Surveillance and total control have always been a major goal of the Chinese Communist Party, China’s Central Bank Digital Currency (CBDC), which is also commonly known as ‘DC/EP’ is also another way in which it could increase the scope of that control. The CBDC is a form of digital fiat money – a currency established by governments and backed by governments. The concept of CBDC is similar to currencies like Bitcoin but differs in the key aspect that CBDC is backed by a state apparatus and is considered legal tender by the government.
Given China’s large domestic market, DC/EP is currently rapidly progressing and while its initial impact will primarily be domestic, its long-term and global impacts have not even been considered by policymakers and lawmakers. DC/EP has the potential to have serious ramifications for governments, investors, and companies. DC/EP, once fully implemented has the potential to become the world’s largest centralised repository of financial transactions data. This system may provide certain short-term benefits such as tackling the issue of money laundering, but in the long run, this system allows the Chinese government unprecedented access to the financial records of its citizens and companies and increases the opportunities for surveillance.
As mentioned above, the DC/EP will create a repository of digital transactions and the Chinese government will have full access to this data. While at first glance it seems that such a change might only have domestic impacts, such a way of thinking is naïve. There is a possibility that the DC/E might be exported beyond China through the digital wallets of Chinese tourists, students and business people. It is further possible that the Chinese government may incentivize or even mandate the use of DC/EP so that foreign companies and individuals will need to utilise it in order to carry out certain categories of cross-border RMB transactions. This will force foreign entities to use China’s Central Banking Digital Currency in order to access the Chinese marketplace.
A successful DC/EP will allow China to greatly monitor and also to an extent shape economic activity well beyond its borders. This is also in line with China’s ambitions in the future shaping the world’s technological and financial standards.
Globally there is an increase in interest in the concept of central bank digital currencies. This growing fascination is driven by a wide range of policy motivations. The Bank for International Settlements in January 2020 discovered that out of the 66 Central Banks it had surveyed, 80% per cent were interested in or conducting research and experimentation into creating a central bank digital currency. The CCP has invested large amounts of resources into this field and is currently years ahead in terms of research in regards to developing a central bank digital currency known as DC/EP. It is very much possible that the Chinese government in the near future may be able to ensure that over one billion Chinese consumers use DC/EP when conducting transactions and this will ensure that DC/EP becomes mainstream in many other countries.
The DC/EP system is appealing to the CCP and General Secretary Xi Jinping because it is designed to ensure visibility and traceability of transactions. This allows the Chinese government to exert greater control over the financial sector. The main driving force for the DC/EP within the Chinese leadership is the fact that the system allows for ‘risk management’ and greater ‘supervision’. The DC/EP will ensure that there is no true anonymity as the People’s Bank of China will have complete control and access over the transactions that take place. The DC/EP in the hands of Beijing’s authoritarian system not only ensures a more effective financial supervision and risk management system but also injects an aspect of political agenda into economic governance. The DC/EP is currently being developed and will be deployed domestically, but will allow China to shape global standards for emerging financial technologies.
The Chinese government has made it clear that one of the goals that are driving the development of the DC/EP is the goal to internationalise the renminbi. This will make the Chinese currency a substantial rival to the US dollar. The Chinese government sees a US leg global economy as a threat to its stability as the US could utilise economic tools in order to disrupt the Chinese economy and social stability.
This threat has once again been proved after recent events in Hong Kong. After the implementation of the National Security Law in Hong Kong, both the US and the European Union threatened severe financial sanctions against the Chinese. The DC/EP will allow China to gain a stronger foothold in the international economic system, and thereby not only allow the CCP to reduce the impact of international sanctions but also allow it to disrupt the existing system of global economic governance.
What can be done to counter this?
This is not the first digital technology from China that has presented a problem for the world. Policymakers across the world have been tackling the problem of Huawei and 5G over the course of years, and the threat of TikTok and WeChat recently. The problem lies in the fact that the world decided to pay heed to these potential problems after these companies had already become relevant brands and entered the global marketplace. By the time policymakers tackle these problems they have already established dominant positions for themselves and therefore tackling them does not solve the root problems.
The potential for DC/EP to cause disruptions in the global market lies in the far future but these possible impacts cannot be taken lightly. In order to tackle these Liberal Democracies must take quick action so as to deepen analysis, develop standards and coordinate approaches to the risks inherent in DC/EP. If countries and global economies act now, they can build a baseline analysis of the DC/EP project allowing decision-makers to have an opportunity to not only anticipate challenges but also come up with a consistent and coherent policy framework for managing them. By taking cognizant action now, governments can avoid taking drastic or blunt measures in the future that can have a negative economic, social and diplomatic impact. There are certain steps that can be taken now only in order to avoid future problems caused by DC/EP, such as introducing stricter laws on data privacy, regulating the way that any entity can collect and use individuals’ data, and improving due diligence aimed at mitigating data security risks.
Some key aspects of tackling the effects of China’s Central Bank Digital Currency are-
● If the DC/EP becomes popular, then governments will not be able to tackle or regulate it and therefore must be prepared to invest in the credible alternatives for DC/EP.
● The current system for global financial governance must be improved and policy makers in liberal democracies must come up with a clear strategy for allowing the detection and resolution of flaws. International coordination in the financial sector must also be improved.
● Preventive measures must be taken against the ill-effects of DC/EP by establishing strong domestic laws on data privacy. These laws should be able to control and regulate how third parties can use individual data. Oversight improvement and due diligence in the field of mitigating data security risks are also necessary.