Why China’s DCEP Experiment Should Scare Crypto Evangelists
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Why China’s DCEP Experiment Should Scare Crypto Evangelists

Created 2yr ago, last updated 2yr ago

China's national cryptocurrency has created a lot of excitement, but it demonstrates a potentially dark application of blockchain technology.

Why China’s DCEP Experiment Should Scare Crypto Evangelists

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China may become the first country to roll out a live test of a national digital currency in preparation for its stint in hosting the 2022 Winter Olympics. The Chinese government plans to allow individuals to spend digital yuan using wearable payment devices. 
On the surface, this seems bullish that China is normalizing digital currency. Unfortunately, there is a dark side to this development that could help the country’s ruling party further cement its control over the day-to-day lives of its citizens, a fact which should horrify cryptocurrency evangelists who see this new technology as a tool to enable censorship resistance and data privacy. 

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What Is The Digital Currency Electronic Payment (DCEP) System? 

Before diving into the practical implications, we should take a look at the technology itself. China has been developing the Digital Currency Electronic Payment (DCEP) system since 2014. While it does use an asymmetric cryptography, the digital yuan (also called digital renminbi) is not a blockchain project, at least in the traditional sense. 
The main feature of the “purest” cryptocurrencies, such as Bitcoin or Ethereum, is that they operate on a decentralized ledger. The methods used to secure this ledger vary, but the database is designed to be outside of the ownership of any one individual. 
However, that isn’t the case with China’s digital yuan and other central bank digital currencies (CBDCs) like it. Instead, these currencies rely upon a centralized database that records and tracks all transactions on the network, as well as controlling access to the network. 
The digital yuan can be considered to be a more centralized version of Tether. Each e-yuan is backed 1:1 by a physical yuan in the possession of the central bank. 
It is then distributed via a two-tier system. The People’s Bank of China distributes the commercial yuan to commercial banks. These banks are then responsible for distributing the e-yuan to consumers. Consumers can then spend this money using a special app that holds their e-yuan. 

A Digital Yuan? I Thought China Was Cracking Down on Cryptocurrency? 

The technology itself doesn’t appear sinister until you put it into its wider context. The first is China’s recent crackdowns on cryptocurrency. The government has always held a negative view of Bitcoin and other decentralized cryptocurrencies but has allowed lucrative mining operations to continue. 

So why the ban now? 

It is in part due to China’s dislike of speculative bubbles. The government has held the position that cryptocurrencies disrupt the economic order, thus protecting its citizens. However, this stance conflicts with China’s policy towards assets, where the state has a much more granular level of control over pricing than the United States. 
Another major concern is the concept of cryptocurrency itself. China has strict capital control rules and the idea that a currency outside of its control can be used within the country could be seen to undermine the Chinese authorities. 
In this context, the timing for the creation of China’s digital asset is perfect. While the central bank has not elected to provide a rollout timeline for the e-yuan, the fact that it is being tested during an event as important as the Winter Olympics implies that they are nearly ready, as the airdrop of more than $1.5 million e-yuan for the Lunar New Year. 
Given that Chinese citizens have happily adopted WeChat and AliPay solutions, they may just as eagerly embrace e-yuan

Why Is China Pushing So Hard To Create a Digital Yuan

China’s motivations, as always, are complicated. The nation is facing a series of internal and external pressures that the government needs to address. The e-yuan could prove to be a handy tool that will help them solve many of these problems simultaneously.

Digital Yuan Could Help Spread Chinese Influence Abroad 

Let’s start by looking at the external effects of the DCEP. In the last decade, China has begun to adopt an increasingly assertive global policy. The country has managed to garner huge influence in Africa and Asia through the use of trade agreements and loans. The country has also successfully made the West heavily reliant upon its factories, giving the nation considerable global bargaining power. Yet, despite the country’s relative importance on the global stage, their currency represents only 2% of the global reserve currency.
The digital yuan could be the solution to this scarcity. By moving quickly in establishing a digital central bank-backed currency, China could have an opportunity to expand the use of the yuan to its neighbors and perhaps other nations. It is even possible that the e-yuan could replace smaller currencies in high-inflation or unstable nations. 
There is also a real fear in the West that Beijing could use the digital yuan to circumvent potential sanctions. The G7 has raised concerns that a cross-border transaction system based on digital assets could enable China to create a secondary global financial system within its Belt & Road initiative
Increasing China’s presence on the global stage in this way could undermine the global financial system, which is currently based on USD

Strengthening Its Grip at Home 

The other problem that comes with the e-yuan is that it would give China even greater control over its citizens. The government has already instituted the notorious Social Credit System. This system ranks individuals based on their behaviors and gives them rewards or punishments for following the rules set by the party. 

The government watches for any sign of dissent, including associating with “low score” individuals, and uses this as a way to crack down on dissent. The digital yuan could make the government’s control even tighter. 

China can already screen for transactions, but the purpose of the e-yuan is to replace the cash in circulation. Paper money still represents one of the few untraceable ways that individuals in China use. If the government phases out cash, it will give them complete control over who can spend money and where they can spend it. 

How The E-Yuan Could Impact China’s Social Credit System

To understand how this control would work, let’s look at the Social Credit System and how it could interact with the e-yuan. 

Let’s suppose that you make some purchases at a store run by someone with a low credit score. This innocent act then lowers your Social Credit points below the government-defined “threshold.” Now, you can’t purchase necessities because the government has banned your wallet from functioning. You cannot even buy these things with cash anymore, because cash does not exist. 

It is the ultimate tool for controlling dissidents in your country. 

China Has A First–Mover Advantage 

Unfortunately, there may not be much anyone can do about it. China’s central bank-backed cryptocurrency is more advanced than any other nation’s. 

It will be difficult for the US or EU to build their own competing cryptocurrencies in time to prevent nations from being drawn into China’s new digital currency. For example, the UK had only just begun exploring the possibility of a digital pound in April of this year. 

However, there is one option that countries could use to gain a leg-up: Decentralized cryptocurrencies. 

Using Decentralized Cryptocurrencies To Catch Up With China

Cryptocurrencies like Bitcoin and Ethereum represent an already mature ecosystem that could be used to bootstrap national cryptocurrencies and allow them to catch up to Chinese efforts. 

Many countries are wary of taking this approach, citing uncertainty about the technology and concerns about money laundering, but there are some experiments already taking place. 
The Bank of Israel has announced that it is conducting tests that use Ethereum to power a digital shekel. If these trials are successful, it could provide the evidence needed for the Western world to adopt a decentralized alternative to China’s e-yuan. 

Technology Itself Isn’t Good or Evil

Digital currencies have the potential to do good for the world. One of the major problems today is the high costs of banking transactions and middlemen driving up costs further. A globally interconnected digital finance system could revolutionize cross-border transactions and have an outsized positive impact on poorer communities that will no longer be reliant on large financial institutions. 

However, for crypto technology to be positive, it needs to be done with the right intentions. It remains to be seen whether Chinese authorities will use this technology for the betterment of mankind, as opposed to simply furthering their aims. 

With that in mind, crypto enthusiasts should view DCEP with deep skepticism. Instead, we should be championing decentralized solutions that are free from control by any single government or organization. 

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