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China’s Digital Currency—new route to steel a surveillance state

Chinese yuan

China has rolled out testing of eCurrency-“Digital Yuan” to become the first large economy to introduce a virtual currency, showcasing its position as the global leader in payments technology to the world. Chinese authorities are conducting trials for the crucial new technology that will put every transaction on the radar of the People’s Bank of China, the central bank.

China’s digital currency is called Digital Currency Electronic Payment (DCEP). It is also commonly referred to in China as “e-CNY” or “Digital RMB” (Digital Renminbi). It is the digital form of China’s fiat money. Although no official launch date has been announced, China is reportedly aiming to release the e-yuan before the start of the Winter Olympics in 2022 in Beijing.

As per the central bank, China’s e-yuan will allow closer scrutiny of risky investments and help ensure repayment of the debt, the key advantage of the e-yuan system is its ability to trace cash flow and make it easier to enforce financial regulations. But, China’s digital plan is very ambitions as Beijing hopes the technology will help promote the renminbi internationally and weaken the US dollar’s supremacy.

While the other objectives behind China’s virtual currency present a sharp contrast with a public discussion about the issue in many other parts of the world. While in the US cryptocurrencies are steeped in the language of libertarianism, in China the digital currency project is tied up in the Communist party’s drive to maintain control over society and the economy. The technology is partly designed to reinforce its surveillance state.

Chinese virtual renminbi is a central bank digital currency, making it in some ways the opposite of cryptocurrencies such as bitcoin. Cryptocurrencies are often decentralised and they are not issued or backed by governments. The e-yuan, by contrast, is part of China’s top-down design. It is issued and regulated by the central bank and its status as legal tender is guaranteed by the Chinese state.

Official details on how DCEP operates are scarce. The People’s Bank of China has not released any white paper on DCEP’s technical details, nor would we expect any operational details to be released any time soon.

According to a recent report published by the Center for New American Security (CNAS), it said that the central bank's digital currency is being designed to allow for surveillance of all financial transactions throughout its society. “This CBDC (central bank digital currencies) system, which the Chinese government calls Digital Currency/Electronic Payment (DCEP), will likely enable the Chinese Communist Party to strengthen its digital authoritarianism domestically and export its influence and standard-setting abroad. By eliminating some of the previous constraints on government data collection of private citizens’ transactions, DCEP represents a significant risk to the long-held standards of financial privacy upheld in free societies,” the report says.

Chinese digital format enables the central bank to track all transactions at the individual level in real-time. Beijing aims to use this feature to combat money laundering, corruption and the financing of terrorism at home by strengthening the already formidable surveillance powers of the ruling Communist Party.

Beijing also hopes to use the virtual currency as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent. The technology could in effect become a rival to their cashless payments platforms. China’s government is already engaged in a multipronged effort to rein in the power of the new payments firms, which led to Ant cancelling a planned $37billion initial public offering at the end of last year. The digital renminbi is heavily about the party’s ability to exercise control, a common refrain among analysts.

China is pushing aggressively to be a global leader in financial technology. But in China, as elsewhere, the ramifications of adopting a digital currency are huge. It is not just that the digital renminbi stands to replace cash. It also presages the construction of a new payments system that threatens to undermine the market position of Alipay and WeChat Pay, the two most popular and privately-owned platforms run by Ant Group and Tencent.

While it is still early for digital currency, foreign companies operating in China, hi-tech businesses, foreign-invested retailers, financial institutions, and mobile app developers would need to closely track the development and assess how their financial and fintech products fit within the new DCEP ecosystem.