The ASPI Policy Brief on The flipside of China’s central bank digital currency states
Globally, there’s increasing interest in the development of central bank digital currencies, driven by a wide range of policy motivations. A survey published by the Bank for International Settlements in January 2020 found that, out of 66 central banks, 80% were engaged in the research, experimentation or development of a central bank digital currency.
The PRC is a significant actor in this space, not least because it’s years ahead of the world in research into the development of its central bank digital currency known as ‘digital currency / electronic payment’ or simply ‘DC/EP’ (see Figure 1). China’s market-Leninist approach to innovation, personal data and industry policy makes it possible to conceive that over a billion Chinese consumers could be transacting in DC/EP before a central bank digital currency becomes mainstream in any other country.
At the technocratic level, DC/EP is designed to ensure visibility and traceability of transactions and establish greater control over China’s financial system and capital accounts while displacing anonymising cryptocurrency alternatives that can’t be readily controlled. Recent reporting has also indicated that the People’s Bank of China (PBoC) aims for DC/EP to erode the dominance of Alipay and WeChat Pay in the digital payments space, levelling the playing field between the technology duopoly and commercial banks.
At the leadership level, DC/EP is being driven by the financial ‘risk management’ and ‘supervision’ imperatives of Chinese Communist Party (CCP) General Secretary Xi Jinping. DC/EP will offer no true anonymity, as the PBoC will have both complete visibility over the use of the currency, and the ability to confirm or deny any transaction. There are also no express limits on the information-access powers of the party-state’s political security or law enforcement agencies, such as the Central Commission for Discipline Inspection (CCDI), which has a keen interest in the technology. While DC/EP could enable more effective financial supervision and risk management that any government might seek to embed in a central bank digital currency, the PRC’s authoritarian system embeds political objectives within economic governance and otherwise reasonable objectives. Terms such as ‘anti-terrorist financing’, for instance, take on a different definition in the PRC that is directed at the CCP’s political opponents.
DC/EP is being developed and implemented domestically first, but could allow China to shape global standards for emerging financial technologies. It also creates opportunities for the PRC to bypass the US-led financial system, which it perceives as a threat to its security interests, potentially disrupting existing systems of global financial governance. Through DC/EP, Beijing could over time move away from the SWIFT system and bypass international sanctions.
The purpose of this policy brief is to improve baseline understanding of DC/EP’s structural mechanics and place the project in its political and bureaucratic context. The aim is to catalyse and contribute to an informed conversation about what the rollout of DC/EP may mean for China and for the world.
This policy brief is organised as follows: Section 1 is a general overview of digital currencies; Section 2 focuses on the policy drivers behind DC/EP; Section 3 examines DC/EP’s architecture based on patents in order to assess the surveillance capabilities it would embed; Section 4 describes the institutional ecosystem behind DC/EP; Section 5 looks at how DC/EP would affect domestic digital payment systems Alipay and WeChat pay; and Section 6 looks at the implications DC/EP could have for global financial governance.
ASPI's recommendations are -
DC/EP’s rollout is likely to have notable ramifications for governments, investors and companies, including China’s own tech champions. More analysis is needed before prescriptive policy solutions can be developed for the political and financial oversight challenges DC/EP could create. At the same time, it’s important to act in anticipation of key shifts in global financial regulation and advances in financial technology, so that governments don’t end up trying to reverse course when it’s too late to deal with the systemic risks DC/EP could create. We suggest the following:
1 If DC/EP achieves global take-up, the political features it embeds won’t be possible to effectively mitigate or regulate. Therefore, governments must be prepared to mitigate the political risks by investing in research into and the development of credible alternatives to DC/EP for all key highly traded currencies.
2 Decision-makers in liberal democracies must develop a clear strategy for detecting flaws in and improving the existing system for global financial governance and work to improve international coordination among each other to achieve those strategic outcomes.
3 Liberal democracies should establish domestic laws on data privacy and protection. They should regulate the ways that any entity can collect and use individuals’ data, improve oversight and improve due diligence aimed at mitigating data security risks.
