PROMISE AND PERIL OF DIGITAL MONEY IN CHINA.

• Author: Chorzempa, Martin

Digital currency and fintech have been some of the most powerful forces for freedom and personal liberty7 in China for the past decade, but their future influence is uncertain. Starting as a disruptive force that gave Chinese unprecedented autonomy in their financial lives, connected either to global cryptocurrency networks or local tech ecosystems built by private firms, a new chapter is beginning. In this new era, one speech urging an emphasis on innovation instead of regulation can seemingly bring the full force of the Chinese state to bear onto a firm that once disrupted state banks with impunity. Technologies like blockchain first embraced by libertarians and cryptography enthusiasts as freeing money from dependence on the state look poised to become tools for governments to increase their ability to monitor and shape financial transactions. Meanwhile, disruptive fintech tools have become symbiotic with the major state banks, which will retain their role as the core of the financial system.

One of the most discussed but least understood elements of this potential shift in the liberating or controlling power of digital money is the plan from the People's Bank of China (PBOC) to launch a central bank digital currency (CBDC). Around 80 percent of central banks in a recent survey by the Bank for International Settlements (BIS) are now researching and exploring CBDCs, but few other central banks have committed to launching one (Auer, Cornelli, and Frost 2020). China's system, dubbed DC/EP (digital currency/electronic payments) is already in consumer trials and is likely to be the first CBDC rolled out in a major economy. The impact of DC/EP will be felt not only by 1.4 billion Chinese, but will also have global implications by setting a precedent for CBDC standards that could spread around the world.

The impact depends on a set of crucial design choices that do not yet appear settled, despite the advanced stage of thinking and implementation of DC/EP. This article will explore some of these design features and their implication for privacy, consider the prospects for new controls on the economy coming from DC/EP, and conclude with an evaluation of its potential international impact.

The Origins of China's CBDC Plans

Less than a decade ago, Chinese lived under heavy-handed financial repression. They had few choices to invest their hard-earned money outside apartments, a stock market dominated by state companies, and deposits at state banks. Capital controls made it difficult to get money out of the country to freer financial markets abroad. Deposits, the most common investment, had interest rates capped by the government, part of a system designed to funnel artificially cheap funds to state companies and government priorities.

Then, starting in 2013, digital currency in two key forms took off. Chinese rushed to buy and mine cryptocurrencies like bitcoin, and fintech tools like Alipay and WeChat pay, which rely on digitization of money bundled into ecosystems of e-commerce, games, and social media, became the most important touch point for the financial system for nearly a billion Chinese. Both have since been more strictly regulated, however, to reduce the potential threat they pose to the state.

Only months after bitcoin boomed in China, regulators stepped in with mles to ensure it would not compete with the RMB as a currency in circulation or unit of account, nor could Chinese financial institutions handle bitcoin. The regulations, issued in December 2013, relegated bitcoin to a niche role as a speculative asset, and academic studies suggest that these measures stopped its role in capital (light that could move wealth out of the purview of the state (Ju, Lu, and Tu 2016). Since then, regulations have tightened to the point that digital currency exchanges have been forced out of the country as unwelcome gateways both to risky speculation and evasion of the state's controls.

At the same time, the PBOC took away an important lesson from the bitcoin boom and subsequent rise of digital currency and blockchain technology. Rather than being forced to quickly respond to financial innovations from abroad, the PBOC and other key Chinese policymakers aim to shape the way technology is applied to finance by being at the technological frontier. Success in fintech has also become a point of national pride and strategy. PBOC Vice Governor Fan Yifei, who oversees payments and digital currency, recently said that "fintech is the commanding heights of future global financial competition" (Fan 2019).

The PBOC first began research on launching its own digital currency in 2014, when it established a dedicated research team. Though six years have passed, and even retail trials have begun, many of the important elements of what DC/EP aims to achieve and how it will work remain to be either determined, announced, or both. The PBOC has not issued the equivalent of a "white paper" that comprehensively lays out the purpose and design choices involved in issuing the digital currency, and the ambitions and scope of the initiative may change. The PBOC's digital currency research institute has numerous patents and research papers spanning the blockchain/digital currency space, but the system may not work in practice as described in patent filings or publications. Nevertheless, the basics of the DC/EP system have been gradually fleshed out, mostly through interviews in Chinese media and speeches by PBOC officials, which serve as the main source material for the following analysis.

The ABCs of DC/EP

PBOC officials have said that DC/EP will be a direct liability of the central bank, part of...