China’s Digital Yuan Works Just Like Cash—With Added Surveillance

Visa has long paid to be the sole payments processor at the Olympic Games. But at the Winter Olympics in Beijing earlier this year it had competition—from the Chinese government. Visitors could, after scanning their passports, exchange foreign bills for eCNY , a new digital currency being rolled out by the country’s central bank, the People’s Bank of China.

Visitors could splash their digital cash by using a card or mobile app to pay for things around the Olympic Village. China launched its first pilots of digital cash in 2019, but the eCNY’s appearance at the Olympics was part of a project with global ambitions. As the first major country to roll out an official digital currency at scale, China is far ahead of the US and other countries, where the concept of an official form of digital cash is only at the discussion phase.

The hope for government-sanctioned digital currencies is that they will improve efficiency and spur innovation in financial services. But tech and China experts watching the country’s project say that eCNY, also known as the electronic Chinese yuan or digital yuan, also opens up new forms of government surveillance and social control. The head of UK intelligence agency GCHQ, Jeremy Fleming, warned in a speech last month that Beijing could use its digital currency to monitor its citizens and eventually evade international sanctions.

At the same time, China’s world-beating digital yuan has got off to a slow start. The People’s Bank of China reported that its official eCNY app had 261 million users at the end of 2021, and that by August 31 more than 100 billion yuan (about $14 billion) had changed hands across 360 million transactions. Those numbers are modest compared to the size of China’s population and economy, but they are expected to grow after a recent expansion of digital yuan trials in China from about two dozen cities to four entire provinces .

Unlike a cryptocurrency like Bitcoin, the digital yuan is issued directly by China’s central bank and does not depend on a blockchain . The currency has the same value as its analog equivalent, the yuan or RMB, and for consumers the experience of using the digital yuan is not that different from any other mobile payment system or credit card. But on the back end, payments are not routed through a bank and can sometimes move without transaction fees, jumping from one e-wallet to another as easily as cash changes hands.

Chinese citizens are being encouraged to adopt the digital yuan by both China’s central government and local authorities. Over the summer, trials began in cities in Fujian, a province on the southern coast that is host to significant international trade. One foreign resident, who asked to remain unnamed to avoid drawing the attention of Chinese authorities, told WIRED that signs saying digital yuan payments were accepted appeared in supermarkets and convenience stores in the provincial capital of Fuzhou within days of the announcement, and soon rolled out to surrounding rural areas.

Yet many locals didn’t see the need for a new form of digital payment, because they could already use mobile payment services offered by Alipay, from an affiliate of online retailer Alibaba called Ant Financial, and WeChat Pay, from gaming and social giant Tencent. Other strategies aimed at promoting adoption include reimbursing civil servants’ expenses in digital yuan or depositing small sums in new users’ wallets to encourage them to try the currency. During the Qixi Festival last year, sometimes called China’s Valentine’s Day, Chinese bank ICBC offered the first twenty couples to marry at a registry office in the city of Chengdu a card preloaded with 199 digital yuan, about $30.

While results from the expanding trials have been modest so far, Yaya J. Fanusie , a senior fellow at the Washington, DC, think tank the Center for a New American Security, says fast adoption is not yet China’s main priority. The central bank is building the infrastructure needed to enable sweeping adoption in years to come, signing up merchants, adapting the banking system, and developing applications such as a way to earmark money for health care or transit, he says.

That lays the groundwork for eCNY to be China’s default payment system in 10 to 15 years, and it has been enough to put the project ahead of any other government-backed digital currency. “China is clearly the leader globally in terms of how far along they are, how many people are using it, and most importantly, the size of the country,” says Jeremy Mark , a senior fellow at the Atlantic Council. The think tank’s Central Bank Digital Currency Tracker lists 105 countries exploring a central bank digital currency, but only 26 are in pilot programs or fully launched.

Earlier this month India’s central bank said it would begin rolling out a digital version of the rupee. Brazil planned to launch a digital real this year but has pushed back its rollout to 2024. The European Central Bank is studying whether to roll out a digital euro , and US president Biden and some members of Congress have called for research into developing a digital version of the dollar.

China’s project is motivated in part by its leadership’s awareness of how the country has played catch-up in earlier technologies, from space exploration to the internet. President Xi Jinping regularly calls for China to take the lead in developing the digital economy. But Emily Jin, who researches the country’s economy at the Center for a New American Security, says the project has political as well as economic motivations.

“Chinese policymakers are trying to not just create a technical infrastructure, but an institutional environment that makes this kind of currency that has social control implications more acceptable in the long run,” she says. China is well positioned to jump ahead of the West in digital currency in part because its banking system was until recently less developed than that of countries like the US. As smartphones took off, mobile payment systems rapidly drew in consumers who, unlike those in richer nations, didn’t own credit cards, says Martin Chorzempa, whose book The Cashless Revolution charts the rise of digital payments in China.

By the mid-2010s, Chinese people in big cities had generally switched from using cash to using Alipay and WeChat Pay. By the end of 2021, about 64 percent of Chinese people were using mobile payment systems, according to a report by Daxue Consulting , with Alipay and WeChat Pay handling most payments. For city dwellers, the figure was 80 percent.

One reason China’s government is pushing the digital yuan is to try to gain more control of how citizens make payments. For years, big tech companies were able to operate almost like public utilities, creating and effectively regulating large parts of the financial industry. The companies also scooped up reams of citizens’ data , which eventually led to public backlash and scrutiny from regulators.

For now, users can transfer digital yuan into a WeChat Pay or Alipay account, but the government could eventually choose to edge those systems out of business . “They look at the payment platforms as this massive part of the economy that is strictly speaking outside of their control,” says Mark, of the Atlantic Council. The digital yuan could in some ways be less invasive than a private network such as Tencent’s because it won’t combine payment information with a person’s other digital traces, such as social networking data.

But it also gives the government new visibility into people’s lives. “If somebody goes crosswise with the government, suddenly their e-wallets could disappear, or they can’t even get in a taxi or go to a restaurant,” Mark says. Foreign companies that run afoul of the government—say over comments seen as disputing the government line on Taiwan or Xinjiang—could suddenly find that they can no longer receive payments.

China’s central bank says that for accounts with balances below a certain threshold, only a phone number will be required for verification, but Chinese authorities generally have wide powers to gain access to private data. China’s project and the rise of cryptocurrencies like bitcoin have prompted discussion in the US about creating a digital version of the dollar. In some Washington, DC, circles there is concern that the US could fall behind in financial innovation or lose some of its influence over global finance.

At a US congressional hearing in May, lawmakers grilled Lael Brainard, vice chair of the Federal Reserve, about privacy concerns and whether the Fed had the authority to issue a digital currency at all. Many expressed concern about the government wading into areas that had previously been the domain of private banks, or suggested that cryptocurrencies outside government control could serve the same purpose. Brainard, in her testimony, said that no decision had been made on whether the US needs a digital currency, but that it should be prepared to launch one, a process she estimates could take five years.

“In a world where other major jurisdictions move to the issuance of their own digital currencies, it is important to think about whether the United States would continue to have the same kind of dominance,” she said. .