CBDC and communism: why China was the first of economic giants to launch its own digital currency

    05 Jul 2021

    Central bank digital currencies (CBDC) are a promising tool that will enable people to make payments quickly, inexpensively and without intermediaries. That is precisely why now the central banks of the world’s leading countries are conducting research and development, making plans to create their own digital currencies.

    However, the process doesn’t look particularly fast-rolling yet: only 20% of the 66 largest central banks said they plan to issue national digital currencies within the next six years. So for now, China has advanced the farthest in introducing its own CBDC – they almost completed the digital yuan trials.

    Sometimes it gets called “crypto yuan” in the media, but the name “digital yuan” is actually more accurate –  the word “crypto” doesn’t apply to a currency that is controlled from a single center. The use of the blockchain here should not fool anyone.

    It would probably not be an exaggeration to say that the digital yuan issued by the People’s Bank of China could become the main innovation in the global financial system since the advent of bitcoin. And at the same time – a threat to it. This would be the first CBDC meant to replace cash in the near future.

    The People’s Bank of China (PBOC) claims to have started developing a national digital currency back in 2015; the state authorities use the abbreviation DCEP (Digital Currency Electronic Payment) for the new money. The asset is issued by the four largest state-owned banks in China.

    The former Bank of China President Li Lihui said a year ago that unlike the already operating in China payment systems WeChat Pay and Alipay, DCEPs are designed so that they can fully function independent of any singular network or bank. He noted that for the digital yuan to replace cash and modern payment systems, four key conditions must be met: “have the highest efficiency, low transaction costs, sufficient economic and commercial scale, and gain public approval.”

    And in fact, the Chinese authorities are now trying to fulfill those conditions. For example, Chinese civil servants can already use the People’s Bank app that allows you to pay with DCEP. Though, not all of them and not as they wish – such an opportunity is provided in one or another region of the country – and then the experience is analyzed. Also, the digital yuan is used to a limited extent for other purposes – for example, to pay 50% of transport subsidies.

    Finally, the DCEP app can be downloaded by anyone on the Chinese government’s “white list”. The program allows you to receive and send payments, pay by QR code, track your transactions and interactions with other users.

    In addition to Chinese fintech giants Ant Financial (formerly Alipay) and Tencent, American companies McDonald’s, Starbucks and Subway are also taking part in the digital yuan trials. Last year, DCEP trials officially began in four cities: Shenzhen, Suzhou, Chengdu and Xiong’an. Mass trials began in October 2020, when more than 2 million people applied to participate in the lottery. As a result, 50 thousand users were selected, with each receiving 200 yuan (about $ 30). They were allowed to spend the money in one of the 3,389 outlets that took part in the project, but couldn’t transfer them to another person or put them into a bank account.

    The PBC also claimed that the new digital currency may already be implemented across the country in time for the Beijing Winter Olympics (February 2022). Certainly, for China to time the universal DCEP launch for the Olympics is a great way to showcase its digital power.

    That means that by that point there will already be an infrastructure in place, which will allow the use of the digital yuan not only for all residents of the most populous country in the world, but also for numerous foreigners.

    The main feature of this digital national currency is that it won’t be a public blockchain with equal users. All information about all payments, their senders and recipients will be collected on the servers of the People’s Bank of China, with trusted commercial banks and private companies helping in processing transactions – that is, serving as reliable nodes.

    At the same time, the People’s Bank will be able to control the issuance, that is, print new money at its discretion, as well as block accounts and cancel transactions, as it happens now with electronic payments. Moreover, the Chinese government will know at all times how much money is in the pocket of any of its citizens, along with those foreigners who use DCEP.

    What we get as a result is just digitized fiat currency. Only while before you needed Alipay, Visa, MasterCard and other payment systems to process payments, now everything will be tied to nodes controlled by the PBC. And “control of risks and operational opportunities in financial institutions” will be carried out by artificial intelligence, according to PBC’s own statement. So Beijing has created a blockchain completely controlled by the state – thus violating all the principles of decentralization embedded in it by Satoshi Nakamoto.

    In spring, one of China’s largest retailers, JD.com, announced that it began using DCEP to pay salaries in the digital yuan to select employees. The company also uses currency when settling with counterparties.

    If the first task of the digital yuan is to become the ultimate means of state’s control over Chinese citizens, then the second is to squeeze the US dollar out of the world settlements. A report from the Chinese political science center Zero One Think Tank says the digital yuan will help the Chinese currency become a global means of payment. In particular, through transactions in large-scale global economic projects of the PRC, such as the Belt and Road Initiative, which brings together many of China’s neighbors.

    You can even look at China’s actions more broadly. Today, the distinction between the social network economy and the state economy is already blurry. China is well aware of this, as well as the fact that the currency becomes global when it is actively used in cross-border trade and has a sizable share in the reserves of central banks. If the digital yuan turns out to be exactly what it was conceived as, it can combine the whole spectrum of qualities – from “social network money” to a reserve currency.

    To summarize, one of the main disincentives for different countries to launch CBDCs is that the government will gain too much and too direct of a power over the contents of its citizens’ wallets. This is, of course, very convenient for the government, but civil society in any democratic country would reject this out of hand.

    However, this is simply not an issue for China. The Chinese Communist Party (CCP) determines the civil society’s perspective, and those who disagree are treated like the Uighurs – they are sent to concentration camps without hesitation. Therefore, their own citizens can be forced to use DCEP as currency, finally depriving them of what remains of their privacy.

    Moreover, in April 2021, it became known that the digital yuan may receive an “expiration date”. This function will allow the regulator to “turn off” DCEP after a certain date. According to the economic laws, this will stimulate the population to spend money quickly and help the economy accelerate. In any other country, this would have caused massive popular protest. In China, however, it is enough for the party to say “This is how it is going to be!”, and no one will argue.

    The recent attack by the Chinese authorities on the cryptocurrency infrastructure in the country (“the great expulsion of miners”) is precisely the desire to deprive the Chinese of access to alternative financial tools on the blockchain, i.e. traditional cryptocurrencies. In a country like China, there can only be one digital currency.

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