Kunal Nitin Timbalia, Research Intern, ICS
Digital RMB (hereinafter, E-RMB) is the digital version of China’s paper currency, the conversion of physical currency into a digital form. In the last 40 years, China has rapidly developed and transformed its economy into the second-largest economy globally. China wants to enhance this economic status and aspires to become the largest economy in the world. To achieve the goal, China is working with great perseverance on all fronts of the economy. The digital currency is one such examples. Since 2014, the People’s Bank of China (PBOC) has been exploring the chances of digitization of RMB to boost their economy.
E-RMB is issued by the PBOC and is mainly a substitute to physical currency and will coexist with it. Further, the purpose and use of E-RMB are divided into two kinds: wholesale and retail. Wholesale E-RMB is mainly issued to institutions like commercial banks and would primarily serve large value settlements. On the other hand, retail E-RMB is issued to the public for daily transactions. E-RMB is a legal tender, individuals in China cannot refuse it and the PBOC facilitates its issuance.
Between 2014 and 2016, the PBOC formed the digital currency research group and initiated their research on the concept of E-RMB. In 2017, the PBOC started the E-RMB development project. In this project, large commercial banks, telecom operators and internet companies with high technological development were selected to participate and help the PBOC develop and test E-RMB. At the end of 2019, PBOC launched E-RMB pilot programs in Shenzhen, Suzhou, Xiong’an and Chengdu. In 2020, Shanghai, Hainan, Changsha, Xi’an, Qingdao and Dalian were also included in the distribution of E-RMB. PBOC’s Whitepaper titled “Progress of Research & Development of E-CNY in China” confirms that, as of 30 June, 2021, E-RMB has been applied to over 1.32 million scenarios, covering utility payment, catering service, transportation, shopping, and government services. If all goes according to the plan, it is predicted that China would become one of the dominant economies to offer a national digital currency.
As the usage of digital currency is rapidly growing, the circulation of cash in retail payments has been on a decline. E-RMB gives the advantage to people who do not have bank accounts in Chinese banks; for instance, foreigners travelling to China can open E-RMB wallets to use for daily transactions without opening a domestic bank account. E-RMB will help the citizens with a new compatible way of payment and diversify modes of payment and make the transactions more efficient and safer. China also aims to use E-RMB in cross-border payments to promote RMB internationalization. In 2020, with more than 750 million people in China purchasing consumer products online, as per Goldman Sachs, E-RMB could be used by one billion people in the coming decade.
In the recent white paper of PBOC, ‘managed anonymity’ has been proposed as an extra security measure. PBOC while explaining the – ‘managed anonymity’ concept, stated that; “E-CNY follows the principle of anonymity for small value and traceable for high value, and attaches great importance to protecting personal information and privacy.” That means the small transactions will be anonymous and significant transactions will be traceable. Further, PBOC explains that to comply with the requirements of Anti-money laundering, it is vital to guard against the misuse of E-RMB such as tele-fraud, internet gambling, money laundering and tax evasion.
In the current times, Chinese consumers are increasingly using third-party mobile and online payment platforms. PBOC controls these transactions and data. But now through E-RMB, PBOC will have intensive control over all sorts of transactions. While PBOC monitors all the private sector transactions, the private sector has relatively low trust in privacy protection in anonymous payments. Research shows that mobile users in China are worried about sharing excessive personal information through digital wallets.
The E-RMB might facilitate the Chinese government to integrate data, collect and generate more detailed pictures of individual users’ buying patterns. It will help the Chinese government to identify patterns in financial transactions. Hence, E-RMB may allow the Chinese government to use it for public surveillance. Further the government may collect data of its citizens residing abroad or businesses that will use the E-RMB. China already has authoritative surveillance with facial recognition technologies, big data analytics technologies, and artificial intelligence.
The Chinese government reportedly carries out surveillance of all the Chinese citizens indiscriminately. As the users of E-RMB will be sharing personal data with the regulators, it becomes easier for the government to carry out surveillance. It is observed by the Washington Post that, as part of the social credit system, the Chinese Communist Party (CCP) blacklists untrustworthy individuals, and the E-RMB could be connected to this system. The use of E-RMB may give more power to the government and can monitor users. As PBOC argues, if they find any E-RMB or account involved in suspicious transactions they can immediately freeze the account. The Chinese government also claims that post-pandemic; E-RMB will help improve the money supply and boost their economic recovery.
In today’s technologically advanced world, where data plays a critical role, the state controls citizens’ data; and can use it for its benefit – to govern or control. Since China has acclaimed technological superiority in data surveillance, the government can trace all the transactions carried through E-RMB. Moreover, China’s aim to internationalize E-RMB may have larger security impact. The E-RMB may help the Chinese state to carry out scrutiny of data at an international scale as well. The issue here is the trust, and the question to be investigated further is: how the Chinese government mitigates this problem in the coming future.
The author is thankful to his mentor, Aravind Yelery, Senior Research Fellow (Associate Professor Grade) at the HSBC Business School, Peking University, Beijing/Shenzhen, for his invaluable guidance and support in writing this article. The views expressed here are those of the author(s), and not necessarily of the mentor or the Institute of Chinese Studies.