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Monday, November 28, 2022

Opinion: China’s digital yuan shows why we still need cryptocurrencies like bitcoin

The digital yuan has already been piloted in various Chinese cities and was used in more than $8 billion worth of transactions in the second half of 2021. China’s efforts have also spurred other countries to ponder digital currencies of their own. Nearly 90 countries, accounting for more than 90% of global GDP, are actively exploring a central bank digital currency (CBDC), according to the Atlantic Council.

Some would argue that CBDCs will cancel out the need for cryptocurrencies like bitcoin. After all, how many different digital currencies do we really need? But in fact, the opposite is true. The rise of CBDCs highlights the importance of decentralized cryptocurrencies that are relatively private and not controlled by any government.

While China’s digital currency is an impressive undertaking that could offer many benefits, such as ease and efficiency of payments, privacy is not one of them. If anything, the digital yuan will give the government greater visibility into the financial transactions of its citizens.

You may not have to provide an ID to make small payments, Yaya Fanusie, adjunct senior fellow at the Center for a New American Security, said in an interview. But “the government is going to be able to trace all transactions, generally, whether they are anonymized or not.”

China already has a very sophisticated mobile payments system, led by WeChat Pay and Alipay. Companies already collect plenty of private financial data, but the digital yuan will make that data even more accessible to the government. Fanusie said the Chinese government can already go to the payment companies and get the data, but with the digital yuan, they won’t need to take that extra step because they will already have direct access to that data. With the digital yuan, he said, “they barely have to lift a finger. The data comes to them.”

CBDCs are not only trackable, they may also be programmable. After a natural disaster, for example, a government could send citizens digital money that could be spent on food and medicine, but not alcohol. This means that governments will have a greater ability to decide who has access to digital money. In China’s case, Fanusie said, “it’s going to be easy for the central bank to turn off any wallets they want to turn off, because of political issues or crime fighting or whatever.”

It is too early to know exactly how central bank digital currencies will play out in practice, but concerns are so great that Congressman Tom Emmer cited privacy issues in legislation he introduced that would prohibit the US Federal Reserve from issuing a CBDC directly to individuals.

Cryptocurrencies offer a fundamentally different approach. Bitcoin, the world’s leading cryptocurrency, was introduced after the 2008 financial crisis as a form of money that was meant to be independent of government or bank control. Bitcoin transactions are stored on a decentralized ledger known as a blockchain.

One of the main advantages of bitcoin is that no government can stop you from sending or receiving it, and no government can shut down the network. Bitcoin is also a relatively private form of money, in the sense that all you need to send and receive bitcoin is an address that consists of a string of numbers and letters. Some are drawn to cryptocurrencies simply because they believe that even perfectly legal transactions should enjoy basic privacy protections.

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Some crypto purists will argue that even bitcoin is not private enough, as all bitcoin transactions are recorded on a publicly viewable blockchain. Still, attaching a bitcoin address to a real person’s identity takes work: Governments or spy agencies would have to devote a good deal of time, skill and effort to the task of analyzing blockchain data. CBDCs like China’s, by contrast, are designed to be traceable by the government.

Developers are currently working to increase bitcoin’s privacy protections. But there are other digital currencies, for example zcash and monero, that promote privacy protection as a key feature. Zcash, for example, uses a cryptographic tool known as zero-knowledge proofs, which is a way to verify a set of data without revealing that data. New cryptocurrencies are constantly appearing, and we are likely to see even more innovation when it comes to privacy.

China’s digital yuan may eventually become the country’s main form of payment. “Whether I embrace the digital Renminbi or not is not up to me to decide,” Victor Gao, chair professor at China’s Soochow University, said in an interview. “If I stay in China, if I remain a global citizen, I think this wave will hit me sooner or later. I cannot fight against it, I can’t resist it without being buried by it.”

Other countries, including the United States, may not be able to resist the temptation to roll out a CBDC of their own. But government-backed digital currencies should not reign supreme. Other cryptocurrencies are needed to preserve an independent and relatively private form of digital money in a world where transactions are becoming easier for governments to track and control.

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