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.
