The governor of China’s central bank has given an update on the national currency being developed this week Anonymity and privacy will be protected, he argues Our analyst Dan Ashmore is not so sure, believing these digital currencies are potentially too dystopian That said , there are advantages to the nascent concept too But with China leading the way, there is definite concern about what the ultimate goal will look like China is at the forefront of state-sponsored cryptocurrencies known as CBDCs (central bank digital currencies). While technological innovation is to be applauded, there are some very ominous concerns here. And it looks like they’re getting closer.
Concerns around control
Chinese central bank governor Yi Gang discussed how advanced the national digital currency was recently at Hong Kong Fintech Week. Despite his insistence that “protection of privacy is one of the main issues on the agenda”, the reality is that this will give the Chinese state unprecedented power over its citizens – not that it has been lacking in the first place. You see, national currencies mean that, at the touch of a button, wallets (the equivalent of bank accounts) can be frozen. Worse still, they can be drained. The implications are endless here. The government could introduce an automatic tax system, for example, where funds are withdrawn each year. Or maybe some kind of fine. The Social Credit System, which is a national credit rating and blacklist that is being developed, could also be integrated into a national currency. With the credit system tracking individuals and businesses for trustworthiness, is it so insane to think that financial punishment or reward can be introduced with this? I wrote about many of the concerns in April of this year when I focused on the Bahamas Sand Dollar. While worryingly, the Chinese state government’s track record, as well as the size of the economy, means it’s on a different level and far easier to imagine a dystopian future.
How will the Chinese CBDC work?
Concerns aside, it’s fascinating to read about how they work – if not terrifying. Yi gave some insight into the way it is being developed. His defense that anonymity would be protected revolves around a two-tier payment system. At level one, the central bank provides yuan to traders, while processing only inter-institutional information. At level two, operators (all authorized) collect only the personal information necessary for the exchange and circulation of currency for individual citizens. Yi went further, promising that the date would be encrypted and that sensitive personal information would not be shared with third parties. Even more notably, transactions up to a certain level can take place under complete anonymity. This definitely looks promising. Once again, however, the evidence and history are not on the side of the Chinese state here. In delving deeper into Yi’s quotes, he noted that he would have to keep an eye on this anonymity: “We recognize that anonymity and transparency are not black and white, and there are many nuances that need to be carefully weighed. In particular, we need to strike a precise balance between protecting individual privacy and fighting illegal activity.” This balance is the line that is sometimes difficult to follow in cryptocurrency. I recently wrote about the dangers of decentralization, but in this case, it’s more of a danger of centralization. For many, CBDCs are incredibly dystopian. Of course, assuming you’ve read this article this far, I can see perfectly how this could be the case – and overall I’m worried about what this might look like in the future in certain countries. Then again, CBDC and blockchain technology have advantages. Efficiency, lower fees, greater speed and greater affordability are all powerful proponents. But the dangers are extremely glaring. I think we’ll all have to wait and see what happens, but for now it’s China that seems to be leading the way – and I’m not sure that’s a good thing.