China Using Digital Yuan As A Surveillance Tool Is Very China
Image Credit: Michael Aleo on Unsplash

China Using Digital Yuan As A Surveillance Tool Is Very China

22nd September 2021 | 4 min read

Digital payments are fast becoming the norm in our societies. We no longer have to carry dollar bills around, and transactions can be immediately executed with the tap of a card or a flourish of a smartphone. It’s estimated that 2.5 billion people will have access to online banking services by 2024. 

While the digital banking system has been developing, a more disruptive technology has emerged, which threatens to dethrone the lofty stations of banks and governments. Cryptocurrencies, backed by blockchain’s decentralised technology, enable us to directly transact with one another without middlemen and their bureaucracies.

The “money” that we know can now be written in code and displayed as mere figures on our screens, with their intangibility ironically creating a more fluid and secure financial system.

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But unlike the banking industry, cryptocurrencies are a symbol of anarchy. They crudely question the fundamental need for centralised financial institutions while flaunting a degree of anonymity that allows for undercurrents of illicit activities.

The idea of faster transactions without costly intermediaries is undoubtedly attractive, but they’re natural magnets for regulation. 

As a result, approximately 86% of central banks around the world are exploring the possibility of introducing CBDCs (Central Bank Digital Currencies), a legal tender digital currency based on blockchain technology that’s often touted as a more efficient and “inclusive” alternative to cash. Some are even exploring different governance and operating designs that will enable central banks to share CBDC infrastructures to enable international settlements.

Because they’re government-issued currencies operating on distributed ledgers, CBDCs have the efficiency of public cryptocurrencies and the relative stability of fiat. Their intangibility means that they can be easily distributed to digital wallets on mobile phones, therefore providing instant access to financial services for the unbanked and enabling more people to participate in the digital economy. 

To some extent, CBDCs can promote financial inclusion. There is no doubt that a currency independent of private banks can be more accessible to the unbanked than the dollar. It’s a reachable option for low-income families or people with poor credit ratings, and it can be especially effective for countries lacking basic banking infrastructure.

The digitalisation of money has inherent benefits, including ease of storage and faster cross-border payments. A blockchain-based currency will only complement the global market and its increasing reliance on financial technology. 

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But imagine a centralised financial infrastructure based on blockchain’s immutable nature. It contributes to a cashless economy, but also creates an ironically opaque and controlled system where every transaction can be privately scrutinised without the risk of tampering. CBDCs are the antithesis of decentralisation – the defining feature of blockchain technology that’s designed to democratise data access and combat the vulnerabilities of centralised systems. 

A sovereign digital currency might be able to facilitate inclusion, but it’s unnecessary for economic giants like China, where digital payment systems developed by private corporations are already being utilised by the masses. It’s estimated that more than 47% of the country’s rural population already transact through non-banking mobile payment platforms like Alipay and WeChat Pay, with the platforms also providing convenient access to prominent e-commerce platforms such as Taobao and JD.com. 

It’s evident that China’s CBDC (known as the digital yuan) is simply a trackable currency for authoritarian capitalism; a politically motivated excuse for Beijing to observe financial data uploaded by the country’s 1.4 billion population in real-time. The underlying DLT (distributed technology) allows for faster payments and efficient recording of transactions, but it should not violate the basic human right to privacy. The digital yuan is a canny yet perverse manipulation of a technology meant for transparency.

Image Credit: Sajad Nori on Unsplash

China has since proposed a set of “rules” for CBDCs around the world that will supposedly facilitate interoperability, allowing for the synchronisation of funds and information. But the issue of interoperability is far more complex. It’s something that public blockchains like Bitcoin and Ethereum have not been able to achieve – ether cannot be sent and received on the Bitcoin blockchain and vice versa.

This means that unless interoperability can be achieved whereby the world’s central banks are able to collectively agree on the same DLT, regulatory requirements, coding standards, and consensus mechanisms, cross-border payments will be virtually impossible, therefore limiting CBDCs within their country of issue. 

Without a clear framework for transparency, consumer privacy, and interoperability, CBDCs are merely isolated tools for a surveillance state. They might discourage crime and allow for a more secure financial system, but the reliance on a third party makes it no different from centralised database systems that blockchain technology was built to reform.  

Digital currencies will have far-reaching implications on the future of finance. A centralised financial system based on blockchain technology has its draws, but a delicate balance between regulation and opportunity has to be achieved before the advent of a transparent digital economy. 

Written by Timothy Goh

Timothy is a financial journalist at Bread News. He’s in constant deep thought, plotting to become the next celebrity chef. He also pretends to know about blockchain and coffee.

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