- While not many technical details about China’s plans for the Central Bank’s digital currency (CBDC) are publicly available, the digital yuan is already raising concerns over privacy, national security and political power.
- The DCEP (Digital Currency / Electronic Payment) system would enable the Chinese Communist Party to monitor its citizens’ tiny financial transactions in real time.
- The US must accelerate the development of tools for dealing with CBDCs on a global basis.
China is a world leader in developing and piloting a central bank digital currency (CBDC). With this head start comes increased scrutiny and concern about the downstream impact of a digital yuan on privacy and political power.
A new report from the Center for New American Security (CNAS) Not only does it describe the history and state of the Chinese CBDC system in stark terms, but it reviews the few technical details available and recommends policy steps the US should consider in an escalating CBDC conflict.
“This CBDC system, which the Chinese government is calling digital currency / electronic payment (DCEP), is likely to allow the Chinese Communist Party (CCP) to strengthen its digital authoritarianism domestically and export its influence and standard-setting abroad “says the report.
“By removing some of the previous restrictions on government data collection on transactions from individuals, DCEP poses a significant risk to the longstanding financial privacy standards that free societies adhere to.”
Privacy risks of China’s digital yuan
The privacy concerns stem in large part from the massive intelligence a CBDC would give Chinese authorities about the financial data and behavior of its users, as well as information about anyone who interacts with those users, including potentially American citizens.
“DCEP would give the Chinese Communist Party something that no government has had in history: the ability to monitor its citizens’ tiny financial transactions in real time,” said Yaya J. Fanusie, Adjunct Senior Fellow at CNAS and co-author of the report in one Email to CoinDesk. His research focuses on the effects of cryptocurrencies on national security.
He said that much of the world now processes transactions digitally, but that transaction data is not available on a large scale to government agencies because the government has to go through financial institutions to get the data.
The DCEP design deviates from this model and puts the data directly in the hands of the CCP without the need for intermediaries. Fanusie says that anyone who uses a digital yuan is giving their financial privacy directly to the Chinese government. It is not yet clear how accessible DCEP would be outside of China, but if it does, it will affect other governments.
“The US government needs to look into whether the use of DCEP should be blocked in the US,” Fanusie said. “But US private-sector tech companies should also consider providing access to the DCEP application on their platforms such as app stores.”
The report notes that officials from the People’s Bank of China have stated that the CBDC will have “controllable anonymity,” meaning the central bank could watch and monitor transactions while the parties to the transaction would remain private. However, the central bank has also announced that it can continue to analyze transactions to monitor “crimes”.
Taken in conjunction with China loose social credit systemInformation gleaned from digital yuan transactions could be used to punish Chinese citizens. In addition, any metadata collected could, according to the report, provide insight into users’ personal and device movements and further round off a range of important personal data.
“DCEP’s PBOC modeling shows that every digital currency token held by users is created using a cryptographic algorithm expression with various data inputs such as information about the owner of the token,” the report said. “Not all of the data will be available to those doing business in DCEP, but it will be available to the central bank according to its early proposed draft outlines and most of the technical reports on DCEP.”
The PBOC thus becomes an owner of a significant set of data that can be combined with its instruments for censoring and monitoring people.
The political power of the CBDCs
Related to privacy concerns are ways that a lack of privacy in conjunction with the use of big data can be used to remove political power from individuals and even change their behavior.
The Parable of the Panopticon is a way of looking at it. Inside there is a central observation tower within a circle of prison cells so that the guards can see each cell and its inmate while the inmates cannot see inside the tower. Without knowing whether they are being watched or not, detainees assume they are being watched and act accordingly – that is, what the authorities want them to do.
While it is certainly straightforward about the complications of the digital age, it is a fundamental model for understanding that information and surveillance are forms of power that can be used in the service of a particular set of outcomes.
In the US, the founders created the fourth amendment to the constitution precisely because it was clear that government access to all private property (such as their papers at home) would lead to government repression, according to Fanusie.
“This dynamic persists, and places like China where this standard is not integrated into the system of government are more likely to abuse their citizens and impede their ability to stand up for their interests or rectify grievances,” he said.
The report notes that the PBOC is already testing a digital yuan to “pay out government salaries and subsidies.” Centralized monitoring and control of DCEP wallets would make it easier for the government to restrict a person’s transactional ability than if they had to try to do so through other third parties.
Cryptocurrencies have been attractive to some parties to get involved in a financial world that is beyond the reach of the state. Some case studies on the benefits are clear in places like Nigeria, where groups protesting police violence were able to get money through Bitcoin after the government froze their bank accounts, and in Belarus, where protesters against the country’s recent illegitimate elections supported by Bitcoin received grants after being fired from work for protesting.
CBDCs bring the idea of a digital currency directly under government control and appear to contradict the ethos of cryptocurrencies. But Fanusie said that CBDCs are unlikely to directly affect the ability of cryptocurrencies to thrive, “unless the financial authorities are technically trying to ban cryptocurrencies, which is not feasible.”
CBDCs could be seen as a way for citizens to use the functionality of digital money instead of permissionless cryptocurrencies.
“So there is certainly an element of governments looking to compete with crypto,” Fanusie said. “One big possibility, however, is that governments could actually facilitate the adoption of cryptocurrencies by developing the infrastructure for digital wallets, programmability, and microtransactions through CBDCs.”
The report concludes with a series of specific policy recommendations from Fanusie and his co-author Emily Jin, a research fellow for the CNAS energy, economic and security program.
These include, for example, running a diplomacy campaign demanding transparency and reluctance on the part of the Chinese government to use DCEP for punitive measures, monitoring all DCEP data collection on US citizens, establishing CBDCs as an important part of national security concerns US and the US private sector study. Links to “China’s Digital Financial Authoritarianism”.
Finally, the report suggests that going forward, the US should set CBDC standards, examine the economic impact of CBDCs in more detail, and examine ways of economic statecraft to combat CBDCs, including assessing whether and how the US can apply sanctioning instruments to CBDCs. ”
CBDCs are not a question of if but at this point rather when. The sooner important considerations such as these are taken into account and viewed as an integral part of geopolitics, the sooner countries can consider the risks and benefits they offer.
“The US should address this as an important topic in diplomatic channels and also highlight the data protection component in intergovernmental discussions about CBDC, for example with the Bank for International Settlements, but also the Financial Stability Board, the G7 and the G20,” said Fanusie.