Experts warn that Beijing could make the digitization of the yuan the latest means of government surveillance of its people, and that the internationalization of the digital yuan could drive further exports of China’s authoritarian system to other countries.
Security of Chinese payment instruments under scrutiny
When Armand Mazloumian, director of China e-payment and e-commerce at France’s Postbank, was promoting China’s Alipay and WeChat payments to European merchants a few years ago, the most common question he encountered was: Are these e-payment solutions from China reliable? Will they have access to my information? Will Alipay access my bank account?
Malumin’s answer: “[Chinese mobile payment products] are safe for retailers and for us, because we are a French government bank with a lot of guarantees, so there is no problem. And Alipay has done a lot of KYC (note: an acronym for the financial risk term “know your customer”) controls, and every user is tested.”
Ma Lumen is now the president of the French Chinese Center in Paris. This organization provides services to French companies entering the Chinese market.
Speaking to Voice of America, Marumin said that the Chinese don’t want to change their payment habits and that for French and European merchants to attract Chinese tourists, “don’t offer foreign solutions because the Chinese don’t want them; you have to offer solutions from the Chinese ecosystem and that’s what matters.”
As Chinese tourists go abroad mobile payment platforms are not only taking root in popular tourist destinations like France, but also in many developing countries along the “Belt and Road” initiative, where Chinese mobile payment technology is everywhere. The security of this technology is a growing concern.
Nadia Schadlow, who served as White House deputy national security adviser during the Trump administration, recently co-authored an article that called “Fintech a Trojan Horse for China. The article, published in Foreign Affairs, says Beijing will use fintech to seize the high ground in global commerce, strengthen surveillance and lay the groundwork to challenge the dollar’s status as the world’s reserve currency.
Some analysts say WeChat and Alipay will likely be the future vehicles for the yuan’s digital currency. Experts warn that the Chinese government could make mobile payments a powerful tool for government surveillance of its people through the digitization of the yuan, or even for fighting dissent by financial means, an impact that would bring the security of Chinese payment technology under renewed scrutiny once it extends beyond China.
Analysis: New Tricks for Digital Currency Surveillance Government Makes Money You Can’t Spend
Precisely because the digitization of the yuan will give China’s central bank such influence, analysts worry that Beijing will be able to use the central bank to intervene in real-Life money transactions in real Time and directly, and even use it to crack down on dissidents.
The People’s Bank of China can basically record every transaction,” said Pace, a computer technology expert. They could potentially choose not to authorize certain transactions. Not only can the PBOC see all transactions involving cash, but they can manipulate or block them. So it’s possible that you have money and you can’t spend it, and it’s recorded no matter where you spend it.”
Fanussi and Emily Jin, a research associate at the Center for a New American Security, released a report in late January on China’s digital currency and totalitarian rule. Emily Jin told Voice of America, “The PBOC has the intention of wanting to use DCEP as a tool to monitor party members, including to prevent corruption and misconduct by party members. We also found in our research that the Central Discipline Inspection Commission will also work with the PBOC on the DCEP.”
“That said, there is a link between the internal control bodies and departments of the CCP and the development of China’s digital currency electronic payment system.” She said, “We understand that this is talking about just the 90 million or so party members, but it’s also possible that this could eventually expand to a wider group of people.”
While the People’s Bank of China does not have direct access to financial transaction information under Alipay and WeChat Pay’s platforms, the central bank will have the ability to monitor transactions in real time and keep close tabs on individuals’ finances through the design of digitizing yuan cash transactions, Fanussi said.
This will help the government control party members, censor party members, and even dissidents or other groups,” he said. This could potentially be used as a more direct means of pressure, because technically the CCP could actually cut off [access to the digital yuan] very directly if it wanted to do so.”
Geopolitical Implications of the Internationalization of the Digital Yuan
Beijing also hopes to use the digitization of the yuan to accelerate its internationalization and accomplish its goal of making it the world’s main reserve currency.
Andrew Davenport, chief operating officer at RWR Advisory Group, a Washington-based risk consulting firm, said those countries that embrace Chinese mobile payment technology will face a host of risk issues.
“There are quite a few issues here related to the reliability of the industry involved and the companies involved.” Davenport told Voice of America, “Probably the most pervasive concern for foreign countries is how to protect the data that travels through society, protecting their businesses, the private sector and the public.”
Emily King, a scholar at the Center for a New American Security, said that from a geopolitical perspective, if DCEP is successful within China, it is possible that China could export the system to other countries, and its “Chinese” surveillance model could be attractive to some.
These countries may also want to develop a central bank digital currency (CBDC) or want more internal control and oversight capabilities …… which could ultimately undermine global standards on financial privacy and political freedom,” she said.
For his part, Fanoussi is concerned about the challenge to the status of the U.S. dollar from the international rollout of the digital yuan.
He said, “The concern is that if [the Chinese digital currency system] catches on in other countries, it could reduce the importance of the U.S. dollar if other countries want to use not only the technology itself, but actually use the DCEP.”
How the U.S. is responding
In terms of mobile payments, former U.S. President Donald Trump signed an executive order on Jan. 5 of this year that banned U.S. businesses and entities from transacting with eight China-related App companies and their affiliates, including Alipay and WeChat Pay. The ban took effect 45 days after the executive order was signed, and attention is being paid to whether the Biden administration will renew the ban.
U.S. policymakers must also watch the progress of the digital renminbi and decide whether to ban DCEP in the United States, Fanussi said. “Because what’s happening with DCEP is that the relevant financial information could be sent directly to the Chinese government, so that could be a bigger issue.” He said.
On Jan. 4, the Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury Department, issued an explanatory statement noting that banks can use blockchain networks and stable currencies to make payments more convenient, and that banks can also choose to issue their own stable coins under certain guidelines.
Pace explained that the U.S. is adopting an “anarchist” model in encouraging financial technology innovation. Everyone is doing it, competing to see what’s best,” he said. The Chinese are looking for a very centralized model. I think by the middle of the 21st century, we’ll see how things evolve, there will be a lot of entrepreneurial initiatives, a lot of new things that will happen. China is looking to try to overlord digital currency and other aspects with a single organization, and (the U.S. model) will be a counter to that.”
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