By Grant Anderson

The Reserve Bank of New Zealand (RBNZ) should issue NZ$50m as cryptocurrency.

This would attract international interest, software expertise and investment. It would reduce costs for importers and exporters. It would boost the local economy. And, if successful, existence as a secure fiat currency in cryptocurrency form could see the NZ$ become sought after as a global trading currency.

Blockchain, cryptocurrencies and smart contracts are hot topics in the technology world. All around the globe, investment money is flowing into developing the latest ideas for these technologies.

New Zealand could lead the world and become the global centre of excellence through this one initiative. It could be the economy that attracts the cream of the investment dollars, along with the best of the skilled technology workers, if the RBNZ issues some New Zealand dollars as cryptocurrency.

Hype and promises

At the moment there is lots of hype surrounding this technology and many promises about the solutions it will deliver. Much of the hype will probably prove to be just that — hype. All technology, from the steam engine to the smartphone, has gone through this phase. However, some of the promised solutions and benefits will come to fruition.

Blockchain appears to have uses in public registers, authentication and in financial services (as discussed in the March 2016 issue of Acuity).

Smart contracts, enforced by computer protocols built into the blockchain that supports the cryptocurrency, could be useful for escrow, contract settlement (real estate settlement), admission control (smart locks let the right guest into the B&B) and supply chain management. And a fiat currency in digital form could facilitate all of this.

Acceptance barriers

One of the big barriers to mainstream acceptance of cryptocurrencies is lack of understanding of how those currencies work. If it isn’t backed by a sovereign central bank, how can I trust it?

This same barrier exists to the adoption of smart contracts. Lack of understanding and lack of trust in cryptocurrencies such as Bitcoin and Ether are major stumbling blocks to the widespread adoption of smart contracts.

To use a smart contract now, capital in fiat currency must first be converted into one of the independent digital currencies. This conversion is seen as a risk. Mainstream business is not yet at a point where “risking” capital in that manner is a palatable idea.

What if a smart contract could be entered into with digital New Zealand dollars?

The major barrier to uptake would be overcome.

Tui dollars

The creation of a pool of New Zealand dollars as cryptocurrency would be a world-first for a fiat currency. The creation of a digital NZ dollar (let’s call it a Tui, to distinguish it from the conventional dollar) could be a significant boost to the New Zealand economy.

New Zealanders are quite tolerant of cutting edge technology generally. It was one of the first countries in the world to have widespread adoption of EFTPOS, and businesses have been quick to embrace cloud technologies like Xero. So it is reasonable to forecast fast adoption of a fiat cryptocurrency.

Economic growth

This opportunity would captivate software developers. New Zealand would become the proving ground for software developers from all around the world.

New Zealand could attract hundreds more of the world’s brightest technology entrepreneurs. It could foster hundreds of tech start-ups drawing investment capital from all around the globe as a result of issuing Tuis.

According to the Ministry of Business, Innovation and Employment, a computer developer adds NZ$180,000 to the New Zealand economy. Another 300 developers attracted to New Zealand to work on Tui-enabled technology would give the economy a boost of NZ$54m in the first year — and that benefit would continue for many years.

The introduction of the Tui along with mainstream usage of digital wallets would also allow transaction-intensive industries to become more cost-effective. High volume retailers and online commerce sites are obvious big winners from this technology.

Macro-economics

The RBNZ would need to develop blockchain technology capability. Once this is done, a pool of Tuis could be issued through one or more of the trading banks.

Businesses and individuals wishing to convert to Tuis could swap paper notes, or other M1 [publicly held] money supply components, at that trading bank. The cost of issuing (say) NZ$50m as Tuis would be the one-off cost of the RBNZ developing the blockchain technology.

Issuing NZ$50m in Tuis would represent a 0.01 per cent increase in the value of notes and coins on issue (currently around NZ$5b). With New Zealand’s M1 currently well over NZ$40b, an expansion of M1 money supply by NZ$50m would have a negligible effect on inflation.

One of the big barriers to mainstream acceptance of cryptocurrencies is lack of understanding of how those currencies work. If it isn’t backed by a sovereign central bank, how can I trust it?

Speedy money

We should consider the bitcoin blockchain as version 1 of this technology. It is written in a limited code, restricting its capabilities. Version 2 blockchain like Ethereum have a Turing-complete code, meaning that the blockchain can be used for much more than just currency. It is this capability that allows smart contracts to be written.

It is well proven that technology speed improves and costs reduce over time. Blockchain processing times are already significantly improved from version 1 (minutes) to version 2 (seconds) and will continue to improve. In the same manner, processing costs of blockchain technology should continue to fall.

Tuis could be held in a digital wallet on a mobile phone or in the cloud. Tuis could be exchanged peer to peer through digitally enabled banks, direct from wallet to wallet, or through intermediary software that enabled digital payment.

The system cost of this type of payment service should be lower than many of today’s legacy systems, so business costs should reduce as a result of paying in Tuis.

Use cases

All sorts of smart contracts become much nearer to market if they are able to be executed in fiat currency.

For instance, smart contracts could take the place of irrevocable letters of credit for importers.

Tech savvy exporters to New Zealand would love the low cost associated with the payment service. This could result in many smaller independent exporters preferring the Tui as their currency of choice for exports to any country.

If this capability went viral the Tui could become one of the de facto global trade currencies.

Inappropriate use

One criticism consistently levelled at digital currency is that it facilitates criminal activity by being anonymous and being borderless. This criticism is unfair for a number of reasons.

Firstly, digital currencies like Bitcoin are not anonymous. Bitcoins are pseudonymous; identity is masked to some extent but is knowable, as several high-profile criminals have found out the hard way. US Federal Courts have ordered the confiscation of bitcoins from a number of criminals including the infamous Dread Pirate Roberts, founder of the Silk Road website.

Secondly, many reputable regulatory authorities (including HM Treasury) believe that banknotes in circulation are a greater money laundering risk than digital currencies. The rationale is the same as the first point. Banknotes are absolutely anonymous, so would remain the medium of choice for criminal activity.

Thirdly, technology should not be hampered by the ability of humans to harness that technology for criminal purposes. Automobiles and cellphones are capable of being used by organised crime. However, our society does not ban them. Rather, we try to limit their potential use for illegal activity and develop ways of catching those who do use them for illegal activity. This is the best way of dealing with any downsides of the technology.

Where to next?

There are many aspects of the introduction of the Tui that would need to properly addressed. For instance, security of the currency needs to be proved and the necessary network for processing needs to be established.

There will be naysayers who say it can’t be done or shouldn’t be done. Maybe it can’t be done with today’s technology, but that will change tomorrow. And why shouldn’t we experiment?

The first country to issue cryptocurrency will gain a first-mover advantage. That advantage could belong to New Zealand.

Perhaps a project team of visionaries and experts from both the private and public sectors could be tasked with making this happen. Part of the challenge should be being first to market which means getting a result quickly. Let’s start the discussion and get going.

Grant Anderson is head of accounting at Xero. xero.com

This article was first published in the August 2016 issue of Acuity magazine.