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China’s Digital Currency: Implications for the US

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Trans-Pacific View | Economy | East Asia

China’s Digital Currency: Implications for the US

Insights from Emily Jin.

China’s Digital Currency: Implications for the US
Credit: Illustration by Catherine Putz

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Emily Jin – research assistant at the Center for New American Security and co-author of “China’s Digital Currency: Adding Financial Data to Digital Authoritarianism” (CNAS 2021) – is the 265th in “The Trans-Pacific View Insight Series.”

Briefly explain the financial function of China’s Digital Currency / Electronic Payment (DCEP).

China’s DCEP, or more commonly referred to is the digital RMB, keeps near real-time transaction data of all individuals and entities using the currency. This gives China’s central monetary authority considerable access to its public. The DCEP would disrupt intermediary links in China’s currency operations and allow the PBOC to directly reach the end users of the digital RMB. With current public information, we understand that the PBOC will occupy the back end of the two-tier DCEP system, while state banks and some technology firms build out the front-end such as distribution channels and payment interfaces.

How are the Chinese Communist Party (CCP) and People’s Bank of China (PBOC) using DCEP to fuel China’s geopolitical ambitions?  

U.S.-China increasingly competes in two domains: economics and technology. Successfully implementation and scaling up the DCEP (within China and eventually beyond its borders) would empower China to potentially rewrite international norms, values, and ethics in financial technology. As innovative technology has potential to disrupt global finance – an intricate ecosystem of institutions and legal frameworks that facilitate international flows of financial capital – an authoritarian shift in standards could just lead to a sea change in international finance.

Analyze the role of DCEP in advancing China’s digital authoritarianism domestically and globally.

DCEP would have immediate implications for imposing digital authoritarian practices on China’s domestic domain, as it could deploy its surveillance capacity if it is successfully implemented. We do not know the exact mechanics involved in restricting citizens’ access under DCEP. However, the design principle of “controllable anonymity” would allow the PBOC to identify its users. This controllable anonymity principle requires users to register with their real name and provide personal information to the back end (i.e the central bank), while allowing users the choice to stay anonymous with their front-end transactions (i.e. counterparties). This gives a centralized authority such as the PBOC the ability to cut off someone’s access to their digital funds and block their transactions. Internationally, if China is successful at implementing DCEP, it would be the first major economy to do so. This would be significant as it would have an opportunity to design international standards around CBDCs and gain an edge in its technological competition with the United States.

What is the impact of the PBOC’s DCEP strategy on global trends in central bank digital currencies (CBDC)? 

If the PBOC implements the digital RMB successfully, it would be the first major economy to launch a CBDC. This would give China hefty discourse power in setting international standards and rules around how CBDCs should be integrated into global trade and finance. This could potentially mean an authoritarian model of privacy and governance being exported abroad to other countries developing their own CBDCs. This could mean other countries would take after the “controllable anonymity” model the PBOC is currently employing for its digital RMB, where the central authority has access to one’s transaction information, while counterparties can retain their anonymity with one another.

Identify the top three challenges and opportunities for the United States in managing China’s DCEP trajectory.

There are three formidable challenges for the United States in managing China’s DCEP trajectory. First, U.S. policymakers and the larger stakeholder community must understand China’s impressive developments in the CBDC space, and more importantly, acknowledge the linkage between these developments and implications for political and economic liberty within and eventually outside of China’s borders.

Second, while the United States does not necessarily need its own CBDC, policymakers should track the quickly changing payments space and assert American leadership in global standards regimes.

Third, fintech experts and policymakers need to work together to trace out the types of data that would be captured from entities using the digital RMB, and more specifically, how these data would flow across borders. These are two important steps before policymakers decide whether to put in place restrictions.

The flipsides of these challenges, however, are opportunities.  First, the United States government should promote research into economic and security impacts of CBDC technology. Second, the Federal Reserve needs to continue its research on CBDCs, and steward international discussions on standard setting. Third, the United States government needs to assess how American companies are linked with Chinese firms involved with DCEP development and implementation and devise appropriate countermeasures to stop American innovation from propping up the CCP’s digital authoritarianism.