A month after China’s central bank distributed its first $1 million in digital currency, the Reserve Bank, Commonwealth Bank and National Australia Bank announced they were starting a research paper.
The research would explore the potential use and implications of a central bank digital currency, the RBA and two of Australia’s largest lenders said. The financial pillars noted its use “remains an open question”.
In Shenzhen and soon, Suzhou, in eastern China, millions of Chinese consumers will become the first to spend their digital currency after six years of development by Chinese authorities. The chasm between China and Australia’s experiences of the digital economy could have profound consequences, not just for the speed at which Chinese consumers can mop-up discounts – but for control, surveillance, diplomacy and international sanctions.
The world’s governments should pay attention now, according to a report by the International Cyber Policy Centre at the Australian Strategic Policy Institute.
China’s “digital currency/electronic payment” platform, known as DC/EP or the digital renminbi, is the anti-crypto currency. Where bitcoin sought to unshackle cryptocurrency traders from the rigours of central banks, DC/EP could one day bring more than 1 billion people under the surveillance of the Chinese government.
It is a replacement for the physical renminbi in the country’s money supply. A one-for-one, like-for-like trade backed by the central bank that will see China’s money supply switch to smartphones. Next month, another $1 million will be released for the “double 12” (12th of December) shopping festival, the second trial in three months.
To most consumers, cash is cash, to be spent on clothes, presents or holidays. It matters little what form it comes in. But the DC/EP is much more than that, the International Cyber Policy Centre found.
Unlike cash, the digital renminbi will have an encrypted string attached to each bill. The string can be used to track each transaction for as long as that money is in circulation.
“It has the potential to create the world’s largest centralised repository of financial transactions data and, while it may address some financial governance challenges, such as money laundering, it would also create unprecedented opportunities for surveillance,” the ICPC noted.
“The promise is a vastly greater understanding of how the economy operates and the ability to respond where needed for the benefit of all. The threat is the ability to consolidate power in the hands of authorities, to enable persecution and surveillance and to reshape society as the authorities want it to be.”
Financial surveillance and prosecution in Australia have historically focused on organised crime, tax fraud or terrorism.
In China, “anti-terrorist financing” can be used to encompass Muslim Uighurs in Xinjiang and teachers protesting the new curriculum in Inner Mongolia. When the state views cultural others as a threat, the weapon of digital currency can be directed at political opponents, not just to monitor their activities, but to cut off their money supply.
As researchers Dr Matthew Johnson and John Garnaut note in the report, the Chinese Communist Party’s top political organ for imposing political discipline internally, the Central Commission for Discipline Inspection, is prominently involved in both the promotion and policy direction of the digital renminbi.
And the man who announced the rollout of the currency was not a member of the People’s Bank of China, but Wang Zhongmin, a former member of of the party’s political discipline inspection body and later, the national pension fund.
Here is where it gets extra-territorial.
The policy centre notes that over time, it is not far-fetched to speculate that the Chinese party-state will use incentives or even mandate that foreigners also use the digital currency for certain categories of cross-border transactions as a condition of accessing the Chinese marketplace.
That marketplace is soon to become the world’s largest. China will be the only one of the world’s top 10 economies to grow this year on its way to overtaking the United States at the top of the pile by the end of this decade.
President Xi Jinping, while repeatedly claiming that China is committed to global trade, has used half-a-dozen speeches in the past six months to reiterate that internal circulation will become the dominant driver of China’s future economy. The policy will encourage China’s 1.4 billion people to produce and consume at home.
The measures will protect its economy from external shocks such as a trade war or conflict-driven supply shortages. They will encourage the shift through state-backed bonuses for those who can demonstrate their loyalty, while driving increasing control over private enterprise.
That means companies still wishing to engage with China will have to do so on even stricter terms. The digital renmimbi is another tool of control in a high risk, high reward marketplace.
“In the long term, therefore, a successful DC/EP could greatly expand the party-state’s ability to monitor and shape economic behaviour well beyond the borders of the People’s Republic of China,” the policy centre notes.
Finally, the issue of sanctions. Historically, implementing sanctions on rogue states or individuals for breaches of international conventions has been done through the SWIFT system.
The US-backed network is the mechanism through which international banks communicate, allows enforcement agencies to target funds or sanctions on state actors, criminals or terrorists. Funding for al-Qaeda? Blocked through SWIFT. Iranian banks? Suspended through SWIFT.
Chinese Communist Party and Hong Kong officials sanctioned for crackdowns in Hong Kong and Xinjiang will likely have their assets targeted through the same system. But the digital renminbi may no longer need SWIFT, creating an alternative settlement system and international transaction method that will not need to rely on the US dollar.
“If foreign businesses are able to bypass US banks and US currency, then the impact of US sanctions would be significantly reduced,” ICPC researcher Kayla Izenman said.
This has significant implications not just for China, but for other actors who may feel more emboldened to push on with an agenda, absent the financial consequences. Like much of the rules-based order, the rules are being rewritten.
“If DC/EP achieves global take-up, the political features it embeds won’t be possible to effectively mitigate or regulate,” the ICPC said.
It has urged governments to develop credible alternatives for all key highly traded currencies before it is too late.
Time for more than a research paper.
Source: Thanks smh.com