Reserve Bank digital cash: social safety net, or Big Brother in your wallet?

Opinion: The Reserve Bank of New Zealand (RBNZ) is considering a central bank digital currency (CBDC), or “digital cash”. Other central banks around the world are contemplating the same.

We already use digital forms of payment. So, why is the government exploring a central bank digital currency, and what are the issues?

Central bank digital currencies may be designed to combat cryptocurrencies, which attempt to bypass both central and commercial banks. Like cryptocurrencies, CBDCs could also limit the role of commercial banks.

To an extent, the global financial crisis was caused by excessive risk-taking and the banking sector’s introduction of complex financial derivatives. CBDCs may help central banks mitigate some of this risk.

Currently, when the Reserve Bank wants to amend interest rates via changes in the official cash rate, they depend on the banking sector to pass on those changes. CBDCs will allow central banks to manipulate interest rates directly.

Another key motivation behind the use of CBDCs is financial inclusion.

In developing countries, and even among people experiencing poverty in developed countries, getting aid to the appropriate person can be challenging. Many don’t have bank accounts, and there’s always the possibility of fraud.

However, given widespread cellphone penetration, one option is to deliver digital cash to the less well-off via cellphone apps. Removing financial intermediaries makes the process faster and easier.

Other financial transactions may be carried out using CBDCs via apps, meaning people can avoid paying various surcharges to commercial banks.

However, central bank-issued digital cash has problematic aspects, including implications for civil liberties, and we need to develop appropriate safeguards to ensure a balance between financial expediency and fundamental rights.

A key issue with CBDCs is their programmability. It’s possible to make sure that CBDCs aren’t used for specific purposes, for example purchasing addictive substances.

In recent years, central banks have increasingly focused on climate change, arguing that it’s not only a social and environmental problem but that it also poses significant financial risks. This, in turn, implies that a central bank could curb the use of digital cash in ways that are considered environmentally risky, such as international travel.

Digital cash may also come with expiration dates, meaning money held in this form must be spent by a specific time. This may help in recessions by forcing people to spend money, thereby boosting aggregate demand, but it would have significant implications for individual rights and liberties.

Since 2020, China has been trialling its digital currency (e-CNY). In May 2023, the city of Changshu started making payments using digital cash.

It’s concerning that the widespread use of digital cash could further reinforce the ability of such governments to monitor citizens.

For example, China’s extensive social credit system, originally designed to be a trustworthy credit-rating system for businesses, individuals and government institutions, has gone far beyond its remit by effectively judging citizens’ behaviour and trustworthiness. As one columnist put it: “Caught jaywalking, don’t pay a court bill, play your music too loud on the train — you could lose certain rights, such as booking a flight or train ticket.”

Digital cash will require governments to collect and maintain biometric identification data from citizens. India’s identification system, Aadhaar, has seen the government gather biometric information from those who sign up, including fingerprints, eye scans, and facial photographs. Collecting and maintaining such detailed biometric data raises serious concerns about privacy and identity theft, and India’s Supreme Court has curbed how the data may be used.

Information held can be misused for civil rights violations, and governments could choose to freeze critics' CBDC holdings.

At the time of writing, only a few countries have adopted CBDCs. They are mostly Caribbean islands, such as the Bahamas, Jamaica, Dominica, St Kitts and Nevis, Anguilla, Grenada, Antigua, and Barbuda. Nigeria is the only large economy that has adopted a central bank digital currency, and as noted, China is undertaking extensive trials.

Meanwhile, our current commercial banking system certainly has its drawbacks. Evidence suggests that following a period of circumspection after the global financial crisis, many reverted to business as usual. They charge exorbitant fees for some services, resulting in hefty profits both here and overseas.

Enforcing existing regulatory laws to rein in unfair practices is essential to creating greater competition and transparency in the banking sector.

But increasing the financial control of a central authority like the RBNZ will, in my opinion, spawn a giant monopoly with little oversight and the potential for abuse.