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China’s Digital Currency Will Be a Weapon for Authoritarianism

As Beijing introduces a centralized digital yuan, Chinese citizens will lose one of the last untrackable domains: paper cash

For many in the cryptocurrency world, the separation of money from government control is a central ideology. Satoshi Nakamoto, the pseudonym used by the creator of the bitcoin concept, argued that centrally controlled banks abused the trust citizens placed in them. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” he wrote when first announcing his peer-to-peer currency. “Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

So crypto enthusiasts are naturally concerned about China’s plans to create a digital currency that would not be independent from the state, like bitcoin, but run by it. The digital yuan is expected to launch in 2020 and will be the world’s first digital currency controlled by a central bank. A digital version of China’s currency will, the government hopes, allow more visibility of international transactions, reduce money laundering, and compete against U.S.-based digital currencies, such as Facebook’s planned Libra.

Paper cash is an important tool for those who don’t want their location and identity tracked and aggregated alongside other personal data.

James Griffiths, author of The Great Firewall of China, suggests technology in China has not empowered individuals as it largely has in the West — with some exceptions — but has instead reinforced the authority of the state. “The government’s willing embrace and investment in certain technologies has helped make China a world leader in many areas, but also further enmeshed citizens in a system where they are subject to widespread censorship and surveillance both from private companies and also state security,” Griffiths writes.

Paper cash, then, remains an important tool for those in China who don’t want their location, spending habits, and identity tracked and aggregated alongside other personal data. Unlike digital coins that leave a timestamped transaction record, paper notes and coins have no such metadata and cannot be traced back to an individual. Alex Gadstein, chief strategy officer at the Human Rights Foundation, describes cash as the “last bastion of privacy” in China.

It is not yet clear whether the digital yuan, also known as Digital Currency Electronic Payment (DCEP), will, like bitcoin, be based on blockchain or an alternative digital ledger technology. What is clear is that it will not be open or decentralized. “We know the demand from the general public is to keep anonymity by using paper money and coins… we will give those people who demand it anonymity in their transactions,” said Mu Changchun, head of the digital currency research institute at the People’s Bank of China, at a conference in Singapore in November. “At the same time we will keep the balance between ‘controllable anonymity’ and anti–money laundering, CTF [counterterrorist financing], and also tax issues, online gambling, and any electronic criminal activities.”

Gladstein believes that DCEP is likely being sold to the public using the beguiling narrative of “convenience and modernity,” even while it is actually delivering an ideal system for tracking dissidents and political protesters via their financial transactions. Cashless payments are already more ubiquitous in China than anywhere else. Half of the country’s citizens use smartphones to pay for everything from vegetables at local markets to bus tickets, according to the research company eMarketer. Most mobile payments in China currently use two privately owned applications, AliPay and WeChat Pay, both of which are likely to be sidelined by a government-backed digital currency.

Gladstein says this will give Beijing direct control over the money supply and enable real-time direct surveillance. It will also give the government a window into financial transactions that are arguably the most sensitive form of personal data.

While many citizens in the West have become much more concerned over how private companies have used their personal data, the Chinese government faces far fewer restraints on data protection and privacy. The government is developing a vast “social credit” scheme based on surveillance and personal data collection, which the government is planning to roll out this year. Pilot schemes are already in place that dole out rewards for good actors and penalize the bad. In China’s Rongcheng region, a system already deducts residents points for littering and allows them to earn those points back with hard labor. In Shanghai, a similar scheme promotes the proper sorting of garbage. The digital yuan, Gladstein says, is likely to work in partnership with such policies to control economic, social, and moral behavior.

Outside of China, the digital yuan could also be used to assist with the government’s long-term plan to increase its global status through quasi-colonial projects in the developing world. Beijing is already funding major infrastructure projects in Pakistan, Myanmar, and Zimbabwe, typically involving construction of bridges, housing, and then telecoms networks, which will have the digital yuan built in.

This would not only act as a mechanism for worldwide adoption of the yuan but also could pave the way to dethroning the dollar as the international currency standard. Bank of England Governor Mark Carney told the Economic Policy Symposium in Wyoming last August that a central bank–backed digital currency — be it from China or any other world power — could replace the U.S. dollar as the world’s reserve currency.

The digital yuan could potentially allow a nuclear warhead to be sold to North Korea and ultimately pointed at the United States.

Other analysts fear a more sinister outcome, with the digital yuan being used to extend surveillance and control toward the West. The first step, as economist Takahide Kiuchi suggests, is that China will “use the yuan more widely in dealing with partner countries” as part of its Belt and Road initiative, a vast international infrastructure program. This, Gladstein says, could ultimately lead countries to be forced to repay loans in the digital yuan, making it necessary for them to give Beijing the ability to disrupt or spy on communications.

Europe and the United States, meanwhile, appear to have only recently woken up to the implications of a Chinese digital currency. In her first speech as president of the European Central Bank (ECB) in November, Christine Lagarde acknowledged that the West has fallen “behind the curve” on digital currency and announced that an EU-wide task force was looking at the issue. At the same time, what many saw as the most viable competitor for the digital yuan — Facebook’s Libra — has been quashed by regulators, including the ECB, over concerns it may threaten the stability of government currencies.

In defending Libra, Facebook’s Mark Zuckerberg has specifically cited the threat of China, telling Congress in October that the digital currency would “extend America’s financial leadership around the world, as well as our democratic values and oversight,” and that “China is moving quickly with the launch of a similar idea in the coming months.” In a crisis simulation game held in November at Harvard’s Belfer Center for Science and International Affairs, academics role-played an international crisis. The group demonstrated that by enabling Western adversaries to bypass the dollar-denominated international banking SWIFT system and avoid economic sanctions, the digital yuan could potentially allow a nuclear warhead to be sold to North Korea and ultimately pointed at the United States.

Ash Carter, director of the Belfer Center, was playing the role of secretary of defense — also his real-life role during President Obama’s administration. “We can’t let stand the Chinese using this currency issue as a way of making inroads into what has traditionally been a strength of ours,” he said at the event, pointing to China’s increasing influence across Asia and Africa. “We have to counter it in some way.”