China's digital currency play could spell trouble for private sector, foreign industry
Critics like Yaya Fanusie see the digital yuan project as an extension of China's ambitious data-driven goals
China's ongoing experiments with a national digital currency could be an attempt to expand its influence over citizens' daily finances, while also serving as a way of expanding control over both domestic and foreign corporations, according to some economic experts.
Dubbed Digital Currency Electronic Payment (DCEP), the project is effectively a digital version of the renminbi that serves as the People's Republic's official national currency. China's currency is often referred to as the yuan, which itself is a basic monetary unit akin to the dollar.
Though the digital renminbi is a digital currency, cryptocurrency expert Yaya Fanusie says it differs from cryptocurrencies like Bitcoin because the Chinese approach is centralized and regulated by the People's Bank of China — the country's central banking authority.
"What the central bank did was it said, 'OK, we're not going to have this decentralized currency, but why don't we try to figure out a way to create our own centralized digital bank note … and let's construct it so that it's dispersed by the central banks,'" said Fanusie, an adjunct senior fellow with the Center for a New American Security and a former CIA analyst.
"It's really a system where it's the central bank's asset that is being transacted and sent from user to user."
Challenging the private sector status quo
China began distributing, through a lottery, millions of dollars worth of digital renminbi to citizens in major urban hubs starting in 2020, allowing residents in places like Suzhou, Shenzhen and eventually Beijing and Shanghai the opportunity to use the digital currency to pay for everything from food to groceries to mobile phones.
According to Cornell University economics professor Eswar Prassad, the DCEP project isn't just an alternative to existing third-party payment platforms.
Unlike popular mobile payment platforms AliPay and WeChatPay — digital wallets akin to Apple Pay and Google Pay — the digital renminbi wouldn't be coordinated by private sector entities. The digital renminbi also differs from those platforms as a genuine currency on par with the physical yuan.
"What the People's Bank of China is trying to do is to create an alternative payment system that is not purely in the hands of the private sector," he said.
"It's very easy for Chinese households and businesses to transact at a very low cost, but there is a concern that most of the payments are now in the hands of just these two very powerful companies."
Prassad says DCEP is a way of maintaining currency relevance, acting as competition against the private sector, and also serving as a "backstop so that if there were to be any concerns about the stability of those two payment providers, you'd still have an alternative."
PBOC has attempted to assuage privacy concerns
But the DCEP project has received criticism due to privacy concerns, especially over a perception that the central bank would be able to effectively view, track and trace in real-time individual transactions at the user level.
Speaking at the China Development Forum in Beijing in late March, however, the director of the Digital Currency Research Institute of the People's Bank of China, Mu Changchun, tried to assuage concerns over the "controllable anonymity" aspect of the digital renminbi, by assuring that the "People's Bank of China does not know the real identity of the user when opening a digital wallet with a mobile phone number."
According to Changchun, should data analysis reveal discrepancies about a user's spending habits, the central bank would "submit the evidence clues to the competent authority" and it would be up to law enforcement agencies to pursue the case.
"We don't know the person's true identity," he Changchun, according to a translation of his remarks at the China Development Forum shared with CBC Radio.
Digital currency possibly contentious for foreign companies
Nonetheless, Fanusie says foreign companies are going to have to decide whether to conduct business in China or not, because foreign multinationals "may have to hand over certain data."
"We don't know exactly what data will be collected, but … what I think we do understand is that the central bank is going to know, number one, how much digital currency you have, they'll know when you're spending it," he said.
"I think there's a lot of even just competitive concerns that the central bank is going to collect a lot of information on that company's behaviour and that company's activity and who it's spending money with."
Fanusie pointed to Swedish clothing giant H&M's recent troubles in China, following a decision to no longer source cotton from the Xinjiang region over concerns of forced labour and other human rights violations.
"If China had the digital currency in this situation, it would've given it the ability to more effectively and efficiently cut off payments to [H&M]," Fanusie said.
"It would have really been, I think, a proverbial flip of a switch to basically designate H&M wallets as basically prohibited."
Beyond the potential corporate implications, Fanusie says DCEP is evidence that the People's Republic sees itself as "advancing the next phase of the internet and leading the digital economy of the future."
"Never before in human history has there ever been a system, no matter how advanced we've been technologically … where one government could have access to all financial transactions in real-time," Fanusie said.
"This system is just that. It allows one entity to potentially see the transactions in the economy as they happen."
Written and produced by Sameer Chhabra.
Hear full episodes of Day 6 on CBC Listen, our free audio streaming service.