China’s central bank is trying to build trust in the data protection measures built into the nation’s sovereign digital currency, something analysts say is crucial for widespread adoption among its citizens.
Mobile users in China are worried about having to share too much personal information when downloading digital wallets, while the private sector has relatively low trust in privacy protection for anonymous payments, even if they are controlled by the central bank, research has found.
Mu Changchun, director of the Digital Currency Research Institute at the People’s Bank of China (PBOC), said that “controllable anonymity” was an important feature in the design of the e-yuan, also known as the Digital Currency Electronic Payment (DCEP).
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It’s important to get the balance right between protection of privacy and reaping efficiency gains
Hyun Song Shin
Relatively small transactions using the digital currency would be anonymous “to a reasonable extent”, Mu said at the China Development Forum held at the weekend.
When the digital yuan is used to make a payment, personal information becomes encrypted in an e-wallet before being delivered to an e-commerce platform. As a result, the e-commerce platform will not gain access to the personal information, protecting privacy, Mu said.
Telecoms operators are also involved in the development of the e-yuan, but they are not allowed to disclose customer information from mobile phones to third parties like the central bank under current laws and regulations, Mu said.
However, large suspicious transactions will be traceable to maintain financial security. The PBOC official said complete anonymity was impractical if the e-yuan was to help prevent criminal behaviour such as money laundering, terrorist financing and tax evasion.
Mu’s comments come as the global conversation over central bank digital currencies heats up, with the Bank of International Settlements (BIS), the international association of major central banks, set to hold a four-day conference this week on the subject.
Mu’s comments come as the global conversation over central bank digital currencies heats up, with the Bank of International Settlements (BIS), the international association of major central banks, set to hold a four-day conference on the subject this week.
As part of pilot tests for the e-yuan in four major cities over the past year, more than 2 billion yuan (US$307 million) has been spent by consumers via 4 million transactions in shops, restaurants and online stores.
The PBOC is reportedly aiming to launch the new sovereign digital currency by the start of the Beijing Winter Olympics in February 2022, although no timetable has been officially announced.
Hyun Song Shin, economic adviser and head of research at the BIS, said protecting consumers’ privacy was an important consideration in the design and development of central bank digital currencies.
“Establishing both proper identification and privacy in the payment system is key,” he said. “It’s important to get the balance right between protection of privacy and reaping efficiency gains.”
The political structure in China allows it unrestricted ability to collect and analyse credit data compared to the United States and other Western countries, said Sky Guo, co-founder of enterprise focused blockchain platform, Cypherium.
What China’s government does with this data is a different matter, Guo said, adding it cannot be known for certain whether the privacy rights of users will be fully considered or if there is a risk of data extortion.
“The implementation of the DCEP will afford the Chinese government complete access to users’ data,” said Guo. “If China’s goal is simply to monitor transactions and prevent fraud, there should be nothing to worry about as long as there is the political will to adopt supportive technologies that are able to enforce [user] anonymity.”
In more open democracies, people normally have a say as to whether the government should be allowed access to the personal data of its citizens, Guo said. In March 2020, for example, a surveillance reform bill was introduced in the US Congress seeking to end bulk data collection and improve transparency and oversight of surveillance in the US.
Guo said security breaches and data that was compromised are two of the most common setbacks for a digital finance security framework.
There are bad actors, hackers and fraudsters willing to exploit system weaknesses, and centralised sovereign digital currency platforms can actually be easier for hackers to isolate and focus on their targets, Guo said.
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