Four democratic risks that arise when Digital IDs are coupled to Central Bank Digital Currencies.
Four democratic risks that arise when Digital IDs are coupled to Central Bank Digital Currencies.
Stepping Back from the Brink: The Programmable Ledger.
‘But there can be no government by the people if they are ignorant of the issues to be resolved … there can be no assurance that government is carried out for the people unless the facts are made known [and], the issues publicly ventilated.’[1]
EXECUTIVE SUMMARY
By releasing this discussion paper, Physicians & Scientists for Global Responsibility New Zealand (PSGRNZ) aim to encourage debate around governance, democracy and the inter-operability of Digital Identity systems and central bank digital currencies (CBDCs). What are the risks from adopting CBDCs which are tied to your digital ID, your digital ‘twin’?
PSGR 2024 in-depth discussion paper: Stepping Back from the Brink: The Programmable Ledger. Four democratic risks that arise when Digital IDs are coupled to Central Bank Digital Currencies. ISBN 978-0-473-71618-9. 2-page summary | Press release
This paper asks that all New Zealanders, including members of Parliament and government officials, consider Digital IDs and CBDCs as an inter-operable technology, and consider the implications of this inter-operability from a risk-governance and long-term interest perspective. This is difficult, as these technologies are paradigm-changing and it is difficult to predict what the future may hold. However, once in place, they will be all but impossible to withdraw from. Risk management involves understanding the extent to which the government is identifying, assessing and reducing long-term risks and vulnerabilities. It is also critical that our government officials and members of Parliament have sufficient information to pay attention to problems and trends, acute and chronic – and can practice adequate foresight.
‘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.’[2]
However, the inter-operability of digital identity and central bank digital currencies, and the scale and pace at which their use can be expanded, demand that we consider these technologies from a broad public interest perspective.
PSGRNZ hope that this summary and the paper will help decision-makers read more widely, to understand why these technologies risk undermining not only democracy, but human rights and freedoms.
CBDCs are designed to fold into – or couple with - a larger, inter-operable, networked digital oversight framework, or architecture. Digital IDs will be a condition of access to CBDCs. The key difference between CBDCs and traditional digital money held in commercial retail banks is that CBDCs will be programmable. Individuals can only obtain a Digital identity (ID) if they agree to their biometric video and images (likeness) data being captured and stored.
This paper sheds light on what PSGRNZ refer to as four democratic risks that arise from the inter-operability of Digital IDs and CBDCs.
1. Digital IDs coupled to CBDCs enhance all-of-government oversight over private activity. Therefore, privacy issues in this document primarily concern government surveillance, including surveillance across government and through backdoor access points.
2. CBDCs will be transferred electronically using pre-programmable smart contracts. Smart contracts are executable code. They can be deployed remotely or directly on Central bank ledgers. Three-party locks can be programmed whereby a third party can issue directions. The third party could be a government, corporation, United Nations agency or A.I. entity. The finance and technology (Fintech) industry will contract to governments to support the design and control of the digital infrastructure. Central bank papers anticipate that smart contracts will be deployed to achieve larger policy objectives. Smart contracts have potential to incentivise or disincentivise behaviour by ensuring CBDC access is solely available for ‘approved’ activities.
3. The potential for erosion of parliamentary oversight. New Zealand’s Central bank, the Reserve Bank of New Zealand (RBNZ) is, of course, accountable to our sovereign democratic government. Conventional money creation through the budgetary (appropriations) process arises through processes of negotiation between Ministers, department 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.
Unfortunately, much of the RBNZ’s CBDC strategy development and consequent campaign has already been undertaken in secret. The RBNZ, a semi-independent government authority, is currently undertaking a major four-stage campaign to roll-out central bank digital currencies (CBDCs). The two final stages have not been publicly disclosed. It’s unclear to what extent that Parliament and the Minister of Finance, Minister Responsible for the Treasury, has been informed of the Reserve Bank’s CBDC strategy.
4. Continued increase in oversight and delegation of the production of strategy, policy and rules to the Bank of International Settlements (BIS) and International Monetary Fund (IMF). This can occur through mentoring, guidance, global harmonisation and ‘best practice’ arrangements. Such arrangements can undermine and erode the powers of sovereign governments. The BIS and IMF lead global policy on CBDCs; working closely with the ‘Fintech’ sector. These institutions are neatly situated to take advantage of delegation of powers, and the opportunities presented by interconnected Central bank ledgers.
Background to the need for a Moratorium
The world of Central banking and Fintech is both complex and opaque. This paper has aimed to identify and review many of the relevant issues that shape the current conversation around the worthiness of CBDCs, while also querying the missing ‘bits’ that promote public ignorance and hence prevent critical enquiry. Part one briefly outlines the social, political and legal concept of trust, how trust is an important democratic value that is essential for good government.
Part one considers the discursive use of the term trust in Fintech and government communications in relation to Digital IDs and CBDCs and how this relates to trust in democratic societies.
The mysterious RBNZ CBDC campaign is discussed in part two. RBNZ has been far from transparent regarding the extent of policies developed for their CBDC campaign. The RBNZ refer to CBDCs as ‘digital cash’. RBNZ’s term ‘digital cash’ risks conflating CBDCs with retail digital money. The issue of programmability is pervasively understated. This paper will refer to digital cash as CBDCs.
The RBNZ only briefly touches on the last two of four stages. A roll-out in 2030 is presumed. The entire RBNZ campaign remains confidential. The Central bank’s secrecy results in public ignorance about its activities. New Zealand society as a whole can only access the very limited information about plans for CBDC implementation that RBNZ has chosen to publicly publish. This includes some limited policy, some ‘values’, friendly case studies, and concerns that have previously been raised by collegial international organisations who also favour the implementation of retail CBDCs.
PSGRNZ highlight that the RBNZ-endorsed core CBDC benefits relating to ‘monetary sovereignty’ and ‘inclusion’ have not been developed by RBNZ, but rather, by the global central banks and the Fintech industry. Historically, Central banks have responsibility for issuing cash, which is a small percentage of the larger money supply and is subject to natural limitations. Central bank issued digital cash, or CBDCs carries none of these limitations.
The evidence used to support their CBDC campaign has been developed in partnership with the global consultancy firm Accenture. Accenture is a billion-dollar Fortune 500 company, which might consult with government agencies one week, and the Fintech industry the following week. Accenture’s key priority is to enhance shareholder profits.
‘Inclusion’ language used by the RBNZ and global actors portrays a veneer of social justice and altruism, but often only implies greater access to financial services. ‘Inclusion’ language should not be used to whitewash or dismiss real concerns about a potential impact on human rights and freedoms, and the real experiences of indigenous peoples, when government laws are coupled with rules that extinguish social and cultural practices. A cashless trial in Australia recently revealed an administrative preference for technical tweaks, which increased administrative burdens for these communities and reduced the autonomy of the individuals involved.
Part two also provides an overview of the RBNZ’s role and functions, including a brief review of ‘a significant turning point in our history’, a recent and extensive transformation process that the RBNZ has undergone in the past five years. This is necessary if society is to evaluate the RBNZ’s existing roles and responsibilities as well as the new powers that the bank would gain in relation to CBDCs. It is also necessary to identify the potential for conflicts of interest, or contradictory powers that might leave that Central bank acting in such a way that is anti-competitive or contrary to the public purpose.
Parts three and four consider the influence of the Bank of International Settlements and the International Monetary Fund. These institutions have exerted and will continue to exert a powerful influence over RBNZ strategy. However, they have demonstrated by their actions over time, that they are far from impartial actors.
Part five discusses the digital infrastructure, the platform and ledger technologies, the potential for tokenization of currency or assets and the power of programmable smart contracts.
It is essential that society understand the way CBDCs differ, and are anticipated to differ, from conventional digital currencies.
It is also important that the society have some idea of the extent to which these technologies will be predominantly designed and driven by the private Fintech sector, or as private-public partnerships with government agencies. As much of the technical expertise will lie in private industry, the legal, regulatory and institutional frameworks, and the commercial ‘in-confidence’ contracts, will require an extraordinary degree of cooperation with the private sector.
The networked, inter-operable design of these digital frameworks concentrates power in government agencies and the private institutions who will have commercial arrangements with governments. With a broad understanding of the sophisticated actors involved, it is difficult not to predict a shift in the balance of power. No New Zealand government-based consultations, whether for the Digital ID’s or CBDCs have revealed this broader picture.
Part 6 considers the outcomes in Nigeria and China where CBDCs have been released, and in Australia, where a cashless trial was undertaken. In China and Nigeria where CBDC trials have occurred, use patterns indicate that citizens have little desire to use the technology, and very little trust in the technology. In Australia, indigenous Australians (First Nations people) were negatively impacted. However, government reviews repeatedly wrote out or undermined the complaints of First Nations people, preferring to paint a rosy political picture of that cashless trial.
It is also advisable to consider that the CBDC policy campaign is not occurring in isolation. Digital IDs are discussed in part seven. Digital IDs are compulsory for access to a Central bank account. Policy papers predict an enlarged role for both Digital ID development and CBDC inter-operability. Our research suggests that the policy, values and language for both Digital IDs and CBDCs have been co-designed by transnational non-government stakeholders, including global management consultancies. The policy, language and values are then inserted into nation state discussion papers and policies, manufacturing a global consensus-based narrative. These values do not extend to the upholding of human rights and freedoms.
It is not surprising that the global banks and the Fintech sector have worked together, consortium-like, to frame the language and values underpinning public discourse around Digital IDs and CBDCs. This includes the envisaging of the global, networked digital infrastructure. Central banks, management consultants, and the Fintech industry work with exclusive non-government institutions, who have a core mission of influencing government policies to ensure optimum take-up of corporate solutions. It is simply good business practice to ensure nation states are receptive and optimistic about the potential of a Digital ID-CBDC digital infrastructure, all the way down to the smart contracts, the self-executing pre-programmable applications that are triggered if pre-specified conditions are met, that interface with the individual client.
In part eight we discuss the dilemma of regulatory capture, shedding light on the techniques used by private industry to capture government actors and agencies, to ensure that nation state initiatives and regulations pose no threat to the industries concerned, instead benefitting them.
Public oversight over what has been called a ‘dark infrastructure’, is impossible. Extensive undisclosed arrangements produce a black-boxed, intermeshed, network effect. From government officials (public servants) in the RBNZ and in partnering agencies, to the Fintech industry and management consultancies that provide contractual services. All of these arrangements will involve private and confidential negotiations that result in confidential (secret) agreements. The arrangements will be critical for fulfilment of technical operations and the design and contracting of services, including self-executing smart contracts, which have potential to be deployed to sanction/permit CBDC-related activities.
Part nine draws attention to the role of fiscal policy and money creation. This is because RBNZ’s CBDC campaign is underway during the most severe economic downturn since at least the 2008-2009 financial crisis, or even the economic shocks of the 1980’s. Therefore, there is a risk that the public may underappreciate the role of fiscal policy and inappropriately misinterpret CBDCs as an answer to New Zealand’s economic woes.
PSGRNZ propose that the four democratic risks from the coupling of Digital IDs to CBDCs involve ten pathways of harm.
TEN KEY PATHWAYS OF HARM
1) Adding another hat to the RBNZ’s role could well be a recipe for democratic disaster.
2) How much power would the Bank of International Settlements hold over Central banks, including the RBNZ?
3) Early adopters of new technologies are not well placed to assess long-term, unanticipated and off-target risks.
4) Policy and legislation can end up being a Trojan horse for industry interests.
5) RBNZ claims rules will be transparent. However, smart contracts will be secret.
6) The combined power of Digital IDs and Programmable CBDCs is not considered.
7) Overarching policies and legislation have left out democratic values and principles.
8) Human rights have not been taken into consideration, and smart contracts hold real potential for abuse of civil, constitutional and human rights.
9) There are constitutional and administrative law issues that must be addressed in public fora.
10) Decades of ignorance relating to fiscal policy has created a perfect storm for Central banks.
Without context there is risk that society may underestimate the phenomenal shift in the relations of power that has potential to happen, mostly behind closed doors. These technologies have not arisen in a response to public need. Rather, the policies, potential and resultant language about what can be achieved, have been driven by large institutions who have significant political and financial conflicts of interest, who are independent of democratic parliaments.
PSGRNZ recommend: A minimum six-year moratorium.
We consider that New Zealand should pause any development or trials of CBDCs and regard the inter-operable Digital ID-CBDC potential, with cautious skepticism.
PSGRNZ recommend:
A. That a minimum 6-year moratorium, at least until 2030, is placed on any CBDC trial or project in New Zealand. This is in order to observe for an extended period of time, at least two election cycles, how this technology and related financial system intersects with the political and democratic landscape, and impacts civil, constitutional and human rights in early-adopting countries.
B. That the RBNZ is not granted authority to issue CBDCs until after 2030. That any parliamentary vote is taken after a six-year period of observation of the impact on other jurisdictions, including impact on rights and freedoms.
C. That government agencies equally accept traditional identification, passports and drivers’ licences in parallel with Digital ID’s and should not, through the design of policy or online internet portals, favour Digital IDs over traditional primary forms of identification.
D. That the broad powers held by the Department of Internal Affairs requires some examination in the context of information sharing agreements between government agencies and the potential for Digital IDs and CBDCs to be deployed to fulfil political objectives.
These 4 recommendations are made because there is no expert independent comment on the implications of the inter-operability of this intended networked architecture. There is a dearth of research in independent academia on the social, cultural, economic, political and legal implications of inter-operable Digital IDs and CBDCs. In this gap, globally influential management consultancies, that are listed as a top 100 strategic partner of the World Economic Forum (WEF), an industry think-tank, should not step in and offer their services as a proxy for public-good expert review. The fourth estate seems unwilling to discuss the big picture. Consequently, the New Zealand public have been left alone to both review the limited publicly available information and critically analyse the associated risks that remain unexamined by the RBNZ.
Questions for governance.
Representative democracy can only ‘work’ if a sound and stable government reflects the will, or consent of the people. This imperfect arrangement involves incessant negotiation of slow-motion troubles.
Is it fair or reasonable that the Central bank, whose key function is stewardship of the financial sector, should also issue digital currencies? The RBNZ’s role extends far beyond that of a financial markets regulator, a role that is central to maintaining trust in the New Zealand dollar. The RBNZ has a wider range of responsibilities than most Central banks worldwide, and these have expanded following recent reforms. Is it fair or reasonable that the RBNZ, the Central bank of NZ, whose key function is stewardship of the financial sector, should also issue digital currencies?
Democracies die when the Parliament-people relationship is severed or eroded, through rules, guidelines, crises and delegation to offshore powers.
There is currently no evidence that members of Parliament are aware of the biggest change in monetary policy in 50 years. Yet the House of Representatives, our elected members of Parliament, forms our Government. The Government is required to oversee, and hold the government to account for, the running of the country in the long-term public interest. [3]
In contrast to New Zealand members of Parliament and the RBNZ, the organisations that counsel the RBNZ, - the Bank of International Settlements, the World Bank and the International Monetary Fund have legal immunity and privilege. CBDC policy papers by these institutions persistently refrain from considering the real potential for entrapment from tying identity to a bank account that can be dually scrutinised and programmed by a nation state.
Why a Moratorium?
This paper encourages debate in a very complex and predominantly opaque environment – the world of Central banking, money creation, global Fintech and the role of regulatory capture through the corporate capture of policy creation.
This is a macro-political issue and it speaks to the tendency of administrative officials to compartmentalise policy in order to get it over the line. ‘Predictive’ government anticipates that Artificial Intelligence (AI) will take a role in the future of deploying smart contracts, further building secrecy into the infrastructure. These shifts can occur incrementally and without disclosure, further undermining democratic checks and balances.
The concerns outlined by this paper cannot be understood unless the potential of this inter-operable digital infrastructure is broadly appreciated. The key features that differentiate retail bank digital currency, that is created when a private individual or corporation takes out a loan (that is not programmable), and central bank digital currency (that is, by design, programmable) have been downplayed by the RBNZ, but they have been fleshed out in international Central bank and Fintech white papers and conference seminars. Discussion outlining the responsibility for design and control of smart contracts, the potential for composability of self-executing smart contracts so that large groups can be tagged, and the commercial-in-confidence agreements which will prevent access to information, have also been downplayed.
Digital ID and CBDC coupled regulatory and governance architecture and the digital technology infrastructure carry extraordinary potential for abuse, because of the opacity and complexity of digital environments. However, the potential for digital money (or tokens) to encompass not only currency, but assets and behaviours, such as in a social credit system. We cannot dismiss the potential of this tech. It’s not just the influence of global powers that make this technology democratically precarious.
Public risk is amplified by two increasingly popular lawmaking processes used by New Zealand cabinet Ministers – using the excuse of urgency to speed legislation through, and increased production of secret Orders in Council (secondary legislation), which bypass Parliament.
Big corporations draw upon the seductive nature of new technologies to claim to solve social dilemmas. It’s unsurprising that Fintech emphasises the potential of digital currencies as a tool for human collaboration, volunteering, social prescribing and social and regenerative finance. However, all these functions can be enabled through the government Budget process and should be publicly and democratically agreed upon.
[1] Joseph, P. (2021). Joseph on Constitutional and Administrative Law, 5th Ed. Thomson Reuters. R. v Shayler 11.2.2. p.321
[2] Boston J, Bagnall D and Barry A (2019) Foresight, insight and oversight: Enhancing long-term governance through better parliamentary scrutiny. Institute for Governance and Policy Studies, Victoria University of Wellington.
[3] Boston J, Bagnall D and Barry A (2019) Foresight, insight and oversight.
Even should the final decision, after decades and perhaps generations of discourse, be to implement these schemes, they should never be anything other than optional based upon individual freedom of choice.