China

Who should be scared of China’s big, bad digital yuan?

Hint: It's the payment platforms, not their users.

Close-up of Mao Zedong's portrait on 5 Yuan RMB,10 Yuan RMB,100 Yuan RMB (China Currency).

The implementation of e-CNY has some concerned about security and surveillance.

Image: hudiemm/Getty Images

Every step China takes with its centrally-backed digital currency — the e-CNY, also known as digital yuan or the Digital Currency Electronic Payment project — is closely watched. Which, come to think of it, is exactly what some fear the Chinese government will do to the e-CNY's users.

Last Monday, three U.S. Republican senators called for a ban on American athletes using e-CNY during the 2022 Winter Olympics in Beijing. They say they are concerned with how the currency can be used as a tool to surveil its users.

It sounds scary, but it's probably not as significant as the senators make it sound.

With the recent release of a digital yuan white paper by People's Bank of China, named "Progress of Research & Development of E-CNY in China," observers are finally getting some long-anticipated details on the project. Protocol talked to several e-CNY researchers about what the document tells us, especially who should really be concerned about the new digital currency. The skinny: It's private payment companies, not individual users, who should worry most about their data being snatched by the state.

How anonymous is it, really?

From the very beginning, the PBOC has emphasized that the e-CNY will enable a certain level of anonymity to simulate the experience of using physical cash, a concept they call "controllable anonymity" (可控匿名).

In June, Mu Changchun, director-general of the Digital Currency Institute at the PBOC, said publicly that it will be possible for users to set up an anonymous account as long as their deposits do not exceed 10,000 RMB (or $1,540). The only thing needed will be a valid phone number.

In reality, the system is likely more "pseudonymous" than anonymous, Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, told Protocol. It's not like cash or the prepaid debit card people can buy anonymously at a local convenience store. Instead, every digital yuan wallet, physical or virtual, will be associated with a valid phone number. That means any e-CNY transaction will be traceable back to a number, which in China is tied to an individual via their ID.

Mu, the director-general, has said that telecom companies cannot provide identity data to institutions like the central bank. But telecoms are still legally obliged to surrender any data to police or court requests in China.

Theoretically, this means the government will have more insight into individual transactions if they happen in the form of e-CNY instead of cash. This has raised surveillance concerns from outside observers, including from Jerome Powell, chairman of the U.S. Federal Reserve, who said, "It's one that really allows the government to see every payment for which it is used in real time."

But that worry can be overblown, researchers told Protocol, since the e-CNY doesn't give the Chinese government much more power to surveil financial activities than it already enjoys. Records of financial activities, whether via the popular payment platforms Alipay and WeChat or via commercial bank-issued credit cards, can also be seized by the government if it wishes.

From the individual user's perspective, they can still opt for cash if they want to keep a transaction secret, since physical cash is guaranteed to co-exist with its digital alternative for a long time to come.

"It's very scary in general, but if you consider how surveilled financial transactions already are in China, I just think it's not significantly more scary," said Chorzempa.

Data as an asset

Instead of fixating on individual activities, the Chinese government is probably more interested in obtaining the troves of aggregated transaction data that a centrally-backed digital currency will generate.

"Setting this up for data is probably the No. 1 [argument for deployment]," said Zennon Kapron, founder of Kapronasia, a Singapore-based fintech consulting service. "When you look at the amount of work that the government puts into setting monetary policies, financial policies [and] capital controls, [the data] just make it much easier."

The white paper has confirmed that the PBOC has "set up a framework for big data analysis, risk monitoring and early warning for the e-CNY." Once the digital yuan is used widely across the nation, it has the potential to generate a massive amount of data that can be useful for financial regulators. They could, for example, monitor how money flows from region to region, analyze consumption activities or detect system risks earlier than they could have otherwise.

The state won't just collect data; it will undercut private companies' ability to do the same. Authorities claim that "the e-CNY system collects less transaction information than traditional electronic payment systems and does not provide information to third parties or other government agencies unless stipulated otherwise in laws and regulations."

This means if someone is using an e-CNY wallet to pay on the Alibaba-owned Alipay app, the digital yuan system will shield some data from Alibaba, like what product the payment is for, or who receives the money.

It's no secret that China's modern-day tech giants rely on massive consumer data to generate insights and income. A user's spending habits on Alipay or WeChat could feed information to the system to determine the targeted ad they receive or the maximum loans they can get. Losing the ability to tailor ads and loans will be a major blow to domestic fintech companies.

But the move fits well with the kind of data security regime China is trying to become: one in which presumptively untrustworthy private companies face strict limits on what they can do with user data, while the presumptively trustworthy state does not. Recent regulations on personal data have drawn up strict rules, comparable to or even beyond Europe's GDPR, when it comes to what private companies can or cannot do with customer data. That part is celebrated by most observers as a move in the right direction. But the state, which can easily leverage state security concerns to collect personal data as it pleases, remains unchecked.

It doesn't mean private tech companies will now get no data at all: Currently, the standalone e-CNY app is not publicly available. To make a payment with digital yuan, users need to open a digital yuan wallet in one of the existing apps, be it Alipay, WeChat or those from commercial banks. That means these payment platforms will still know something about the user even if they are blocked from knowing the entirety of the transaction.

"Obviously [the platforms] would prefer to have more visibility into the data, but if they are only limited to the level 1 data [a category that only includes the amount, date and basic retailer information] that still gives you a lot of information about the individual," which then can be used to provide products and services, said Kapron.

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