e-CNY surveillance fears are overblown

Published: Mar 2023

The e-CNY, China’s central bank digital currency (CBDC) is a digital version of cash with one major difference: transactions can be traced. This has prompted concerns of a surveillance state, but as China pushes ahead with its project some experts say those fears may be overblown.

Close up of a hawks eye

For consumers in China, the e-CNY is just another way to pay – a digital wallet that adds to the proliferation of payment technologies that have exploded in recent years. With the e-CNY, however, there is a difference: this technology has been developed by the state. And while it is described as a digital version of cash, its lack of anonymity has prompted concerns about privacy and what this could entail.

The typical concerns usually go something like this: an individual with banknotes can squander them as they please and no one has visibility of their spending choices. That changes when cash becomes digital. A worst-case scenario is that cash has been eradicated – so anonymity is no longer an option – and an individual, if they fall foul of the state’s expectations, could be cut off. They could, in theory, find their digital wallet blocked and be unable to travel, buy food – or anything for that matter. These fears could extend to a corporate scenario where a company’s transactions from its e-CNY wallet could also be monitored by the state. This is how those who fear the surveillance of the e-CNY usually frame the risks.

High profile figures have been vocal about their fears, and this includes Sir Jeremy Fleming, the Director of GCHQ – the UK’s intelligence, security and cyber agency. In October 2022, he gave a speech that described China as “a nation that is evolving into a superpower on its own terms”, and its focus on developing new technologies is part of this. “Without mindful choices today, we will sleepwalk into a future where technology limits our tomorrow instead of helping to release it,” he said. Of the e-CNY digital currency, he said: “Control is also a major driver for Beijing as it seeks to build a centralised, digital currency. Yes, it introduces efficiencies and new ways of settling payments. But the way it’s being implemented allows the monitoring of citizens and it forces companies to use the service.”

That sentiment was echoed by three US Republican Senators – Marsha Blackburn, Roger Wicker and Cynthia Lummis – who wrote an open letter urging US athletes to be forbidden from using the e-CNY during the 2022 Winter Olympic Games in Beijing. “Olympic athletes should be aware that the digital yuan may be used to surveil Chinese citizens and those visiting China on an unprecedented scale, with the hopes that they will maintain digital yuan wallets on their smartphones and continue to use them upon return,” they wrote.

Such concerns have repeatedly been addressed by the People’s Bank of China (PBOC). Its Governor Yi Gang was quoted during Hong Kong Fintech Week as saying, “It is also important to keep in mind that anonymity and full disclosure are not as simple as black and white. There are many subtleties in between. Therefore, we must strike a delicate balance between protecting privacy and combatting illicit activities”.

The PBOC laid out the details of the e-CNY in a paper that was published in July 2021, and this explained its approach to anonymity. The paper explains that e-CNY is a digital fiat currency that is the liability of the central bank – ie M0 money that is treated the same as banknotes in circulation – and is distinct from deposits (M1) that can earn interest. The central bank authorises certain commercial banks to provide e-CNY to their customers. This can be done via a digital wallet through a smartphone app, for example. On the question of anonymity, the PBOC’s view is that “e-CNY follows the principle of ‘anonymity for small value and traceable for high value’”, and the central bank adds that it attaches great importance to personal information and privacy.

In practice, this means that the higher the transaction amount, the more identification is needed, a principle that is already familiar to the payments industry in various markets – for example, with single-use low-value prepaid cards that don’t require any ID (thus providing anonymity similar to cash).

The central bank wouldn’t be able to see any personal information that is associated with a e-CNY wallet, but could potentially access it with a court order. This scenario is no different from what is already in place with existing payment methods, and so the fears of surveillance, or social control, are not specific to the e-CNY as a CDBC; any electronic retail payments can already be traced by the same mechanisms. The PBOC states: “The e-CNY system collects less transaction information than traditional electronic payment and does not provide information to third parties or other government agencies unless stipulated otherwise in laws and regulations.”

In a previous interview with Treasury Today Asia, Urszula McCormack, a partner at law firm King & Wood Mallesons (KWM) and specialist in the digital economy and emerging technologies, commented that there was a “very careful approach about what data is collected, who can see the data and for what purpose”.

Internally, the PBOC states that it has set up a firewall for e-CNY-related information, and strictly implements information security and privacy protocols, such as designating special personnel to manage information, separating e-CNY from other businesses, applying a tiered authorisation system, putting in checks and balances, and conducting internal audits. “Any arbitrary information requests or use are prohibited,” the central bank states.

For corporates, the concerns could also be overblown. Michael Ho, a Partner in the Financial Services practice at Oliver Wyman and expert in transaction banking, corporate banking digitisation and payments innovation, says when it comes to the Chinese authorities monitoring corporates’ transactions, this doesn’t make any difference because their transactions are already digital and can be monitored. “With the monitoring, corporates are not moving banknotes around. They only transact digitally – every country is already monitoring transactions for anti-money laundering and know your customer purposes – and nothing has changed from that perspective,” says Ho.

Aside from the privacy and the surveillance concerns, the other issue that is often raised about the e-CNY is how it shifts the power balance in the global economy, and whether China could use the digital currency to evade sanctions. In theory, the reasoning goes, China could allow businesses to transact in e-CNY with companies and individuals that have been sanctioned by the United States, for example. This issue was also raised by GCHQ’s Fleming in the speech about the potential of a surveillance state. He said of the e-CNY: “It might, in future, also enable China to partially evade the sorts of international sanctions currently being applied to Putin’s regime in Russia. Be in no doubt, the Chinese Communist Party is learning the lessons from that conflict.”

One scenario where this could be applied is in the case of Hong Kong’s leader, Chief Executive Carrie Lam, who found herself dealing with piles of cash at home because she was sanctioned by the United States, and unable to have a bank account. In theory, e-CNY could provide a workaround to this situation, if it did not depend on financial institutions that were subject to US sanctions.

It is still unknown the degree to which China’s digital currency will be internationalised. As KWM’s McCormack pointed out in a previous interview, the e-CNY project is “super-charging a currency and making it super competitive because of how easy it is to use”. Buyers and sellers on a Belt and Road project, for example, could transact via their CBDC wallets and this could be done as an offshore digital currency – much in the same way that CNH transactions are conducted today.

If the e-CNY is internationalised, this could boost the use of the RMB as a trade currency, which would remove the need for transactions to be denominated in US dollars, and could ultimately lessen the reliance on intermediaries such as SWIFT. Many observers comment, however, that given the capital controls that China has in place to manage its currency – and the distinction between onshore CNY and offshore CNH – it is unlikely that the e-CNY will be internationalised anytime soon.

Also, there is an inertia in the world’s willingness to switch away from the world’s major currencies and payment rails they already use, Ho says. Global commodity pricing continues to be in the same currencies and many markets in Asia still manage their currencies by pegging them to the US dollar, points out Ho.

The e-CNY has been primarily designed as a retail currency. On the wholesale side, Ho explains, one main use case is with cross-border payments. Instead of the correspondent banking network, which relies on a series of bilateral relationships, CBDCs can make things more efficient. Currently, a cross-border transaction has to weave its way through a convoluted series of banking relationships, where at each stage an instruction is created and a claim is made against the counterparty’s credit line. Instead of these instructions and claims on relationships, tokenisation creates a store of value – the token – and it is the actual value itself that is being transferred directly. For corporates this will make payments more efficient and also more cost-effective.

With this more direct and efficient way of paying, there is potentially no need to denominate emerging market currencies into US dollars first. With Project mBridge, notes Ho, the US dollar has not been involved so far. The CBDC trials as part of this project have connected the central banks of China, Hong Kong, UAE and Thailand and completed live transactions. “What is interesting is that cross-border trade was settled and FX [foreign exchange] was converted without direct use of USD,” says Ho. This has interesting implications as it means that various currencies can be settled between themselves in a completely separate ecosystem.

On the retail side, however, the adoption of the e-CNY still has some way to go and the fears of the potential implications could be misplaced – especially if the currency isn’t even used. In a recent cross-border use case for the e-CNY, Hong Kong residents were offered the opportunity to use the currency when they visited Shenzhen, which is just across the border from Hong Kong. However, the reported uptake was low.

China’s central bank now publishes e-CNY as part of its figures on the money in circulation. So far, it seems the wider adoption is also low and the e-CNY project is not progressing as many had hoped. According to figures released in January 2023, at the end of 2022 the e-CNY was only 0.13% of the CNY10.47trn that was in circulation.

And for now, cash remains an option for consumers and so they can continue to spend anonymously, if they wish. As the PBOC stated in its July 2021 paper: “As long as there is demand for the physical RMB, the PBOC will neither stop supplying it, nor replace it via administrative order.” So for now, the e-CNY will remain just one of many payment options that are available to individuals and companies.

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