Media Reports on China’s DC/EP Drawbacks, Risks
In the wake of a rebuttal by the former director of the digital currency institute that its DC/EP is not to monitor citizens’ payments, two China-focused media reports have highlighted some of the drawbacks to the CBDC. Yao Qian, a former People’s Bank of China (PBoC) official, said at the International Finance Forum in Beijing that China began to develop the digital yuan to counter the impact of private payment platforms.
His views counter the Federal Reserve Chair Jerome Powell’s that China’s CBDC could “see every payment that’s used” in real time.
“The PBoC has said that a fully digital yuan would enable regulators to better detect financial crimes such as money laundering and terrorism financing,” says Helen Chan, a Regulatory Intelligence Expert for Thomson Reuters. She notes that digitized cash payment transactions will enable regulators like the PBoC to apply data mining technology and market surveillance.
“Indeed, the PBoC has been very active in the enforcement of anti-money laundering wealth. They imposed more monetary penalties for AML violations in the first half of 2020 than they did during the entire year of 2019. So this is definitely a high priority area for them,” she said, adding:
“Certainly, there are some potential drawbacks related to central bank digital currencies. We know that the PBoC will have full control over transaction data and also the ability to programme the currency invalidated in certain circumstances. But we don’t know if this data will be shared with other regulators for cross border enforcement and we also don’t know what kind of access to transaction data might be available to commercial banks which is something that is vital for their compliance with their AML requirements if they are going to be responsible for distributing and processing the digital yuan.”
Other downsides she cited include monetary policy concerns for central banks working on CBDCs, questions around their potential impact on commercial banks and the wider economy should certain business functions be disrupted and cybersecurity and data privacy concerns.
Lack of trust hindering CBDC progress?
Privacy concerns were also cited by Bloomberg’s Charlie Zhu in Shanghai as he reports that many people are not hugely interested in the DC/EP at the moment even though it has been piloted in major Chinese cities. He said:
“Based on our reporting, participants of the trial currently in the southern city of Shenzhen we interviewed showed little interest. There are a lot of reasons for that such as the ubiquitous use of AliPay and WeChat payment, the pay apps which currently account for the majority of the country’s payment system. There are also concerns about privacy issues. They are afraid that the government might use that to do surveillance on them. For business, that’s also a problem because they don’t want their government to monitor their performance because they are in competition with state-owned enterprises.”
Information on how the digital yuan might be used overseas is still limited but Zhu believes the lukewarm response to the digital currency so far “underscores the challenges definitely faced by the government in pushing for its international use.”
“The international use of the currency remains negligible,” he said. “Even if the authorities eventually convince or force its citizens or residents to embrace the yuan, it’s far from clear that they can do the same with international consumers and businesses for reasons I mentioned just now.”
Such caution, he added, is what makes the yuan’s share of the global payment system stand at 3% which is disproportionate to the size of China’s economy as the current second largest in the world.