Two years ago the Deputy Governor of the Bank of England, Sir John Cunliffe, spoke the most sinister sentence I’d heard in a long while. The menace was unmistakable: 

“giving your children pocket money but programming the money so that it couldn’t be used for sweets.” 

This statement was offered in the context of Central Bank Digital Currencies. Let me explain what these are and why Sir John’s statement is terrifying. 

Everyone knows about cryptocurrencies such as Bitcoin. In January 2024 their total market capitalisation reached $US 1.77 trillion. For central banks that is an inordinate amount of money sitting outside traditional financial systems and regulatory frameworks. 

The crypto market has evolved. Until fairly recently it was difficult to spend, so it tended to be treated more as an investment asset than as a mechanism of exchange. The time taken to process transactions was the most inhibiting factor. Unlike the near-instantaneous transactions of current electronic payment systems, cryptocurrency processing can take minutes.

Imagine the government decides the economy requires stimulation by encouraging spending – your pay-cheque will lose 20% of its value if you don’t spend it within a month.

That made it suitable for a making a purchase from an online retailer, but not so good for buying a coffee in the local café.

Technology has evolved to address this limitation. Cryptocurrency exchanges (much like a brokerage) now offer a variety of financial tools and services in partnership with credit card companies. One such service is a debit card directly linked to a crypto account.  

This resolves the usability issue. A card such as a WireX can be used wherever Visa is accepted with transactions debited from the user’s crypto account at the speed of a standard EFTPOS transaction. Spending cryptocurrency to buy an espresso has become mundane.

And in consequence, financial technology (fintech) becomes tomorrow’s battlefield. 

Conducting private transactions with a democratised digital currency is nirvana for libertarians but a nightmare for the state. Tax departments find it difficult to levy goods and services taxes on transactions that are opaque, while central banks can struggle to set monetary policy when sections of the populace are using a different currency. In New Zealand the Reserve Bank’s ‘Future of Money’ discussion paper identifies this as the primary risk to New Zealand’s monetary sovereignty. For a small economy, the prospect of goods and services being priced in a cryptocurrency instead of $NZD is a very real challenge to the Reserve Bank’s overarching objective of stewarding a stable anchor of value.

What to do? For the state the answer is to co-opt and regulate, which is where Central Bank Digital Currencies (CBDCs) come in. 

Like most central banks, the Bank of England realises digital currencies are inevitable. Their plan is to mandate a state-controlled alternative, linked to the traditional local currency. 

As Sir John points out, CBDCs can be programmed like any other cryptocurrency. From the point of view of the state this is fantastic: improved efficiencies in the financial system generating economic benefit whilst enhancing the control that states traditionally exert over fiat currency. 

From the point of view of the people it is not so good. Programmability has the potential to enable totalitarian micro-control over every aspect of our financial lives. When every transaction is recorded and the state can manipulate the currency with immediate effect, the people are reduced to mere economic units whose financial behaviours can be strictly monitored, manipulated and mandated.

 Cryptocurrency exchanges (much like a brokerage) now offer a variety of financial tools and services in partnership with credit card companies.

Imagine the government decides the economy requires stimulation by encouraging spending – your pay-cheque will lose 20% of its value if you don’t spend it within a month. Imagine being automatically sent to the bottom of the queue for diabetes treatment because the health system has determined you spent too much on Coca-Cola over the last 12 months. The possibilities afforded by control of currency at this granularity are endless. 

In New Zealand the Reserve Bank’s discussion papers are at pains to obfuscate the essence of this aspect. In response to concerns raised by the public, industry and no less than the Privacy Commissioner himself, the Reserve Bank stressed that privacy would be a consideration. It has not been elevated to the status of principle. Of perhaps greater concern is the Reserve Bank’s differentiation between the definitions of privacy and anonymity:

“’Privacy’ means that it is possible that data was collected but has not been shared, while ‘anonymity’ means data was not collected.”

Between the competing regulatory demands of the Privacy Act and the Anti-Money Laundering and Countering Financing of Terrorism Act, the Reserve Bank’s view of precisely where on the spectrum New Zealand should reside certainly isn’t leaning towards privacy or the anonymity Kiwis currently enjoy with physical cash currency.

Alongside the introduction of CBDCs will be initiatives to hobble the competition. Governments will endeavour to regulate existing cryptocurrencies out of existence and are likely to impose stiff penalties on those who trade in them, an aspect the Reserve Bank addresses with the vague and rather euphemistic intention to ‘Regulate new forms of money and payments that impact stewardship goals.’ 

This is already happening in China: the introduction of the Digital Renminbi CBDC in 2021 was accompanied by an outright ban on other cryptocurrencies, the Standing Committee knowing full well that control of the digital currency was essential to the long-term success of the overlying Social Credit System.

Western governments are likely to put a friendlier face on CBDCs, arguing trust, convenience and efficiency. Despite those arguments and the fluffy, paternalistic authoritarianism espoused by technocrats such as Sir John, no-one but your mum should have the right to tell you how many sweets you can buy with your own money. 

Because she has your best interests at heart. Sir John espouses the best interests of the state.