Approaches to CBDC: US vs. China

Few people today doubt that in a few years, central bank digital currencies (CBDCs) will be as widespread as cash is now. But so far, no one can tell how exactly Western countries will approach their digital money. And this question, as you are about to see, is hardly a trivial one.

If you discount a few experiments done by a handful of tiny countries, China has been the only major state to launch a full-fledged CBDC so far. And the philosophy underlying the digital yuan (also referred to as DCEP) seems to completely copy the ideology behind the whole of Chinese society and political system. That means full-fledged authoritarianism, state centralism, total disregard for citizens’ individual freedoms, and a strict top-down hierarchy.

So is it any wonder that the Chinese state is fully aware of exactly how much money is in their people’s digital wallets and how they manage it? Not to mention the additional regulatory mechanisms already in place, like the People’s Bank of China’s (PBOC) ability to make digital yuan stored in the wallet gradually lose its purchasing power. The idea is to encourage citizens to spend DCEP on goods and services and keep the economy going instead of hoarding cash and letting it lie idly by. Moreover, the PBOC can determine what the digital yuan can and cannot be spent on.

In China, such an approach does not shock or confuse anyone; the principle “state comes first, ordinary citizen comes last” has been cultivated there for thousands of years. But that’s China. The opposite extreme is the United States, where the approach to personal money is fundamentally different. There, the only “sacred” direct state function is tax collection. Once a person has paid their share in taxes, they are free to dispose of all the remaining money as they please. The state has no way to tell them how to spend their hard-earned cash. Even establishing the financial and technological system that enables the government to know where and what a person spends their money on would be considered a violation of constitutional rights.

In other words, direct access of the federal or municipal authorities to information about a person’s expenses in the States is perceived as a breach of individual freedoms. This, by the way, was what halted various initiatives to issue the digital dollar which involved the US Federal Reserve. See, the Fed officials – simply by virtue of their position – sometimes engage in a bit of “Chinese thinking” That is, they allow for the possibility that Americans’ digital wallets would be transparent to the country’s authorities.

But we are talking about a country where the Declaration of Independence is superior to even the Constitution, let alone the federal authorities’ little wishlists. Therefore, I was not at all surprised to learn that a group of American politicians has recently introduced a bill codenamed ECASH (the Electronic Currency and Secure Hardware Act). Its developers propose that the FRS should not be responsible for the introduction and subsequent circulation of the digital dollar. Instead, the bill would entrust the task to the legislative body – the House of Representatives of the US Congress, with the US Department of the Treasury handling the development and issue of the American CBDC.

Important side note, this project has nothing to do with eCash, a failed fork of Bitcoin Cash, rejected by the community.

The main theses of the legislation are as follows:

– End users will be able to store the e-dollar on their phone or card.

– The digital dollar will be considered legal tender and accepted at the identical rate to cash.

– Digital currency must meet two conditions – privacy and transaction anonymity.

– The system will be based on tokens, not accounts. If the owner loses his phone or card, he will lose his funds. In other words, it would be equivalent to losing your wallet with dollar bills.

According to the bill, the electronic money will have to provide “instantaneous, final, direct, peer-to-peer, offline transactions using secured hardware devices that do not involve or require subsequent or final settlement on or via a common or distributed ledger [i.e., blockchain], or any other additional approval or validation by the United States Government or any other third party payments processing intermediary.” It means that no digital money transaction data can be collected, tracked, or stored by the state or any third party.

Rohan Grey, an assistant professor at Willamette University who consulted on the bill, commented on the initiative: “We’re proposing to have a genuine cash-like bearer instrument, a token-based system that doesn’t have either a centralized ledger or distributed ledger because it had no ledger whatsoever. It uses secured hardware software and it’s issued by the Treasury.”

The lawmakers want no stricter KYC rules than those applied to ordinary cash transactions. Users are to be able to buy e-cash through a bank account, a peer-to-peer transaction, or an exchange. Afterward, the money is entirely at their disposal.

Supporters of the project say this form of digital currency will create greater financial inclusion for people who may not currently have a private bank account due to issues like minimum balance requirements. What’s more, unlike with other electronic payment tools such as credit cards, merchants will not be able to charge commission on digital dollar transactions.

And even though the bill is unlikely to pass, it does an excellent job of showing the American public’s real demands for digital dollar technology.

In Europe, on the other hand, active discussions on CBDCs still lean more towards the “Chinese model”. Their legislators are ready to sacrifice the anonymity of digital money to combat the legalization of illicit income. The fear that criminals and corrupt officials will use digital currency outweighs the arguments in defense of privacy.

One can only hope that the United States will not only introduce a truly anonymous digital dollar but will serve as an example in this matter for the entire Western world.