The Reserve Bank of New Zealand (RBNZ) is contemplating the introduction of a central bank digital currency (CBDC), sparking a debate about its potential advantages and disadvantages.

Professor Ananish Chaudhuri of the University of Auckland outlined several reasons behind the government's interest in digital cash.

One key motivation is to counter the rise of cryptocurrencies, which aim to bypass both central and commercial banks.

CBDCs could similarly reduce the role of commercial banks by allowing central banks to manipulate interest rates directly, thus bypassing traditional financial intermediaries.

The global financial crisis, which was partly caused by excessive risk-taking and complex financial derivatives in the banking sector, highlighted the need for greater control.

CBDCs might help central banks mitigate such risks by exerting more direct influence over financial transactions and monetary policy.

Financial inclusion is another significant benefit. In developing countries and among impoverished populations in developed nations, access to banking services is often limited.

Many people do not have bank accounts, and fraud can be a concern.

With widespread cellphone usage, digital cash could be delivered via mobile apps, simplifying the process and reducing the reliance on traditional banking infrastructure.

Ananish Chaudhuri, Professor of Experimental Economics at the University of Auckland Business School

However, the introduction of central bank-issued digital cash raises concerns about civil liberties.

The programmability of CBDCs means they could be designed to restrict certain types of purchases, such as addictive substances.

Central banks' increasing focus on climate change also suggests that digital cash could be used to limit transactions deemed environmentally harmful, such as those related to international travel.

Another potential feature of CBDCs is the implementation of expiration dates, which would require users to spend the digital cash within a specific timeframe.

While this could stimulate economic activity during recessions, it also poses significant implications for individual rights and freedoms.

China's trial of its digital currency, e-CNY, offers a glimpse into the possible future of CBDCs.

In May 2023, the city of Changshu began making payments using digital cash.

This development raises concerns about government surveillance, as seen with China's extensive social credit system, which monitors and judges citizens' behaviour and trustworthiness.

Such systems could potentially lead to restrictions on individual freedoms, such as the ability to book flights or train tickets.

Moreover, the implementation of digital cash would require the collection and maintenance of biometric identification data from citizens.

India's Aadhaar system, which gathers biometric information including fingerprints, eye scans, and facial photographs, highlights the privacy and identity theft concerns associated with such data collection.

India's Supreme Court has already imposed restrictions on the use of Aadhaar data to protect citizens' privacy.

To date, only a few countries have adopted CBDCs, primarily small Caribbean nations like the Bahamas, Jamaica, and Antigua and Barbuda.

Nigeria is the only large economy to have implemented a central bank digital currency, while China continues to conduct extensive trials.

Despite the drawbacks of the current commercial banking system, including high fees and hefty profits, the potential risks of increasing the financial control of a central authority like the RBNZ cannot be ignored.

As Professor Chaudhuri cautions, a central bank monopoly over digital cash could lead to significant oversight issues and potential abuses of power.

As the RBNZ explores the possibility of introducing digital cash, it will be crucial to balance the benefits of financial inclusion and control with the need to protect individual rights and privacy.

The debate over CBDCs will likely continue as more countries consider their own digital currency initiatives.