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China’s national cryptocurrency becomes a concern

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  • China’s central bank governor provided an update this week on developments in the national currency.
  • Anonymity and privacy will be protected, he maintains.
  • Our analyst Dan Ashmore is not so sure, and says these digital currencies are potentially very dystopian.
  • That said, the emerging concept also has its advantages.
  • But with China leading the way, there is real concern about what the ultimate goal will look like.

China is at the forefront of state-sponsored cryptocurrencies, known as CBDCs (central bank digital currencies).

While the technological innovation is to be applauded, there are some very troubling problems. And there is a sense that they are looming.

Concerns about control

China’s central bank governor, Yi Gang, recently explained how advanced the national digital currency is at Hong Kong Fintech Week. Despite the insistence that “privacy is at the top of the agenda,” the reality is that it will give the Chinese state unprecedented power over its citizens, not that it lacks it in the first place.

You see, national currencies mean that, at the push of a button, purses (the equivalent of bank accounts) can be frozen. Worse, they could be drained. The implications are endless.

The government could introduce a system of automatic taxation, for example, where the funds are depleted each year. Or perhaps some kind of good system. The social credit system, which is a national credit rating and blacklisting being developed, could also be incorporated into a national currency. With the credit system tracking individuals and businesses for reliability, is it so foolish to think that financial penalties or rewards could be introduced with it?

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I wrote about many of the concerns in April this year, when I focused on the Bahamian dollar. While this remains a concern, the history of Chinese state domination, as well as the size of the economy, make it on a different level and much easier to imagine a dystopian future.

How will the Chinese CBDC work?

Concerns aside, it is fascinating to read how they work, if not frightening. Yi gave an overview of how it plays out.

His call for anonymity protection revolves around a two-tier payment system. At level one, the central bank provides yuan to traders, while only handling inter-agency information. On the second level, operators (all of whom are authorized) collect only the personal information necessary for the exchange and circulation of citizens’ money.

Yi went further, promising that the date would be encrypted and that sensitive personal information would not be shared with third parties. In particular, transactions up to a certain level could take place in total anonymity.

This definitely sounds promising. However, once again, the evidence and history are not on the side of the Chinese state in this case. Delving deeper into Yi’s quotes, he cautioned that we should keep an eye on this anonymity:

We recognize that anonymity and transparency are not black and white, and that there are many nuances that must be carefully weighed. In particular, we need to strike a careful balance between protecting people’s privacy and combating illegal activities.”

This balance is the line that is sometimes difficult to walk in cryptocurrencies. I recently wrote about the dangers of decentralization, but in this case it is more of a danger of centralization.

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For many, CBDCs are incredibly dystopian. Of course, assuming you’ve read this article so far, I can see how that might be the case – and in general, I worry about what it might look like in some states.

Again, CBDC and blockchain technology have advantages. Efficiency, lower fees, faster speed and greater accessibility are their main proponents. But the dangers are very great. I guess we’ll have to wait and see what happens, but for now it’s China that seems to have the lead, and I’m not sure that’s a good thing.

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