providers, and the public. The Reserve Bank of New Zealand needs to adopt a prudent and gradual implementation strategy, continuously collect and analyze feedback, and optimize and improve the CBDC system to ensure it can bring long-term positive effects to the New Zealand economy. Additionally, it is crucial to consider the potential impacts of CBDC on monetary policy, financial stability, and economic structure, ensuring that its introduction enhances the efficiency and inclusiveness of New Zealand’s financial system without causing significant disruption to the existing financial ecosystem.
3.2 Legislative Aspect
3.2.1 Completion of Legal and Regulatory System
Currently, New Zealand is taking a more cautious approach than other countries that are vigorously pursuing CBDC. Recognizing that the crypto industry is still in its infancy, the New Zealand government has emphasized the importance of adaptive rules that can evolve with the industry and align with global crypto regulation. Prior to the development of new specific legislation, the focus is on how existing regulations apply to cryptocurrencies and crypto service providers.
We believe that a sound legal and regulatory system begins with clarifying the definition and categorization of CBDC to ensure their legal status within New Zealand and to protect the legitimate rights and interests of holders. Clarify the status of CBDC in the New Zealand legal system so that they become part of legal tender. The legitimacy of CBDC can be ensured by amending the existing Reserve Bank Act or enacting a new Digital cash Act. Also clearly define CBDC and its difference from other digital currencies to ensure the accuracy of the legal provisions and the operability of the implementation. In addition, in terms of usage specifications, it is necessary to standardize the transaction process of CBDC, clarify its application scenarios, and formulate unified technical standards to ensure interoperability and compatibility. Develop detailed CBDC transaction processes and specifications to ensure transaction transparency and security. This includes, but is not limited to, transaction confirmation time, handling fee standards, and transaction record keeping.
In terms of regulatory measures, it is necessary to establish a sound regulatory framework, formulate risk prevention and control measures, especially for the effective prevention of risks in cybersecurity, money-laundering and terrorist financing, and strengthen auditing and transparency. In addition, we believe that it is necessary not only for the New Zealand government to regulate unilaterally, but also to cooperate with international regulators and private sector information providers such as blockchain analytics firms, cryptocash trading platforms, research institutes and fintech companies. Multi-body, all-encompassing regulation will help maximize market stability.
In addition, the privacy issue is also an important challenge that CBDC will face. In our view, in response to the privacy risks mentioned earlier, New Zealand can regulate them through the following legislative measures to safeguard the privacy and security of users: first, requiring all CBDC transaction data to be strongly encrypted during transmission and storage, and formulating unified security protocols and technical standards; second, permitting anonymous transactions within a certain amount to protect users’ privacy, and restricting the identification of users to mandatory disclosure; at the same time, formulate strict access control regulations to ensure that only authorized personnel and institutions have access to the CBDC system and user data, and require regular independent audits; in addition, limit the scope of use of CBDC transaction data, prohibit data misuse, clarify the data protection responsibilities of each participating institution, and promote decentralized data management solutions to reduce the risk of single-point failure; finally, formulate cross-border data transfer protection regulations to ensure the privacy protection of user data in international cooperation and cross-border payments, and actively promote international standardization to ensure the security of cross-border data transfer.
In addition to the macro-level policy initiatives mentioned above, we believe that an attempt could be made to introduce “anonymity for small transactions”. Through technological and policy measures, this anonymity could be similar to the anonymity of the use of cash. We suggest that New Zealand could allow anonymity for micro-transactions to protect user privacy when implementing CBDC. Specifically, when implementing CBDC, New Zealand can safeguard users’ privacy by setting a reasonable upper limit on the amount of small transactions (e.g., several hundreds NZD) and allowing transactions within that amount to remain anonymous; explicitly permitting small anonymous transactions through legislation and formulating a stringent privacy protection policy and regulatory mechanism to ensure that anonymous transactions are not abused, and at the same time, conducting strict authentication and monitoring to prevent money laundering and other illegal activities; and implementing regular audits to review the CBDC system to ensure the legality and compliance of anonymous transactions and guard against potential privacy risks. By doing so, New Zealand can achieve anonymity for small transactions similar to the use of cash, which protects the privacy of users while taking into account the needs of financial regulation, improves public acceptance of CBDC, and promotes the widespread use of digital currencies in daily life.
Lastly, we suggest that the New Zealand Government, in implementing CBDC, should conduct in-depth studies and learn from the successful experiences and failures of other countries in implementing CBDC, so as to avoid repeating the mistakes of the past. For example, China’s Digital RMB Pilot Project has achieved a certain degree of success in terms of technological innovation and user experience, and it is worthwhile for New Zealand to learn from its strategy in large-scale user testing and promotion; while Sweden’s e-Krona Project emphasizes privacy protection and financial inclusion, and New Zealand can make reference to its experience in terms of legislation and technological design, so as to ensure that the CBDC can achieve widespread use while safeguarding user privacy; And in the Bahamas, the implementation of the Sand Dollar project highlights micro-transactions and offline payment functions, which provides important insights for New Zealand in advancing the popularization of CBDC. By analyzing the practices of these countries, New Zealand can better avoid potential risks and formulate a CBDC policy that is in line with the actual situation of the country.
3.2.2 Strengthening Tax Administration
It should be noted that the application of CBDC can bring significant benefits to New Zealand’s tax administration - through the real-time tracking and transparency of digital currencies, the government is able to monitor and collect taxes more accurately, reducing tax evasion and money laundering; the application of CBDC technology improves the real-time and accuracy of tax data, making tax collection and management more efficient and refined. To this end, New Zealand can implement the following supporting policies to strengthen tax administration:
First, the technical foundation and security framework of the CBDC system should be established and improved to ensure the security and reliability of transaction data and prevent data tampering and hacking, so as to protect the information security of taxpayers.
Second, clear tax laws and regulations should be formulated to clarify the legal status and application rules of digital currencies in the field of taxation, to ensure the legality and transparency of CBDC transactions and to prevent them from being used for tax evasion or other illegal activities.
Once again, the degree of technologization and automation of tax administration is being strengthened, and the real-time monitoring function of the CBDC is being used to improve the efficiency of tax data collection, analysis and utilization, so as to identify and respond to tax risks in a timely manner.
Finally, public education and information disclosure efforts will be carried out to enhance taxpayers’ understanding and acceptance of the application of CBDC in taxation, and cooperation and international exchanges will be strengthened to promote tax cooperation on a global scale and jointly address cross-border tax challenges. These policy measures will help New Zealand fully utilize the potential of CBDC in tax administration and achieve a fairer, more efficient and transparent tax system.
3.3 Social Aspect
3.3.1 Guaranteeing Citizens’ Right to Vote
Although the Reserve Bank of New Zealand has indicated that CBDC will not replace physical cash and that New Zealanders can choose to use digital cash or regular bank accounts, credit cards, cash or other payment methods, and that digital cash will simply provide people with more choices when making payments, there is a need to be vigilant about citizens’ right to financial freedom. In order to safeguard this, there is a need to ensure that the use of CBDC is voluntary and that citizens are not forced to use digital currencies; that a wide range of payment methods are available to safeguard citizens’ financial freedom; that, in addition, a clear legal framework should be established to ensure that citizens’ privacy and data security are adequately protected in the use of CBDC and to prevent any form of misuse or surveillance; and that there should be extensive public education to improve citizens’ understanding of and ability to use the various payment. There should be extensive public education to improve citizens’ understanding of and ability to use various payment methods, and to ensure that everyone is free to choose the payment method that best suits his or her needs; at the same time, the New Zealand government should continuously monitor and evaluate the implementation of CBDC, listen to public opinions, and adjust its policies in a timely manner, so as to ensure that the right to financial freedom is respected and protected at all times. These measures will ensure that in the process of promoting CBDC, the right to financial freedom of New Zealand citizens will not be infringed upon, and that a truly diversified and liberalized payment environment will be achieved.
3.3.2 Enhancing Digital Inclusion
The consultation paper released by the Reserve Bank of New Zealand states that the Reserve Bank can use digital cash to improve financial inclusion and that the private sector can use its existing products and services to improve digital inclusion, but at the same time the paper recognizes that there is not always an incentive to do so. Therefore, in order to enhance digital inclusion for New Zealand citizens, the government and relevant agencies should take a series of measures, including: increasing investment in Internet infrastructure in rural and remote areas to improve network coverage and speed; providing specialized education and training programs to help older adults and technologically disadvantaged groups acquire the necessary digital skills; establishing community-based technical support centers to provide all citizens with easily accessible technical help and guidance; promote affordable digital equipment and services so that even more economically disadvantaged communities can enjoy modern digital tools and services; and promote digital inclusion policies through public-private partnerships to ensure that the promotion of digital currencies does not further exacerbate social inequalities, but rather enables truly inclusive finance and promotes social equity and inclusion. Those measures would help to narrow the digital divide and ensure that all New Zealand citizens could participate in and benefit from the development of the digital economy in an equitable manner.