In April 2020 a grainy screenshot of China’s sovereign digital currency, DCEP (short for Digital Currency/Electronic Payments) or the Digital Chinese Yuan (DCNY), was leaked online. The image showed a wallet for the DCNY provided by the Agricultural Bank of China, with payment functions, QR codes, and the ability to tap phones together to pay offline. While the People’s Bank of China (PBOC) had started researching digital currencies as early as 2014, the screenshot was the clearest indication of how far along in the process they were.
Soon after, pilot programmes were rolled out in a few major cities. In Suzhou, the DCNY was used to pay half of the travel subsidies owed to public servants. In October 2020, more than 47,000 people in the 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.
Digital Society is a digital magazine exploring how technology is changing society. It’s produced as a publishing partnership with Vontobel, but all content is editorially independent.
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This article was originally published by WIRED UK
