At the beginning of the 11th century, China became the first country in the world to officially introduce paper money into circulation. Now, in its latest effort to digitise its economy, it could be among the first to give it up.
A pilot version of a new Digital Currency Electronic Payment (DCEP) scheme is currently being rolled out across multiple Chinese regions, and could launch nationwide before the end of the year, although authorities have not confirmed an exact date.
Other nations are also likely to soon follow suit. The European Central Bank recently announced it has ramped up the development of a digital euro, while the Digital Dollar Project has called for the US government to accelerate the development of its own offering.
But introducing a digital currency also comes with certain security, privacy and geopolitical concerns that governments will need to address
Especially with regard to China, critics fear an extension in the authorities’ powers of surveillance. And, more widely, what the consequences of a new Chinese currency could be for US-led global finance – and America’s ability to impose sanctions abroad.
In an effort to catch up to the rapidly-evolving needs of digital societies, central banks across the world are at various stages of developing digital versions of their currencies, known as Central Bank Digital Currencies, or CBDCs.
Many of these projects function very similarly to cryptocurrencies such as Bitcoin, meaning that they use a blockchain system to issue and support financial transactions. But unlike most cryptocurrencies, CBDCs are issued by a central authority instead of a network of independent users and are a digital representation of a traditional national or regional currency, so their value is much more stable.
Potential advantages to such government-backed digital legal tender include creating more efficient and inclusive payment systems, as transactions would be recorded by the national bank directly instead of through regular bank accounts. Since CBDCs would be pegged to fiat currencies controlled by central banks, they would also likely inspire more trust than corporate projects, such as Facebook’s beleaguered Libra currency.
Over 60 different digital currency projects backed by central banks in countries and territories have been identified around the world.
But no country is as far ahead as China and their DCEP project. If successful, the new currency could both replace physical cash in the country and may also pose a threat to widely-used online money transfer services such as AliPay or WeChat Pay.
Chinese authorities are currently testing out the system by distributing digital money-gifts, accessed through an e-wallet via the official Digital Renminbi App. Around 50,000 citizens in the southern city of Shenzhen — sometimes called China’s Silicon Valley — received a total of 10 million yuan (around $1.5m) in digital currency this October to spend at outlets around the city. While details of the full launch are still sparse, the People’s Bank of China has said there are plans to use it at the 2022 Winter Olympics Games in Beijing.
Although it still lags behind some Western countries such as Sweden and the UK, China has recorded a dramatic fall in cash use over the past 10 years. In 2010, cash was used for 99 per cent of all transactions in the country. By 2020, that figure had dropped to just four in ten.
The coronavirus pandemic is also likely to accelerate this digitisation. As the virus started spreading around the world, the People’s Bank of China, the country’s central bank, began deep cleaning and even destroying potentially infected cash. Studies found that the virus can survive for up to 28 days on banknotes and public perception towards paper cash has soured.
However, the DCEP comes at a cost to those who would prefer to keep their financial transactions private, according to Samantha Hoffman, a research fellow at China Forum and an expert on China’s tech-enhanced authoritarianism. “DCEP transactions are fully traceable, which means that the government would be able to have both complete visibility over the use of the currency, and the ability to confirm or deny any transaction”, she told the New Statesman.
“Furthermore, there are no express limits on the information, and because China’s authoritarian system embeds political objectives within economic governance and otherwise reasonable objectives such as ‘anti-terrorist financing’, there will be an increased risk for those transacting in DCEP,” Hoffman added.
According to some commentators in China, Chinese consumers are not as bothered by privacy issues and data protection as those in the US and Europe. This gives Chinese tech companies access to more data that they can use to improve their products and services, and sharing between government agencies and companies is common, as noted in a 2018 University of Oxford report.
But concerns about data protection have also been increasing. In September, China’s leading financial paper published an editorial arguing that privacy and security concerns need to be addressed before the DCEP can fully launch, and the government has recently unveiled the country’s first law on personal data protection.
According to Dr Matthew Johnson, research director at Garnaut Global and one of the co-authors of a report on the DCEP, there are multiple motivations behind the Chinese’s government’s support for DCEP. “Introducing more surveillance and control to the domestic financial system seems to be one goal; creating alternatives to a new wave of Western-created financial technology, and to the existing global financial system, which is predominantly shaped by the US dollar, is another,” he told the New Statesman.
Creating an alternative to the US-led global financial system is key to China’s plan to shake off American leverage, according to Huang Qifan, an executive at the Beijing-based think tank, China International Economic Exchange Center.
“There are certain risks associated with a high degree of reliance on SWIFT and CHIPS systems … [which] are gradually becoming the financial instruments for the United States to exercise global hegemony and carry out long-arm jurisdiction,” he said in a recent speech.
Although SWIFT – a vast messaging network used by financial institutions worldwide to send information about transactions – positions itself as a neutral, Brussels-based institution, the US dollar accounted for some 42.2 per cent of all transactions recorded through the system. And since most of these transactions are routed through American banks, this leaves individuals and companies particularly vulnerable to economic sanctions imposed by the US, even if they don’t hold any assets in America.
The Bank of China has already asked national banks to switch away from SWIFT and could create a rival to it by using a version of the DCEP as an international payments system. Western countries have some catching up to do to be able to properly address these new realities and mitigate the “negative impacts of that potential global reach”, says Samantha Hoffman. “But in the meantime, co-ordinating in areas such as norms, rules and standards is of critical importance.”
The biggest challenge associated with the digitisation of the economy is the need to strike a balance between maintaining privacy and complying with regulations regarding the fight against money laundering and terrorism, notes a European Central Bank publication. But while full anonymity is not plausible, the European System of Central Banks has developed a proof of concept that seeks to grant a “degree” of anonymity in digital cash.
It is understandable, then, why governments are approaching the subject cautiously. Yet if Western democracies don’t set the tone for what the future of CBDCs will look like, China will likely be more than happy to do so itself.