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China's national cryptocurrency is becoming increasingly ominous

 


China is a leader in state-sponsored cryptocurrencies known as CBDCs (Central Bank Digital Currencies).


While the technological innovation should be welcomed, there are also some very worrying aspects. And it seems as if they are creeping closer.


Concerns about control

China's central bank governor Yi Gang recently discussed how far the national digital currency has come at Hong Kong Fintech Week. Although they stress that "privacy protection is one of the most important issues on the agenda," the reality is that this gives the Chinese state unprecedented power over its citizens -- not that it meant it in the first place lacked.


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


For example, the government could introduce an automatic tax system that withdraws funds every year. Or maybe some kind of fine system. The social credit system, which is a national credit rating and blacklist that is being developed, could also be integrated into a national currency. With the credit system that tracks individuals and companies for trustworthiness, is it crazy enough to think that it could introduce a monetary punishment or reward?


I wrote about many of these concerns back in April of this year when I covered the Bahamas sand dollar. While it's still a concern, the track record of the Chinese state, as well as the size of the economy, means it's on a different level and it's a lot easier to imagine a dystopian future.


How will the Chinese CBDC work?

Concerns aside, reading about how they work is fascinating - if not terrifying. Yi gave an insight into the way it is being developed.


His advocacy of protecting anonymity focuses on a two-tier payment system. At level one, the central bank provides yuan to operators while only processing inter-agency information. At level two, the operators (all of whom are authorized) collect only the personal information needed to exchange and distribute currency to individual citizens.


Yi went further and promised that data will be encrypted and personal sensitive information will not be shared with third parties. Even more remarkable, transactions are allowed to take place under complete anonymity up to a certain level.


This definitely looks promising. But again, the evidence and history are not on the side of the Chinese state. Upon examining Yi's quotes, he cautioned that this anonymity must be preserved:


“We recognize that anonymity and transparency are not black and white and there are many nuances that need to be carefully considered. In particular, we must strike a precise balance between protecting the privacy of individuals and combating illegal activities.”


This balance is the line that is sometimes difficult to draw in cryptocurrency. I recently wrote about the dangers of decentralization , but in this case it's more the danger of centralization.


For many, CBDCs are incredibly dystopian. Of course, if you've read this article this far, I can see how that might be the case - and I'm concerned overall about what that might look like in certain states.


On the other hand, CBDCs and blockchain technology have advantages. Efficiency, lower fees, higher speed, and better accessibility are all strong pluses. But the dangers are extremely great. I think we'll all have to wait and see what happens, but for now China seems to be leading the way - and I'm not sure that's a good thing.

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