China's social lending system is getting a CBDC upgrade.
China is currently considered to be in the launch phase. Although the Chinese CBDC is technically designated as a pilot (e.g., see reporting in Reuters and Wall Street Journal), this use of the term is misleading. Where most countries use terms such as "pilot," "proof of concept," or "experiment" to describe CBDC tested in a closed environment, the People's Bank of China uses this term to describe CBDC that is largely open to the public in comparison. For example, in 2022 it was reported that over 260 million CBDC wallets were discovered in China.
History and development of CBDC
China may have the longest running CBDC research. In 2014, it was the People's Bank of China project work called Digital Currency Electronic Payment or DC/EP (also called digital yuan, e-yuan and e-CNY). At the end of 2017 the project was extended, and major financial institutions were brought in for further research and development. In 2020, the pilot was public domain in four Chinese cities: Shenzhen, Suzhou, Xining and Chengdu.
Citizens in the four selected cities were given access to the CBDC through a lottery system. For example, in Shenzhen, $ 1.5 million in CBDC was given to 50,000 participants spent at 3,389 locations. Over 1.91 million people applied to be part of the programme. Likewise in Suzhou, $ 3.1 million in CBDC was given to 100 000 participants. However, the money received in the lottery must be spent in a limited period of time before it expires. By the end of 2021 there was 261 million users in the pilot, which collectively performed $ 13.8 billion worth of transactions with 8 million merchants.
31 March 2022. People's Bank of China expand the pilot to Tianjin, Chongqing, Guangzhou, Fuzhou, Xiamen and six cities in Zhejiang Province. With this expansion also came noise from lotteries, discounts and other promotions to attract adoption. By the end of the year there were reportedly 13.61 billion yuan ($ 1.81 billion) in circulation. However, by December 2022, a former research director of the People's Bank of China said, " The results are not ideal ... usage is low, highly inactive. "
The CBDC itself is used by mobile application. The app can link to an individual's bank account, provide QR codes for transactions, and establish multiple wallets within a single account. However, individuals are limited in how much CBDC they can accumulate and spend based on how much personal information they are willing to provide.
The People's Bank of China is also working with the Bank for International Settlements on a wholesale CBDC pilot (referred to as Project mBridge). As the Bank for International Settlements describes it'Project mBridge' seeks to address some of the major inefficiencies of cross-border payments, such as high costs, low speed and transparency, and operational complexities. At the same time, the project aims to preserve monetary sovereignty and monetary and financial stability for each participating jurisdiction, guided by the principles of "do no harm", compliance and interoperability. "
Finally, it is important to keep in mind some of the motivations that may be at play. Official People's Bank of China Mu Changchun said, "To protect our currency sovereignty and legal currency status, we need to plan ahead" when talking about his work to advance the CBDC in China. So in addition to expanding Chinese government oversight and control over the population, perhaps the People's Bank of China sees the CBDC as a way to combat the rise of cryptocurrency. Unlike other countries, China's work on CBDC began long before Facebook's Libra made headlines. However, it is unlikely to be a coincidence that The hostility of the Chinese government to cryptocurrency ended with a ban on cryptocurrency trading and mining shortly after the CBDC pilots launched.
In 2024, reports emerged that CBDC is rarely used in practice. Although government employees receive their salary in CBDC, many immediately transfer their balances to their traditional bank accounts. For example, one participant said, " I prefer not to keep the money in the e-CNY app because there is no interest if I leave it there. Also, there aren't that many places, online or offline, where I can use e-Yuan. "
Concern for human rights and civil liberties
China is obsessed with major abuses of human rights and civil liberties. The US. State Department reported significant human rights problems encompassing genocide, arbitrary imprisonment, forced sterilization, extrajudicial internment camps, restrictions on expression, surveillance, and much more. Because violations are so widespread, considerations of the risk that CBDC may pose will be conceptualized within the framework of risks to financial privacy and financial freedom. CBDC can be used to exacerbate all of these problems.
Financial privacy is critical to the protection of human rights and civil liberties because financial transactions reveal professions, relationships, religion, political ideals and more. The Chinese government uses the financial system as a surveillance tool to target protesters so much reported in 2019 that protesters in Hong Kong are afraid to use metro cards for fear of being tracked. It's not just protesters who are afraid of being tracked. The ongoing genocide against the Uighurs and other Turkic Muslims is also a serious concern. In both cases, things could get worse if the CBDC is implemented to give the Chinese government even greater financial surveillance and monitoring capabilities.
Financial control is also a significant risk. As explained by Freedom HouseChina is home to one of the most restrictive media environments in the world and its most sophisticated censorship system, especially online. " In 2022, 43 journalists were imprisoned and in 2018 the social credit system was expanded to restrict the travel of millions of Chinese citizens. The CBDC could make matters worse by giving the authorities the tools to further cut off journalists from society and stifle dissenting voices. Unfortunately, the CBDC can be used as another tool in this effort. Across the world, governments often turn to freezing and seizing the money of activists, political rivals and protesters to undermine opposition. The CBDC would facilitate such initiatives by allowing governments to take direct control of each citizen's finances.
For further information on concerns about violations of human rights and civil liberties, see the following reports by Amnesty International, Index of financial tyranny, Freedom House, Human Rights Watch, Privacy International, и US. State Department. For further information on concerns about the risks of CBDC, see the following web page and Cato Institute report: The risks of CBDCs and Central Bank Digital Currency: Assessing the Risks and Dispelling the Myths.
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For further information on the indicators, the methodology page explains each of the data points and provides their respective sources.