Don’t be misled – Judging the risk from Central Bank Digital Currencies in isolation is a rookie mistake.

New Zealand’s Central bank, the Reserve Bank of New Zealand (RBNZ) have opened a consultation on central bank digital currencies (CBDCs).

The consultation closes July 26, 2024. On the surface it merely looks like they are talking about ‘digital cash’. We have digital cash in our bank accounts, so what is the big deal?

It’s a very big deal. The problem is, no-one outside the RBNZ is discussing this, and the RBNZ is problem framing in a way that suits its’ objectives. There’s no independent advice anywhere.

Physicians and Scientists for Global Responsibility (PSGRNZ) have just published a paper outlining what we identify as four democratic risks that might arise from the interoperable potential of CBDCs and digital identities (IDs). We highlight ten key pathways harm (to society or to democracies) might arise over the short and long term. Digital IDs are required for access to CBDCs. It is of the essence that we consider Digital ID-CBDC inter-operable and programmability potential, from the get-go.

There is compelling evidence that power and inter-operability of the digital infrastructure will not only enhance government control and surveillance, but that it presents a real risk to civil, constitutional and human rights. This tech is scalable, and it is out-of-sight. Because of the mixture of interests involved, from the RBNZ, to allied government agencies, to the Fintech sector and RBNZ’s Central bank colleagues, the decision-making processes and authorities will be difficult to track and assess, should something go wrong.

Because societies are open-ended and complex, it is impossible to ‘put a finger’ on how and when harm -including to human rights and freedoms – might arise. Therefore, because of the powerful potential of this technology, for it to be deployed at scale and pace, PSGRNZ propose a six-year moratorium on CBDC trials. PSGRNZ also propose that the RBNZ is not granted authority to issue CBDCs until after 2030. After 2030, any permission to trial or release CBDCs could only be approved after Parliament or the public vote for it. This is so that we may as a society, understand the full political, financial and constitutional potential of these technologies.

CBDCs have not been pushed into policy-space by the citizens of nations, but by the big global Central banks and the Fintech industry.

Global white papers by the Bank of International Settlements (BIS), International Monetary Fund (IMF) the finance and technology (Fintech) industry, their management consultant colleagues and prominent industry lobbyist organisations, persistently emphasise the ‘inclusivity’ potential of CBDCs, and the RBNZ draws on this rhetoric also. Yet, as we discuss in our paper, early CBDC trials in Nigeria and China reveal that citizens do not trust, and instead resist using the reserve bank currency.

Authorities might be unwilling to acknowledge when their policies lead to an abuse of powers or reduce individual autonomy. In a six-year cashless trial in Australia, authorities were unwilling to listen to First Nations (indigenous) people who protested that the trial both increased compliance burdens while reducing their autonomy.

There’s a lot to be sceptical about.

The consultation calls CBDCs ‘digital cash’. This is confusing. The money in your bank account is digital cash. The key difference is that CBDC technology is ultimately, programmable and interoperable.

The RBNZ tell us that this is the second of four stages. Why is it taken for granted that inter-operable, programmable CBDCs hitched to our digital IDs, will be the best decision? How deeply has Nicole Willis, the Minister of Finance (Minister Responsible for the Treasury) been briefed, or even our members of Parliament? As PSGRNZ have discovered, the CBDC campaign isn’t declared in funding arrangements, Cabinet didn’t seem to be briefed during 2023, and the 2023 Briefing to the Incoming Minister only touched on CBDCs as a ‘key project’.

No-one outside of the RBNZ is talking about this issue or discussing it with a critical lens. The extraordinary absence of local comment alone, would not, to use legal parlance, pass the sniff test. The institution with the vested interest in change should not be the only ‘expert’ in the room.

The RBNZ downplays the potential programmability and interoperability of CBDCs. Yet their mentor and policy guide, the Bank of International Settlements (BIS) talks up the programmability and interoperability. Even key RBNZ advisor, the billion dollar management consultancy Accenture, is transparent about the programmability of the tech:

‘Programmable payments, the ability to build CBDC with tools such as smart contracts, are a core component of CBDC’s ability to unlock new and future value for New Zealanders and will be a foundational piece of the CBDC… programmable payments enabled by the smart contract feature of CBDCs are seen as a key differentiator for CBDCs over the existing payments systems.’

The CBDSs you would have in your digital wallet would operate on a ledger, as either a token, a digital representation of value, or simply show up as an account. The programmability functions are enabled by smart contracts, ‘executable code that automate the execution of contractual agreement’. Smart contracts can be deployed remotely, to target groups (known as composability), and they can be conditional, where an action will occur if pre-specified conditions are met.

The BIS and the Bank of England have recently confirmed that three-party locks can be programmed whereby a ‘trusted’ third party can specify functionality.

This arm’s length functionality which can occur at scale, and the potential (untrackable) dialling down, and the dialling up of this executable code (as instructions), have been downplayed in the RBNZ consultation.

It’s evident that the digital infrastructure and the directions will operate without parliamentary oversight. Who will control and run the smart contracts which can be enabled at scale and pace? How can Ministers or the public understand the full implications, when agreements with smart contract developers will be hidden by confidentiality clauses and only the so-called rules will be available for consideration? If something goes wrong, if there was arbitrary and unfair use of powers, the Privacy and Human Rights Commissioners wouldn’t have a hope in hell of understanding what happened. The Digital ID governance board’s powers are weak, and full disclosure to all involved corporations is required if a complaint is lodged, before any investigation commences.

This is money. Money corrupts. Central banks are ‘too big to fail’. We must ask, ‘what could go wrong’?

The RBNZ’s consultation spends little time spelling out the fact that society, the ‘client’ is required to have a digital identity (ID) on a digital wallet in order to access CBDCs. The Fintech industry and the immensely powerful global ‘Central banks bank’ the Bank of International Settlements (BIS) and the International Monetary Fund are intimately aware of the opportunities presented by the inter-operability of Digital IDs and CBDCs.

As we discuss, the BIS, IMF, Fintech, their management consultant colleagues and prominent industry lobbyist organisations, have spent years fleshing out how CBDCs and Digital IDs will work, shaping the language around what is risky, and what is not.

PSGRNZ’s research shows how RBNZ have drawn their risk framing predominantly from the language and rhetoric of this big powerful group. RBNZ are problematising from a big-business perspective.

The RBNZ have brought in billion-dollar management consultancy firm Accenture to help them with the CBDC campaign. As we discuss, Accenture is dedicated to digital transformation, and has a long history of working with other like-minded corporations to build traction for Digital IDs and CBDCs. They are not an impartial player.

Therefore, it is not surprising that the RBNZ are not able to envisage risk from the perspective of long-term, democratic stewardship perspective. But it’s not appropriate.

Unfortunately, people – society – have been left on the outer and risk is narrowly framed by the BIS, IMF, Fintech, their management consultant colleagues and prominent industry lobbyist organisations in what appears to be a classic case of regulatory capture. It’s not good enough.

The consequence of the RBNZ downplaying the interoperability of Digital IDs and CBDCs and the potential of smart contracts, may mislead society, including experts in academia, into underestimating their potential power and failing to identify the institutions who stand to benefit.

Like a black box in an aircraft, the technologies will be hidden via commercial-in-confidence agreements; by the complexity of the infrastructure; the executable code; third-party arrangements; the machine learning artificial intelligence that in time may be built in; and the complex and secretive relations between government agencies and private corporations. Official Information Act requests will never get beyond such a dense firewall.

We must question, if Digital IDs are envisaged as a one-stop-shop for access to everything, – from housing, to government services, to the internet, to food – and Digital IDs are required to access finances including CBDCs, and the smart contracts that control permissions to CBDCs can be operated remotely by a third party, how will the public speak up, if policies are unfair or arbitrary? Who will be held accountable?

It’s not surprising that trust in the tech sector is at an all time low.

But there’s more. The RBNZ already have greater powers and responsibilities than most Central banks. The RBNZ’s CBDC campaign must not be considered in isolation, but judged alongside their already extensive powers, which include financial markets regulator.

How might the powers to issue a retail CBDC conflict with their existing responsibilities? In the past five years the RBNZ has undergone a massive overhaul, a ‘significant turning point in our history’, an extensive transformation process where the RBNZ’s oversight responsibilities have been broadened and strengthened. Kiwis don’t know because the New Zealand media has barely reported on this ‘transformation’. It’s another ‘blindspot’ – yet we believe this is a critical, relevant consideration.

All these reasons, are why PSGRNZ recommend a six-year moratorium on trials and release.

The only way we can reasonably understand the effect from the implementation of these technologies, is by pausing to observe and assess the impact, all the way ‘down’ to the individual level in foreign countries. With the pantheon of risks involved, it is eminently unreasonable to claim that we might be left-behind luddites. That we should rush into CBDCs for fear of ‘missing out’.

Democracies work by limiting the potential for Central banks to exert political (which is also social, cultural and economic) power. Smart contracts are ultimately ‘political’. It will be individuals and institutions that have the decision-making power over how, when and why the technologies will be deployed. Money production, and access to money, is, unfortunately, inevitably political.

The more salient question may be, has any Minister of the Crown been briefed on the greater questions of administrative and constitutional law that might arise, if the powers to release retail CBDCs, to issue of retail, Central bank-owned digital cash, are granted to the RBNZ, which will be firmly tied to Kiwi’s Digital IDs?

PSGRNZ furthermore recommend that public law experts and the whole of society take a second look at Digital IDs. There is no sound reason why the government should demand people have a Digital ID for government-related employment and services, including access to tertiary education and public funding, when passports and drivers’ licenses can be used for primary identification.

PSGRNZ suggest that there are four democratic risks that arise from the inter-operability of Digital IDs and CBDCs. However, our suspicions can only be confirmed if independent experts in constitutional and administrative law and in public policy, also take a critical look at the big picture. We propose that the four democratic risks are:

1. Digital IDs coupled to CBDCs enhance all-of-government oversight over private activity. Therefore, privacy issues extend to whole-of-government surveillance, including through backdoor access points.
2. CBDCs will be transferred electronically using pre-programmable smart contracts. Smart contracts are executable code that can be deployed remotely or directly on Central bank ledgers. They can be deployed by a government, corporation, United Nations agency or A.I. entity. Central bank papers anticipate that smart contracts will be deployed to achieve larger policy objectives.
3. The potential for erosion of parliamentary oversight and democratic accountability. New Zealand’s Central bank, the Reserve Bank of New Zealand (RBNZ) is, of course, accountable to our sovereign democratic government. Conventional (unprogrammable) digital money creation through the budgetary (appropriations) process arises through processes of negotiation. Reserve bank power to create or release CBDCs, and related agency co-ordination would be at arm’s length from these processes and remain largely confidential or secret in nature.
4. Risk of delegation of powers to powerful offshore institutions (democratic erosion). The RBNZ may end up being more accountable to the Bank of International Settlements (BIS) and the International Monetary Fund (IMF) than to Parliament. These institutions are mentors to Central banks and provide guidance on policy. Global harmonisation and ‘best practice’ arrangements hold the potential to undermine the power of democratic governments.

It’s the double-edged sword problem. Functions that increase speed and convenience, may also be applied at scale in the service of powerful interests. We should not be naïve to how easily these out-of-sight systems can be corrupted, and how difficult it could be to track the source of that corruption.

PSGRNZ are concerned that not enough people understand the risk presented by inter-operable potential of CBDCs and digital identities. Because there is no information produced by local, independent experts that can look critically at the big picture, we’re left exclusively depending on the RBNZ’s claims.

The U.S. House of Representatives have recently voted to pass the CBDC Anti-Surveillance State Act. It is now waiting to go through the Senate. The Act would prohibit the Federal reserve bank from acting in a retail capacity and from issuing CBDCs.

We should exercise cautious foresight, in the public interest. Is it possible that the digital infrastructure that enables these technologies to be so extraordinarily powerful, also carries with it the potential to shift power away from Parliament and citizens? Is it possible that power could be transferred into the arms of the government agencies, Central banks, global institutions and Fintech corporations who will design and operate the technology? We need to take a step back from the brink and not rush into this.

We recommend a six-year pause. Two election cycles, to let the dust settle.

PSGRNZ (2024) Stepping Back from the Brink: The Programmable Ledger. Four democratic risks that arise when Digital IDs are coupled to Central Bank Digital Currencies. Bruning, J.R., Physicians & Scientists for Global Responsibility New Zealand (PSGRNZ).

Downloadable from PSGR.org.nz or PSGRNZ.Substack.com.