On the Edge of the Programmable Ledger: CBDCs

New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ), has opened a consultation on central bank digital currencies (CBDCs). This is the second of four stages. RBNZ considers that Stage Three will involve the development of prototypes and will be completed between 2028-2029. Then, in around 2030, they ‘would introduce digital cash to Aotearoa New Zealand.’

The language the RBNZ uses, from the rhetoric around risk to the so-called benefits of CBDCs, mimics the language and concerns of the global banking, finance, and technology (Fintech) industry and management consultancy interests. 

There doesn’t seem to be a role for Parliament to debate whether or not New Zealand’s central bank should even enter the retail currency market. 

It seems that the financial markets regulator, the regulator of retail banks, presumes that it can grant itself powers to enter the very market it is supposed to regulate, the retail banking market. 

New Zealand’s central bank is somewhat unusual in that it is charged with broader powers than most central banks. Following a major International Monetary Fund (IMF) review, the RBNZ experienced its greatest transformation process in forty years. 

The RBNZ is not only responsible for monetary policy, the central bank is the financial markets regulator – responsible for oversight of the financial system and prudential regulation of banks, deposit-takers, and insurance companies. The RBNZ can now decide if a financial institution is too big to fail (systemically important). Recently, the RBNZ engaged in large-scale asset purchases, which resulted in billion-dollar losses and appeared to primarily benefit foreign-owned banks.

The impact of a too-big-to-fail (systemically important) central bank entering the retail environment? This is not the only problem. 

Major risks revolve around the known interoperability of CBDCs and digital identity (ID) technologies and the programmability potential of CBDC payments. RBNZ may be downplaying the tech architecture’s potential, but their business partner Accenture underscores the fact that world-leading CBDC capability will maximise ‘synergies with other national digital initiatives, such as Digital ID, CDR 78 and Real Time Payments through inter-operability.’

Unlike bank digital currencies in your account today, central bank digital currencies are programmable. Self-executing applications called smart contracts enable payments to be programmed. These smart contracts can be combined, or bundled together on central bank ledgers, a capability known as composability. Smart contracts can be deployed remotely or directly, and third parties can issue directions using programmable three-party locks. 

This is one thing in a consenting commercial environment. The same capabilities in a government declaring an emergency or crisis and demanding public compliance? What could go wrong?

Not only are CBDCs programmable and combinable, but the long game involves a plan to interconnect central banks and the Bank of International Settlements so that they will network via a unified ledger. When we think about risk, we can’t just think short-term; the tech’s capability in the future must be assessed, and reckoned with, on a global scale. 

We can’t presume that consumers can either choose or not choose to use CBDCs. Digital IDs will be required for CBDCs, and people must submit to an iris scan, which contains biometric information. Digital IDs are increasingly required to access New Zealand government jobs, services, and funding opportunities. The agencies involved are electing to ignore the fact that drivers’ licenses and passports in New Zealand historically have a low rate of fraud. 

There is reason to suspect that CBDCs will involve a similar strategic creep. The government could regulate that government wages, salaries, or funding opportunities are paid by CBDCs in a similar fashion, ultimately giving people little choice. 

A recently released discussion paper by the Physicians and Scientists for Global Responsibility New Zealand (PSGRNZ) looks at the New Zealand consultation and the history of policy development by these big global fintech-facing industries. It reveals how no one is considering how these interoperable technologies may represent a potential threat to civil, constitutional, and human rights. From the RBNZ, through government agencies, human rights, and public law experts, New Zealand is silent. 

‘Digital government’ is so important in New Zealand that our Attorney General has been equipped with an astonishing and unprecedented plethora of digitising government, intelligence, and surveillance-related portfolios. The potential for Digital ID-CBDC tech, forever connected to the biometric data contained in our iris, to impact rights and freedoms, is unlikely to be addressed by New Zealand’s digital-facing Attorney General. 

PSGRNZ believe that there are four major risks that must be addressed that the RBNZ is gliding over.

First, digital IDs coupled to central bank digital currencies (CBDCs) enhance all-of-government oversight over private activity. Therefore, privacy issues encompass government surveillance, including through backdoor access points, rather than exclusively concerning commercial environments.

Second, CBDCs will be transferred electronically using pre-programmable smart contracts. Smart contracts hold the potential to incentivise or disincentivise behaviour through the tethering of activities to access CBDC. Global banking white papers indicate that they will be used to achieve larger policy objectives. The Fintech industry will contract to governments to support the design and control of the digital infrastructure and smart contracts. 

The potential for erosion of government oversight is a third concern. Central banks are accountable to sovereign democratic governments. Conventional money creation through the budgetary process arises through processes of negotiation between elected officials, agency heads, and their staff and public lobbying. Private bank money creation through loans is a consequence of political and economic decision-making. Reserve bank power to create or release CBDCs would be at arm’s length from these processes and remain largely confidential or secret in nature.

Finally, there is a risk of increased oversight and delegation of the production of strategy, policy, and rules to the Bank of International Settlements (BIS) International Monetary Fund (IMF). This might occur through global harmonisation and ‘best practice’ arrangements while undermining the power of democratic governments. These institutions lead global policy on CBDCs, working closely with the Fintech sector. These institutions are neatly situated to take advantage of such a delegation of powers, and the opportunities presented by unified, networked central bank ledgers at a global scale.

The broader concerns of members of Parliament, public law experts, and citizens, what might happen when digital government oversight becomes networked across the whole of government is not in scope.

The act of questioning whether these interoperable, panopticon-like technologies might be contrary to the public interest, is also – not in scope.  

We also highlight extensive evidence of industry capture in our paper.

It’s a tale as old as time. A new technology becomes possible, and the merchants form trade associations and nurture relationships with government actors to ensure maximum takeup and friendly regulation in the service of nation, empire, and the economy. From the 14th-century livery suppliers in the City of London to the 21st-century Fintech and banking consortiums that provide the skills and services to enable the interoperable digital infrastructure and harness the potential of digital ID and CBDCs, it’s all about strategy, service, and sales. 

Because, of course, when you think about livery, you think about saddles, bridles, and reins and a flag or two. When you think about central bank currency, you imagine how good it might be. Everyone can access government money (universal basic income – UBIs), and how CBDCs could come as interest-free loans for the little guy.

But the livery suppliers also supplied weapons, not only for offshore conquests but to halt local rebellions. The double-edged sword problem similarly presents itself with CBDCs. But our 21st-century silicon-based tech dilemma is vastly different from slowly forged weapons. 

It’s a classic industry technique to shrink the issue of risk around a new technology to focus on one discrete component. Meanwhile, the industry developers, from their research and development to their communications and investment strategies, are in no doubt that that discrete piece is nothing without the other puzzle pieces. Whether the end product is a patented formulation or a digital infrastructure, the whole is greater than the sum of its parts.

As an example of this, government regulatory agencies have for decades insisted that the toxicity of Roundup herbicide revolved around the active ingredient glyphosate. The Roundup trials shed light on industry knowledge that the retail formulation was much more toxic. Similarly, mRNA gene therapies require that a lipid nanoparticle encapsulates the genetic instructions, thereby enabling the genetic instructions to be transported into cells unrecognised. In both these examples, genotoxicity and carcinogenicity testing for the commercial formulation was never required. The writing out of the intended effect of the combined technologies is masterful, really.

Industries work tirelessly to shape risk framing and regulation to ensure that a toxic ‘sum’ is not recognised. Regulators and government agencies lean on their technical expertise and prioritise industry literature, including unpublished, confidential industry data, while refraining from reviewing public scientific literature that is outside study guidelines. This is not just luck. It’s the result of years of tactical negotiation with industry experts. We also saw this with Roundup and Covid-19 injections.

So it is ‘natural,’ if we look at the RBNZ’s white papers relating to the benefits of CBDCs, that the networked power of interoperable tech infrastructure would be out of the picture. 

When it comes to the benefits of CBDCs, the RBNZ thinks like the industries that have captured it. 

Regulatory capture is much more than the classic definition, where ‘regulation is acquired by the industry and is designed and operated primarily for its benefit.’ 

Our understanding of regulatory capture has expanded significantly beyond the revolving door problem. When it comes to highly specialised science and technology sectors, industry experts can lead, control, and shape policy design. Expertise and information have arrived for years via white papers, industry workshops, briefings, global conferences, consensus statements, media coverage, lobbying, and networking. Industry-led principles and values then shape domestically-produced white papers and policies. Government risk assessment and policy papers then reflect industry language and framing. The net effect is that the domestic laws and guidelines are perfectly acceptable to the regulated industries and their global colleagues. 

This then influences public sector knowledge and shapes how policy is designed, corralling laws and regulations to achieve certain aims. Saltelli et al (2022) describes this as cognitive or cultural capture, with the effect that regulators think like the industry they are charged with regulating.

Government agencies also hire billion-dollar management consultancies to help formulate and deploy strategies. Yet these very same consultancies have been on the ground from the get-go, working with global banking and fintech, writing white papers, establishing industry conferences, and attending global conferences, for years. The role of the consultants in this is a neat piece of the puzzle. 

Billion-dollar management consultancy Accenture has been hired to help the RBNZ with their CBDC campaign. Accenture’s key partners are the biggest corporations in the world. Accenture has been working on Digital IDs with global bankers and Fintech for decades, fully aware that Digital IDs will be integral for access to CBDCs. Accenture is fully aware of the interoperability of Digital IDs and CBDC and their RBNZ dossier discloses this.

It’s no wonder that the New Zealand public aren’t invited to accept or reject CBDCs. The RBNZ consultation merely invites the public to share their opinions on a small range of issues that exclusively concern CBDCs. 

To date, all the RBNZ CBDC-related information is exclusively supplied by the agency with a massive political and financial conflict of interest.

The RBNZ claims that trials and protocols will be developed over the coming 4 years, with CBDCs being released in 2030.

Our white paper recommends a different track. We consider that for the next six years (two election cycles) no public trials will be held, and that we instead carefully observe the impact in other jurisdictions. This includes impacts across the political and democratic landscape and impacts on civil, constitutional, and human rights in early adopting countries. Then, only after 2030, either a parliamentary or public vote would be held to give the RBNZ the permission to release retail CBDCs. 

Central banks should not be permitted to decide their own destiny. 

PSGRNZ believe it is critical to step back from the brink and consider that the risks are not black and white, but nebulous and difficult to anticipate. Yet the risks may be so considerable that they hold potential to erode civil, constitutional, and human rights. In such an environment the RBNZ is not well placed to consider risks, when the conflicts of interest – their potential expansion of powers – are so extraordinary. 

At the moment, the silence of New Zealand’s political, legal, and governance scholars is deafening. And yes, after publishing this paper PSGRNZ sent it to all the academic experts we could identify who had expertise in administrative, constitutional, and/or human rights law, across New Zealand’s five law schools. No one has as yet responded.

In finishing, let’s consider a quote from New Zealand’s University of Victoria Institute for Governance and Policy Studies:

Safeguarding long-term interests, however, is not easy. There are strong political incentives in democratic systems for policy-makers to prioritise short-term interests over those of future generations. Powerful vested interests often hinder prudent economic or environmental stewardship. Governments must also grapple with deep uncertainty, policy complexity and multiple intra-generational and intergenerational trade-offs. Given such challenges, determining how best to govern for the future is not straightforward; nor is assessing the quality of such governance.

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. ISBN 978-0-473-71618-9.