In July 2021, the People’s Bank of China (PBOC) released a white paper detailing the current workings of the digital yuan, also referred to as the e-CNY. This white paper highlights an immense amount of information about the digital yuan and allows the development of several key insights into what some call the world’s first viable central bank digital currency (CBDC) system both within the People’s Republic of China (PRC) and beyond).
These insights point to increased usage flexibility of the digital yuan at the potential cost of privacy. Additionally, the white paper highlights the PRC’s attempts to consolidate the digital yuan as the preferred transaction medium within China, crushing other players within the robust digital payments industry in China.
In its white paper, the PBOC highlighted how the e-CNY is meant to “diversify the forms of cash provided to the public by the central bank.” This statement indicates one of the positive features of the digital yuan, which is bringing digital payments and technology to traditionally underbanked and unbanked populations.
The white paper also references how even foreigners traveling in China can have access to the digital yuan without a domestic bank account. This is a particular benefit given the difficulties that foreigners have had using popular digital services like WeChat Pay and AliPay. For example, in November 2019, AliPay specifically released the ability to reload digital wallets utilizing prepaid cards. Similarly, WeChat Pay users have been forced to utilize third-party services to fund their wallets, with some examples of foreign credit cards working on an ad-hoc basis for individuals in the past. However, wallets funded via such transactions through foreign credit cards and the like have extremely limited functionality and remain limited to simple one-way payments, a significant point of contention for many.
The release of the white paper also confirms the digital yuan’s readiness to be utilized in support of the 2022 Winter Olympics. This backed earlier statements made in July 2021 by deputy PBOC governor Fan Yifei, who highlighted the Winter Olympics as a key trial for the developing DCEP.
One positive step is the PBOC's statement that it "attaches great importance to protecting personal information and privacy," with an emphasis specifically on small value payments. This is important given the fact that in 2020, around 74% of the Chinese population utilized mobile payments on a daily basis, with transactions of under 100 yuan accounting for 38% of total mobile transactions. This emphasis on anonymizing small value payments is well-intended, but does raise questions over other transaction sizes domestically.
In this regard, the digital yuan’s widespread financial inclusion is being developed with “managed anonymity” in mind. However, the PBOC remains vague in describing this data privacy protocol, simply mentioning how it is necessary to “guard against the misuse of the e-CNY in illegal and criminal activities” via the PBOC's mix of "trusted computing and special encryption based on hardware and software integration."
The point of “managed anonymity” is given even more concern given the fact that certain personnel would be designated to manage information gathered by digital yuan usage. This point creates a method of access and placement for PRC authorities to control big data to support surveillance of individuals and entire groups. Additionally, the PBOC’s statement of managing the e-CNY “through its whole life cycle” further supports the notion of increasing control over its citizens and others, a note that should give readers pause when examining true data privacy features of the digital yuan.
In its statement, the PBOC further reiterated its tight control of the digital yuan, with the right to issue the digital currency belonging solely to the PRC. Utilizing a two-tiered system, the PBOC showcased how it intends to distribute the digital yuan to authorized operators, who then in turn exchange and circulate the e-CNY. Therefore, the PBOC has confirmed the digital yuan being a direct central bank liability. This helps alleviate some concerns over the potential of deposit flights to the PBOC.
However, the usage of authorized operators such as commercial banks and private platforms is certainly challenging. For example, how might consumers recover their funds if an authorized owner was to fail? Given the private nature of some of these authorized owners (to potentially include Tencent and Alibaba), would the government step in to provide relief? This is just one of the many questions that can be raised by the usage of public-private partnerships to distribute the digital yuan in a tiered system.
The June 2021 announcements of crackdowns on cryptocurrency transactions further highlight the PBOC’s desire to dominate the digital payments space, giving others cause for concern about the potential ecosystem diversity of currencies in China. These actions support a trend of PRC regulations contesting the dominance of private providers in the payments space to include
The forced migration to the e-CNY as a payments mechanism would certainly provide evidence for the digital yuan being the exclusive method for individuals to digitally transact domestically in the future. While certainly more stable due to its fiat status, the forced use of the PRC's CBDC could be used to limit access to other services, to include specific social media, gaming, and political platforms, something that the PRC has not been shy about restricting access to in the past. Forcing the use of a specific payments system would heavily impact other digital payments services in China, disrupting the industry as a whole through government intervention and mandates.
All in all, the release of the PBOC’s white paper is one that is certainly thought-provoking and well-received given the need for more information about the digital yuan. However, the vague notions of “managed anonymity” and the preferential treatment of the e-CNY over other forms of digital payments should cause concern to digital payment operators and potential users alike. Therefore, the ability to surveil, and potentially even control, how funds are utilized at the individual level has immense implications for users of the digital yuan.