Digital Yuan

From Wired Magazine:

BARCLAY BRAM

SECURITY
23.08.2021 06:00 AM
China’s digital yuan is a warning to the world
The digital yuan was born as China’s answer to Facebook's Libra. But it’s much more than that

QILAI SHEN/BLOOMBERG VIA GETTY IMAGES

Luohu district of Shenzhen spent 8.8 million yuan (£986,000) during a week-long trial of the digital currency. A total of 1.9 million applicants had signed up to receive one of 50,000 digital freebies – or “red envelopes” – from the government. These packets were each worth 200rmb (£22). During the trial, over 62,000 transactions were made. By May 2020, China had already filed more than 120 patent applications for its official digital currency, more than any other country. In Xiong’an, a new urban centre near Beijing, 19 companies, including foreign brands like McDonald’s, Starbucks, and Subway were invited as participants to test the DCNY. As of July 2021, trial users have created more than 20 million digital yuan wallets and executed over £3.6 billion worth of transactions with the new CBDC.

According to the PBOC, the aim of rolling out the DCNY was to protect its monetary sovereignty after the popularity of Bitcoin and other cryptocurrencies posed a threat to China’s capital account management. A centralised digital currency was also believed to help enhance the efficiency of payments systems. The PBOC also hoped that, unlike current digital platforms, the DCNY could be designed to promote financial inclusion – for instance by allowing for offline payments, which would expand digital payment capabilities to the elderly or those without a smartphone. Critics, however, have argued that the aims of the DCNY are more sinister: that it is a tool for increased government surveillance, giving the CCP a window into every transaction made in the country. It has also been argued that the DCNY represents a deft technological move by the government to subvert the US dollar's primacy as the global reserve currency, and with it destabilise the financial dominance of the US.

While still in its infancy, these pilot programmes taken together with statements from the PBOC itself show the extent to which China is powering ahead with its own central bank digital currency (CBDC), at a time when the rest of the world is just starting to tentatively explore the future possibilities for their own economic systems.

While many countries were initially sceptical of China’s plans to create a digital currency when it was first mooted in 2014, the pace with which China has started to move with the DCNY has prompted many major economies to start seriously considering their own response. According to research from the Bank of International Settlements, 86 per cent of the 60 central banks they surveyed are now exploring CBDCs, and 40 per cent are already building proofs-of-concept. A CBDC is a digital version of a fiat currency. More than 88 of CBDC projects, at pilot or production phase, use blockchain as the underlying technology. However, unlike cryptocurrencies which use blockchain as a way of maintaining anonymity and decentralisation in the system, CBDCs rely on a centralised ledger. This means that Central Banks are able to access an incredibly rich seam of data about the financial transactions of their populations – data that otherwise would not be captured by existing systems or would require going through intricate proxies.

There is no template for what a CBDC should look like in practice. Instead, government priorities, norms around privacy, constitutional limits and individual policy and design decisions in each country mean that CBDCs will vary from place-to-place. This makes them an interesting window into the future of finance in a digital world, and how norms around privacy will be shaped by these emerging technologies.

China’s system is not even the most advanced CBDC in the world. Both Cambodia, with the “Bakong”, and the Bahamas, with the “Sand Dollar”, have more comprehensive CBDCs rolled out at a wider scale, according to a report by accounting firm PwC. China, however, is the first major advanced economy to start implementing a digital currency at any scale, and its ambitions seem to far exceed those of the established players in the field.

China’s move towards implementing the DCNY comes against the backdrop of recent decisions to better regulate China’s fintech industry and a swift crackdown in recent months on cryptocurrency mining. The Chinese “techlash” which has been in full effect since the latter half of 2020 might seem at odds with government plans to roll-out a sophisticated digital currency. In November 2020 the government halted Ant Financials’ IPO just days before it was set to launch on the Hong Kong stock exchange. It had been set to be the largest IPO in history. Soon after, the government rounded on Tencent, the tech giant behind social media application WeChat and the other major player in China’s online payments. In total the payments systems of these two companies amount to over 98 per cent of all mobile payments in China.

Some commentators have speculated that part of the government’s decision to push the DCNY forward is to dislodge the centrality of these companies' payments systems. However, Mu Changchuan, head of the PBOC’s Digital Currency Research Center, has said that DCNY is there to provide a “back-up” to these services, and that it would not replace cash payments or existing e-wallets. As early pilots have shown, the DCNY is interoperable, meaning that it can be used across existing payment platforms. Instead of replacing them outright, it seems more likely that at least in the short-to-medium term the government plans to use Alipay and WeChat pay as springboards to launch its digital currency to the widest possible population. What this means for the long-term future of these payments platforms is an open question.

“Payment from the government perspective is incredibly important, as it is the lubricant for commerce. It accelerates the velocity of doing business when you have cheap and reliable ways of doing payments,” says Rui Ma, a tech analyst focused on China and a founder of the Tech Buzz China media outfit. At the centre of this development is data. At present companies like Tencent and Alibaba generate enormous amounts of consumer data, which they then use to create their own financial services. In the case of Ant, the data generated through Alipay was then used to match state-owned banks with potential borrowers, with Ant Financial acting as a middleman. This however presented a clear case of moral hazard, as the risk was held by the state-owned banks and not Ant Financial itself. This was part of the reason why the government came down so hard on Ant – to stop what it described as “the disorderly expansion of credit.” Data was central to Ant’s ability to create such a dynamic fintech business in the short years before the crackdown.

While it is theoretically true that the government in China could have access to the data generated by companies like Alibaba and Tencent if it wanted, the reality is a lot more complex. “The status quo is that the government has struggled to get the data from these companies, hence why you see the crackdown on fintech companies,” says Yaya Fanusie, an Adjunct Senior Fellow at the Center for a New American Security, who has studied the digital yuan and published a report on the project in January 2021. The type of data that Ant and Tencent generate and the way it is stored means that it is probably not fully legible to the government, even if it did have unhindered access. There has been pushback in the past from these companies in sharing certain data with the authorities. Now, by building out the DCNY, the PBOC will be able to create a digital architecture that is significantly more effective at capturing the types of data that the government is interested in having, with no intermediary capable of pushback.

“In general, this does strengthen authoritarianism. Putting the levers of financial power in the government’s hands does increase CCP power,” says Fanusie. However, as he notes, the picture is more nuanced and complex. “This is part of a bigger process. It’s less about what the Digital Yuan will do, but more about what happens when China becomes more data driven, and when the government has significantly more centralised data in general.” Seen in this light, the DCNY is part of a much bigger plan the government has long been pursuing to get a more detailed picture of its population through big data. As an article from MIT Technology Review argued, who needs democracy when you have data? The CCP is trying to leverage the massive amounts of data generated by an increasingly digitised society to try to create more responsive government systems.

Of course, what this means for individuals and the potential for state repression in a regime with a horrendous human rights record is not encouraging. Mu, of the PBOC, did suggest that the DCNY might actually be good for people’s privacy, as it compares favourably with other digital platforms which share data with vendors. According to Xinhua, a Chinese state media outlet, the DCNY will feature “controllable anonymity.” This means that both sides of a trade can remain anonymous to each other (in other words, an online shop would not be able to collect data from a customer) but could remain visible to the government, to ensure that crimes like corruption, money laundering, tax evasion, and terrorist financing can be quickly discovered. Whether the state chooses to stop there or whether this insight into the financial lives of citizens becomes politicised or rolled into the still nascent social credit system remains to be seen.

The questions that the DCNY poses about the future of data in a world of state-produced digital currencies will play out in different ways in different countries with their own norms around privacy. What measures the Eurozone, which has pushed policies like GDPR, might implement to protect data should they pursue their plans for a digital Euro will provide an interesting counterpoint to the DCNY.

The role of private companies and stablecoins – digital currencies pegged to existing fiat currencies but not controlled by states – such as Facebook’s Diem project (formerly Libra) will also be an important future development. Part of China’s impetus to launch the DCNY was its own fear of Facebook’s potential to create a global digital currency: Mu pointed out that Libra, as it was known at the time, could potentially reach all of Facebook’s 2.7 billion users, dwarfing the size of the DCNY. However, in subsequent years, Facebook’s ambitions with Diem have been massively scaled back due to government backlash. Previously, as Libra, the idea was that Facebook would create a universal digital currency based on a basket of fiat currencies. Diem’s current plan is to create stablecoins backed by individual currencies in individual jurisdictions, though even these plans might come under further scrutiny as time goes on. Either way, how sensitive financial data will be protected and to what ends it might be put will create a whole new set of challenges to norms around privacy.

It is some way off before the DCNY could be used to subvert sanctions or to displace the US dollar as the international reserve currency, but US officials are redoubling efforts to investigate the potential long-term effects it might have. The Biden administration is starting to pay attention – and it’s now only a matter of time before it reacts.

 

OMG!!! That is a lot of red!! LOL I thought my computer screen was bleeding. LOL

 

Red has two meanings.

To some humans, red means prosperity, good luck, fortune.

To other humans, it means disaster, bad omen.
And to animals, it means death.

 

Not to mention their ability to simply switch your money OFF.

Its the opposite of an immutable ledger.

 

If this goes through in China and it will with certainty, we will have no choice but to adopt it here even just to combat the digital s*** from China because if we don't that means we are all going to be subject to the digital s*** from China and we would lose our economic and political sovereignty unless you completely stop trading with China and has absolutely nothing to do with China. Plus all these surveillance benefits, there is no way the government would not want to implement this. Imagine, majority of the things that Jason Bourne could do to make him off the grid would no longer be possible with the digital currencies.

The only thing to counter is virtual currencies now but if it's still going to be reported to the government then it loses its anonymity benefits. The only other thing and probably the last thing that's available that can allow some anonymity is through barter economy or through a commonly recognized merchandise as the medium of exchange like using cigarettes in those POW camps.

 

Yeah all your wealth instantly erased. Imagine Warren Buffet becomes a panhandler. Buy gold, buy diamond, buy rare earth metals, buy land, buy real estate, buy purses, buy anything tangible people! If this is possible with digital currency, then this is like instant infinite inflation!! And just like during any hyperinflation scenario, the only thing valuable will be tangible things. Maybe this is why Chinese nationals are scooping up real estate properties all around the world...

 

I don't want to sound like a contrarian because I too find China's digital currency Orwellian, but European are using cards or other dematerialized method for most of their payments already and I don't hear panic calls for reforms. Reality is that few people care what corporations or governments know about their mundane purchasing habits, but many people and governments care that wealthy individuals don't escape the tax man. European are less distrustful of their governments than Americans. They generally want government to track and catch corporate or individual tax evaders whose actions affect the entire community.
I believe crypto in its present iteration will fail precisely because of its anonymity. China and other countries are simply skipping crypto with their Dcurrency. In another post I stated that within 20 years there will be no more paper/coin currency and I still believe that to be true. The cost of making and protecting currency, of forgery, theft, illicit use, etc... is enough to transition to Dcurrency.
What governments do with it is what governments do with anything. There will be dictatorships like China that will treat it like social moral control and other nations that will have consumer protections and social safeguards all over it.

 

Are those cards mandatory? Are those cards the only sole legally accepted medium of exchange? No. That's the difference between those cards and this dubious digital currency that the Chinese government is trying to launch. And this is why you don't hear panic calls.

All it comes down to is: Choice. And this is the biggest and really the only problem that people have with dictatorial regimes like China. There is no choice. In western civilizations, the choices are getting fewer and fewer but there are still choices. This digital currency of China is not only erasing choice in financial management for Chinese people but also the rest of the world who chooses to trade with China. And once it's implemented people will have no choice but to accept it. That's why it's concerning. I will have less problem if this digital currency is offered by the Chinese government as another alternative form of payment alongside its current paper yuan but as the only sole legal tender, then we've got a problem.

 

That's my point... choice has led European consumers to prefer the convenience of dematerialized payments. It also suits governments and financial institutions for various non nefarious reasons. We are reaching a point when it will be easy for governments to remove currency from circulation and move to a Digital Euro. Before, people had no choice but to use currency or barter. The baby boom era brought flexible payment methods and modern banking. The next generation will do away with currency altogether.