By Alexander Zaitchik, Jeanhee Kim, Kelly Le and Angie Lau, Forkast.News. Part three of a series produced by Forkast.News with support from the Judith Neilson Institute's Asian Stories project. Read Part I here and Part II here.
John Chen (a pseudonym used by request) has viewed the rise of the cashless economy on a split screen.
On one side, the China of his birth, where paper money is all but extinct even in the remotest villages. On the other, the U.S. state of California, where he attended high school and now studies computer science at a state university, and where paper money remains common.
Growing up in Fujian as the son of tech-savvy parents, Chen is in many ways the epitome of a modern Chinese. With a comparative eye, he has been following the development of his country's unique consumer culture for half a decade. "When I visited China in 2016, I thought, 'Wow,' everyone is using WeChat Pay and Alipay. No one had a wallet or purse." Businesses asked him to pay digitally, which he prefers to using credit cards. "Personally, I don't like [carrying a wallet] because I've lost my wallet three times in five years," he said, most recently during the height of the COVID-19 restrictions in the U.S. Without cash, credit cards or his driver's license, he had to ask a friend to lend him money and drive him to Target "so I could buy some chicken for dinner."
Now that he's back in the East and taking correspondence courses, Chen will be able to watch the next phase of China's development from the front row. Beijing is widely expected to launch its central bank digital currency (CBDC) at the Winter Olympics in February.
Unlike AliPay and WeChat Pay, however, the digital yuan gives Chen pause. His reasons are a foretaste of debates that will only increase with the advent of all CBDCs in the coming years.
"I'm concerned because I feel like [government officials] would be able to see all my transaction details," Chen said. "I would lose some of my privacy, and I don't think I would be 100% comfortable with that.
Of course, AliPay and WeChat are already linked to the government (and even helped develop the digital yuan), for example, with ID verification methods linked to government cameras. The linkage becomes tighter the larger the transaction, as is the case virtually everywhere financial institutions have reporting requirements. For Chen, however, it makes a difference that private companies provide a buffer from direct government access to his user data.
Social Credit
China's controversial social credit system, which monitors and assesses citizens' trustworthiness, has raised concerns about how the state could use the e-CNY, as the digital yuan is officially known, to further monitor its citizens, control dissent and encourage or discourage certain behaviors. "It's easy to imagine how the digital yuan could support the development of the social credit system, with tighter controls instead of looser ones," said Ian Wittkopp, a Hong Kong analyst at Sino Global Capital.
In Washington, D.C., the debate over digital currencies reflects the multiple roles that money plays - not just as a means of payment, but also as a symbol of political power and the values imposed by that power.
In July 2020, shortly before China began e-CNY pilot testing, former U.S. Commodity Futures Trading Commission Chairman J. Christopher Giancarlo warned the U.S. Senate Banking and Finance Subcommittee. "The competition for the future of digital money is as much at stake as any other technological revolution in the last hundred years," Giancarlo said. "We are indeed at the dawn of a new world. The question is who will design and build these digital systems ... And what social values will come into play." Privacy, free enterprise, free expression and democracy are all at risk, he later elaborated.
Through the SWIFT banking communications system, the U.S. functionally has a hand in the spigot of global capital flows - a power Washington has used in recent years to sanction Venezuela, Iran, Syria, North Korea and a range of individuals. Giancarlo told senators that the more widely adopted the digital yuan becomes, the greater its ability to bypass SWIFT and help other nations do the same. This, Giancarlo said, could increase the risk of war.
Among technocrats, however, there is less hyperbole. Tommaso Mancini-Griffoli, a department head at the International Monetary Fund, said at CoinDesk's Consensus 2020 conference in May that, in general, "a world with more than one reserve currency is a more stable world."
Of course, it remains to be seen whether CBDCs will prove successful. Even if China paves the way to global acceptance with the Digital Silk Road and the Belt and Road Initiative (BRI), the ultimate proof will be mass adoption. As Chen has shown, the opinions of ordinary Chinese are divided.
Cashless
Tab Liu was born and raised in the central province of Henan. Like Chen, he is now studying at a university in California, where he is majoring in geosciences and international relations. The grandson of small farmers, Liu attended middle and high school 150 miles from home. Nearly a decade later, he raves about the BRI infrastructure project that gave him a better education. "We have the best high-speed rail system," he says. A route that still takes 21 hours in the U.S., such as Chicago to New York City, takes only five in China.
Liu is similarly proud of the rise of the cashless economy.
"In the last five years, I haven't taken any cash with me in China," he says. Whether the digital currency he uses is directly linked to the government doesn't concern him. "The Chinese government is very cautious about financial issues. As long as it officially launches the digital currency, it is most likely mature and safe," he said.
"All people have lost their privacy in this information age," Liu added, citing examples of U.S. privacy intrusions.
Richard Byworth, CEO of Eqonex, a Singapore-based digital asset financial services provider, said that in his custody business, "Chinese clients based in Hong Kong and European clients, especially in Switzerland, prefer to deal with [non-U.S.] financial institutions. There is some sensitivity about assets in the U.S. and what that might mean in the future if geopolitics becomes an issue in any way.
He cited the regulatory environment and government outreach during recent administrations as reasons for this reluctance.
Byworth also points to purely economic factors that undermine confidence in fiat money in general. In his opinion, government efforts to support citizens during the pandemic are driving people toward cryptocurrencies, a completely private form of money. "When you see that 40% of all dollars in circulation were printed during the pandemic, you can understand why people are looking to assets like Bitcoin to protect their wealth from this devaluation," he said. Bitcoin, for example, hit an all-time high of $64,000 in April, shortly after the passage of the $1.9 trillion stimulus program known as the American Rescue Plan Act of 2021.
This has implications for the digital dollar. Federal Reserve Chairman Jerome Powell said in May that the U.S. is weighing the pros and cons of developing a digital dollar while "carefully monitoring and adapting" to the rise of digital payment systems and private currencies like Bitcoin. While Powell has said in the past that the U.S. will not be drawn into a CBDC race with China, he made no mention of China in this address to the American public, which was recorded and posted on YouTube.
Full speed ahead
The contrast between the two superpowers' CBDC activities is stark. While the U.S. is "still in the planning stage of talking about it," as Stanley Chao, a Los Angeles-based consultant on economic trends in Asia, put it, China is putting all its considerable resources into steering the world toward its vision of the future.
Just how life could change is already evident about 100 km southwest of Beijing, where the Chinese have begun building what President Xi called in 2017 the "City of the Future." Xiong'an is where many of China's development initiatives are coming together: fiat digital currency, belt and road infrastructure, and most importantly, the blockchain technology that underpins it all.
Imagine a newly opened 19-track high-speed terminal that will take commuters to Beijing, 250 km away, in 50 minutes. It's a "green" city, where land use and construction are limited to 30%. And it is the first "smart city" to integrate blockchain into its core technology infrastructure.
Recently, Xiong'an signed a contract with Beijing-based startup S-Labs to develop blockchain applications for food safety, project monitoring, procurement and tendering. The CEO of S-Labs, Stacey Zhou, said that the importance of building a city with blockchain cannot be underestimated, as she can observe the development of a smart city firsthand. "Xiong'an is special; it is like a blank paper where we can draw or write anything. We built it on a digital chain, so for the first time, the real city and the digital city are being built at the same time. Every single piece of information is supported by the blockchain. They are real, recorded and immutable."
Xiong'an has used blockchain applications to pay billions of yuan for construction materials, as well as compensate migrant workers and residents who had to be relocated - all without fraud or embezzlement, which are common in large public works projects.
Change is imminent, Zhou said. More cities will be built on blockchain and existing cities will be retrofitted with it. She said CBDC will be an integral part of life in Xiong'an, adding, "You may not understand the technology, but this is the future and the future is coming. Open your mind. Work with us."