Will China’s ‘digital yuan’ reinvent money as we know it?

What’s behind China’s latest crackdown on crypto? For some time, Beijing has banned bitcoin and other cryptocurrency exchanges from operating within its borders. Last week, the Chinese Communist party extended the ban to criminalise anyone dealing in crypto. ‘Virtual currency-related business activities are illegal,’ declared the People’s Bank of China. The CCP would ‘resolutely clamp down on virtual currency speculation… to safeguard people’s properties and maintain economic, financial and social order’.

China accounts for nearly half of the world’s crypto mining, a process in which high-powered computers are used to generate the digital currencies. Most of China’s crypto mining takes place in the country’s most remote regions, such as Inner Mongolia, where vast, hastily thrown-together warehouse complexes are packed with humming computers, swirling fans and tangled bunches of cables. This industry is extremely energy-intensive — it consumes more electricity than entire countries, including Switzerland, Austria and Singapore.

Crypto allows people to spend money in ways that the government can neither control nor trace. The latest crackdown can be seen as a way to clear the decks for the CCP’s new enterprise: the digital yuan (or renminbi), a currency controlled by the government. It’s a perfect fit with the Chinese surveillance state, yet it is also an experiment being closely watched by the world.

The early vision for cryptocurrencies was essentially libertarian. They are not regulated by central banks or governments and were seen as seeds of a genuinely independent financial system. Early adopters dreamed of doing away with banks and other centralised authorities, and embraced the anonymity. It hasn’t worked out that way and has been a gift for criminals. It’s the currency for guns, drugs and ransomware extortion. Crypto has become synonymous with evading the authorities, and so central banks are trying to take back control.

In the UK, Rishi Sunak has set up a taskforce to consider a British digital currency (he calls it ‘Britcoin’) and in the US Joe Biden is making similar noises about a ‘digital dollar’. The Bank of England has admitted that a UK digital currency could be ‘programmable’ to give the state power over who spends what. Tom Mutton, a director of the Bank of England, has said that it should be up to government ministers to decide if such powers should be allowed to exist.

As the West agonises over the ethics, China is rushing ahead. The ‘digital yuan’ is being trialled in several cities including Shanghai and Hangzhou. At Chinese New Year, the authorities doled out traditional ‘red envelopes’ as part of a public lottery, but did so in the form of packets for download on a smartphone. There’s talk of having the new currency up and running by the time Beijing hosts the winter Olympics next year.

Eventually, China wants to promote the international use of its digital yuan. As it would not be linked to the dollar--dominated global financial system, China could join forces with Russia in a way that allows both to dodge western sanctions. Within China, a digital yuan would enhance state power by giving the CCP knowledge in real time of every single transaction that an individual or enterprise makes — from location and amount to the purpose and the recipient. The state would have eyes on not just what Chinese citizens are spending but on what foreign companies (and their staff) are up to.

China already leads the world in electronic payments, thanks to the progress of tech giants Alibaba and Tencent, whose rivalry has done much to usher out the use of cash. Most of China’s 1.4 billion people are now accustomed to using QR codes on smartphones rather than banknotes or credit cards. Last year, 58 per cent of Chinese consumers used mobile payments, up from a third in 2016. Beijing is now moving in to exert more control over these companies, which are in no position to resist.

The digital yuan would be legal tender, state-backed — which means merchants will be obliged to deal in it — and it will be distributed by state banks directly to the e-wallets of users. A thousand years ago, the Song dynasty invented paper money. China may well be about to turn the system upside down again.