“In 2020, the criminal share of all cryptocurrency activity [was] just 0.34%, or $10.0 billion in transaction volume.” This finding by crypto intelligence firm Chainalysis may surprise the casual reader accustomed to dire crypto warnings from government apparatchiks and blaring headlines about crypto scams and ransomware. Yet in this supposed age of “disinformation” it fits that the opposite is true. Far from providing a pathway for clandestine transfers outside government’s view, the bigger crypto concern is its inherent transparency may need more privacy protections.
Many believe crypto only serves illegal ends
The ‘bad-things-happen-on-blockchains’ meme has lots of boosters. Anti-crypto Congressman Brad Sherman (D-CA) stated at recent hearing “Cryptocurrencies, if they succeed, will have appeal to only two groups, narco-terrorists and tax evaders.” The Treasury Department has issued similar complaints.
Ezra Klein, an opinion columnist at the New York Times, is the latest standard bearer. In a crypto deep dive following the infrastructure bill’s tax fight—described here by CEI Senior Fellow John Berlau—Klein stated: “[C]rypto currencies [are] a favored medium for money laundering, illegal purchases and ransomware. To be fair, criminals are often early adopters of new technologies, so crypto’s association with crime is likely to abate as the technology matures.”
Klein points in the right direction but his compass is off a few years. Criminals were early adopters of crypto but crime has abated and now forms a miniscule part of total activity. Criminals shunt what remains into so-called Anonymity-Enhanced Cryptocurrencies (AECs), the best known being Monero.
Crypto does not need government snoopers
In 2013, the Feds shut down Silk Road, a so-called “darknet market,” seizing 26,000 Bitcoins in the process. AlphaBay took its place but tanked in 2017. Since then, only a massive China-based Ponzi scheme called Plus Token caused an uptick. (Chinese authorities arrested six culprits.). But overall, illegal activity occurring via blockchain has drastically shrunk since Silk Road’s demise.
The reason cyber criminals have abandoned non-AEC currencies is governments have become adept at tracking crypto across blockchains. For example, the Justice Department recovered most of the Bitcoin ransom paid by Colonial Pipeline in a well-publicized cyber-attack earlier this year. Indeed, as former Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes Daniel Glaser testified in a House hearing earlier this year, “cryptocurrencies provide enhanced opportunities in certain ways for law enforcement agencies to be able to trace transactions.”
Further, the government is intent on cracking Monero. The IRS awarded two firms contracts worth $1.25 million to break Monero’s privacy protocols. This is an eventuality Monero itself warns: “There is no such thing as 100% anonymous. Monero may . . . have bugs. Even if not, ways may exist to infer some information through Monero’s privacy layers, either now or later. Attacks only get better.”
None of this means ransomware isn’t a growing problem or that cyber hackers and scammers won’t continue to ply their trade. But in the bigger picture, it is privacy and not illegal activity that should concern Klein and others toting the crypto-is-crime handbag.
Crypto’s biggest problem is lack of privacy
Blockchains by their nature are transparent. Although parties usually conduct transactions through pseudonymous public keys, the trail is permanently recorded. As a speaker in a 2018 privacy-focused conference stated: “Peer-to-peer and blockchain technologies are by design very hostile to privacy. There needs to be a lot of work.” If industry leaders are not careful crypto could produce a global super surveillance state. This would not improve the current web’s data silos—vulnerable to hacks and data sales.
As crypto evolves users should insist on privacy protections coded into transactions. Industry players should cooperate with law enforcement to nab scammers and thieves. And those complaining about crypto’s illegal activity should change focus.
A version of this post originally appeared on the blog of the Competitive Enterprise Institute on August 19, 2021, https://cei.org/blog/no-crypto-is-not-a-criminal-haven/
Does crypto currency need new regulatory disclosure mandates from Washington in order to be of service to consumers? No, but that is what Securities and Exchange Commission Chair Gary Gensler is seeking. Gary Gensler’s crypto policy is insane.
As stated in a speech on August 3, Mr. Gensler indicated he wants to double down on the same tried-and-failed approach his predecessor used. From disclosure-heavy mandates to investor-protection obsession, everything Mr. Gensler proposes is a regulatory version of insanity – doing the same things but expecting different results.
Under the guise of technology neutrality, Mr. Gensler seeks to force the crypto industry to heel to the SEC. As he stated, “I think former SEC Chairman Jay Clayton said it well when he testified in 2018: ‘To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.’” Indeed, one would be hard pressed to find a crypto innovation over which he doesn’t want to exert control. Stablecoins? Check. Exchanges? Check. DeFi? Check.
That hasn’t gone well so far.
SEC botched crypto policy from the start
By any account, the Commission’s crypto policy has been a mess. Former Chair Clayton seemed perpetually perplexed by such new technologies, finally appointing a crypto ‘Czar,’—career bureaucrat Valerie Szczepanik—in 2018. A year later she and Corporation Finance Director William Hinman produced a widely panned 13-page crypto “framework.” The document was so impenetrable, SEC Commissioner Hester Peirce compared it to a highly abstract Jackson Pollock painting.
The other major Clayton-era guidance came from a 2018 speech where Mr. Hinman declared ether—the currency for the second biggest crypto blockchain—was not a security. Given Ethereum’s size, success, and potential, the crypto world cheered. But in the closely watched Ripple litigation, the Commission has now disavowed that finding.
Other than these two instances, SEC “guidance” has largely come not from official rulemaking but from punative subpoenas and court appearances.
Gary Gensler’s crypto policy is failing retail investors
But even if the Commission was less scattershot, it’s not clear forcing the nascent industry into a Depression-era disclosure regime would protect those retail investors Mr. Gensler has in mind.
A review of recent Commission press releases reveals multiple enforcement cases against alleged fraudsters that were already beholden to Commission mandates. Empirical studies have repeatedly shown the federal disclosure regime does more to employ myriad compliance professionals than stop scam artists.
It is also telling that the least regulated way issuers can raise capital—Regulation D 506(b) (Reg D), which mandates no disclosures—is also the most successful. In 2019 it raised $1.5 trillion and outpaced the public markets—an impossibility if investors feared widespread fraud.
It’s too bad that securities law paternalistically blocks most investors from Reg D opportunities. Only 13 percent of people qualify because financial and sophistication thresholds limit eligibility. And they tend to cluster in America’s elite zip codes. This means the best deals go to people who need them least. Retail investors are left mostly left with post-IPO scraps. As Professor Usha Rodrigues states “Securities law . . . in theory, as in practice, marginalizes the average investor without acknowledging that it does so, let alone justifying it.” Under Mr. Gensler’s crypto leadership, SEC marginalizing will continue and where opportunities for wealth creation are greatest (perhaps in all of history).
Gary Gensler should make his crypto policy less insane
Instead, Mr. Gensler should change course and approach crypto with a measure of humility and cooperation. This would include:
Ditch the 2019 Framework.
Acknowledge the Commission’s role in creating the uncertainty surrounding crypto’s security status.
Ask Congress to update the definition of security to clearly define what digital assets fall under the Commission’s ambit and which do not.
Drop all prosecutions against nonfraudulent crypto issuers and impose a moratorium against further prosecutions until Congress updates its definitions.
Direct all crypto prosecutions against alleged fraudsters.
SEC regulators should want to give honest innovators certainty and breathing space. A more circumspect approach would also put major crypto policy questions back to Congress to decide and allow everyday Americans to explore the ingenuity crypto has to offer. And it may make the SEC less ‘insane.’
“[I]t’s not that [cryptocurrencies] didn’t aspire to be a payment mechanism, it’s that they’ve completely failed to become one except for people who desire anonymity of course, for whatever reason.” So testified Federal Reserve chair Jerome Powell earlier this month. With some in Congress and the Biden Administration itching to regulate crypto, pointing out supposed operational flaws has become the rage. In one recent hearing senators called it a “phony populist” movement run by “shadowy super coders.” Politicians revel in snarky soundbites, but it’s worth examining if the reserved chair of the Federal Reserve is right. Has Bitcoin/crypto failed as a payment mechanism or more broadly as “money
A decade plus has passed since Satoshi Nakamoto unveiled Bitcoin amid the Great Recession’s orgy of bailouts and insider deals. Since then, crypto has exploded with enthusiasts the world over developing, writing, contributing to the phenomenon. A previously unimagined decentralized future is taking shape where individuals control their online lives and are compensated for their time, attention, and data on their own terms. If the government or current tech titans don’t stifle it, an amazing new web is on the horizon.
Satoshi Nakamoto Designed Bitcoin as Money
But Mr. Powell is correct Nakamoto designed Bitcoin as money. He stated so in his introductory email, “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” And despite volatility, Bitcoin has achieved “electronic cash” status despite Mr. Powell’s contrary assertion.
Throughout history money has been a social construct. It has three characteristics: unit of account, store of value, and medium of exchange. Bitcoin has met all three criteria often despite fierce government resistance.
A year after Bitcoin went live, Florida resident Laszlo Hanyecz initiated Bitcoin’s first commercial transaction. He bargained 10,000 Bitcoin for two pizzas. Since then, Nakamoto’s electronic cash has exploded as a store of value and medium of exchange.
The obvious cases are via dissidents fighting murderous, authoritarian regimes. Name a global hotspot and oppressed people are using Bitcoin as a workaround for closed or failed financial regimes. Notables include Cuba, Venezuela, China, Russia, Iran, and Belarus. Peer-to-Peer marketplaces like Paxos and Local Bitcoins have aided this transition allowing conversion to local currencies and smoothing cross-border payments.
Governments resist Bitcoin as money because of their profligacy
Podcaster Nathaniel Whittemore noted this trend with Bitcoin Google searches rising 400% in the face of Turkey’s lira crashing:
One of the remarkable things about this moment isn’t that digital assets are going to save everyone from the follies of local currency regimes. But for the first time ever in the entire span of human history there is a convenient easy permissionless off ramp from those regimes for those people that have the technical know how to do it. The number of people who have that know how is an ever-expanding group. And that means that Bitcoin and digital assets add an X factor to every single currency crisis from here on out.
What about volatility? It turns out Bitcoin is more stable than many of the world’s currencies including economic powerhouses China and India. According to Crypto Briefing, “The Emerging Market Bond Index (EMBI), issued by financial institutions, tracks the performance for 25-40 countries considered emerging markets. The one-year volatility of EMBI is 31.8%, while it is 12.4% for Bitcoin.”
El Salvador has made Bitcoin legal tender
And El Salvador recently declared Bitcoin legal tender, completing the money trifecta. Hopefully this will spark a monetary revolution in Latin America. Africa too is becoming a Bitcoin hotspot with Nigeria leading the way.
Stateside some of the biggest corporations accept Bitcoin including Microsoft, AT&T, KFC, and the Miami Dolphins. Online behemoth Amazon is rumored to be in the process of accepting Bitcoin although they’ve officially denied it, whilst searching for a blockchain guru. Finally, one Bitcoin ATM startup crossed $50 million in revenue last year.
Bitcoin became money with striking speed. Governments can’t keep up with human ingenuity and the desire for people to be free and prosper. Hungry and oppressed people aren’t interested in millionaire-senator soundbites. They just know what works. And the global desire for Bitcoin is undeniable.
The Environmental, Social, Governance (ESG) movement is coming for Bitcoin and the entire crypto marketplace. This latest foray into corporate responsibility has captured public companies and shifted priorities away from shareholder value toward a set of amorphous standards that too often serve as mere proxies for progressive policy goals. If crypto falls to ESG pressure, that will crush much of its global benefit to individuals worldwide.
ESG promoters complain Bitcoin uses too much energy.. Wall Street and other ESGers see Bitcoin’s energy needs as wasteful and dirty. Bitcoin currently consumes energy equivalent to the Netherlands, whose residents account for .22 percent of global population, according to estimates.
So nonprofits and the trade press want to “solve” the crypto industry’s alleged “social” and “governance” issues by imposing top-down control via an ESG bureaucracy the way they do with public companies.
Leading crypto publication Coindesk recently explored Bitcoin angst in ‘How the Bitcoin Industry Is Responding to Wall Street’s ESG Concerns.’ The “Bitcoin industry” response has been to placate. Ark Financial and Jack Dorsey’s Square published a white paper with promises of “clean” Bitcoins through renewable energy. Elon Musk joined in. Others are pushing carbon neutrality, carbon credits, and so on.
Bitcoin founder Satoshi Nakamoto did not care about Wall Street
If he is still alive, it would be interesting to know what Bitcoin creator Satoshi Nakamoto would think. The opening sentence of Bitcoin’s white paper abstract discusses enabling people to circumvent financial institutions –. Bitcoin’s genesis block famously references bank bailouts, so it seems unlikely Nakamoto would have cared much for Wall Street’s concerns.
In fact, Nakamoto might have offered a vigorous defense of Bitcoin’s energy-intensive consensus mechanism (a set of rules that verifies new transaction blocks and maintains blockchain integrity) as a necessary design tradeoff because Bitcoin is decentralized. Instead of a central authority, many people and entities maintain the blockchain through various nodes in a trustless system. To preserve an accurate ledger history and link new transaction blocks, powerful computers compete to solve mathematical puzzles, a system called mining. The winning mining node receives newly minted Bitcoins, other nodes verify the winner, and then the process restarts. Bitcoin’s mining system enables its consensus mechanism called ‘Proof-of-Work.’ And it consumes lots of energy.
The consensus mechanism forces decentralization as dispersed nodes interact. The blockchain has no single point of attack, thus is essentially hack-proof. Computer scientists tried to make decentralized, hacker-resistant, unique internet money for decades. Nakamoto did it and spurred an emerging new internet known loosely as Web 3.0 that is changing the world.
Nakamoto consensus gives Bitcoin its power
The benefits of Nakamoto’s decentralized vision of people transacting outside centralized institutions are everywhere. Even the worst tyrannical regimes cannot stop Bitcoin transactions like they can cash or credit card transactions. As such, Bitcoin payments provide succor to dissidents fighting persecution from Hong Kong, Russia, Belarus, Nigeria, and Iran, among others. It provides a store of value in grossly mismanaged countries like Venezuela. More mundanely it facilitates cross-border payments, bypassing the current bureaucratic quagmire. Nakamoto would likely take the tradeoff of the inordinate energy consumption equivalent to .22 percent of the world’s population in exchange for the potential liberation of the 53 percent of people languishing under oppressive regimes.
Yet Bitcoin as “freedom money,” is only the start. The future web could decentralize more than just financial transactions. Open source, permissionless protocols could rework every human economic transaction. It could change the power imbalance between individuals and institutions (private sector or government). It could reverse the technological and political “stack” by enabling people to control their data and sell it on their own terms (or not at all) instead of allowing companies to monetize it (in exchange for free services). That won’t bode well for Big Tech.
Imagine a future in which everyone controls their online data and identity, shares it only with who they want, on their own terms. If you want someone’s time, attention, or access to their following, you negotiate and purchase it with cryptocurrency. Raging debates about online ‘cancel culture’ will subside with blockchain decentralization and permeance. In fact, everyone could carry their online digital lives and followings with them from app to app or blockchain to blockchain.
ESG attacks Bitcoin because it is dangerous to our tech overseers
The current internet titans and ESG promoters don’t seek crypto control. They have promoted a different consensus mechanism called ‘Proof-of-Stake’ as an alternative to Bitcoin’s energy-heavy ‘Proof-of-Work.’ Proof-of-Stake allows anyone to buy stake in a blockchain’s currency, validate transactions, and ultimately gain influence in governance decisions. Ethereum, the second biggest cryptocurrency, is currently switching from Proof-of-Work to Proof-of-Stake. By one estimate, 57 percent of cryptocurrencies now use Proof-of-Work and the number is shrinking.
Unfortunately, Proof-of-Stake centralizes governance , which potentially threatens Web 3.0’s best attributes. Centralization provides an opening for ESG advocates to produce a crypto bureaucracy that can control, indirectly, the crypto ecosystem in the way it does with public companies. For instance, concerns over energy consumption could morph into other prominent ESG concerns like lack of diversity, banning hate speech, censorship, and the control Silicon Valley companies have on social media platforms they built and run.
ESG advocates could also attack the exchanges where crypto is sold by seeking bans on ESG noncompliant tokens. Some exchanges are already public companies subject to ESG pressure. And new Securities and Exchange Commission chair Gary Gensler is anxious to regulate all exchanges.
Time will tell how successful these endeavors will be. Perhaps technology advances will outpace would-be overseers. But it is naïve to suppose these governmental and cultural interests will stand down and let individuals roam free.
The promise of Bitcoin and indeed all of Web 3.0 as a user-driven, individual-centered world is still in beta-mode. Just know that despite rhetoric about the public interest or not “leaving people behind,’ the people seeking control have their own self-interest in mind.
A new form of consumer finance could upend the entire banking and finance system that’s plagued by expensive fees, limited “bankers hours,” public mistrust, bailouts and insider government favors.
But Congress and the U.S. Securities and Exchange Commission (SEC) may kill the movement – decentralized finance, or DeFi – in the name of our own protection. Regulators should prosecute fraud, but also acknowledge the limits of their effectiveness and allow DeFi to mature without the burden of governmental compliance.
People are on the verge of cutting out the middleman in finance. Just as Bitcoin decentralized money transfers, DeFi could decentralize all of finance, from lending, borrowing and exchanging to more exotic forms of interest collection.
DeFi applications are not banks, they shouldn’t be regulated like them
DeFi eschews heavily regulated, fee-collecting intermediaries to allow peer-to-peer money flows. In just three years, it has grown from an idea on Meetup to a $50 billion industry. Yet DeFi’s astounding growth has also attracted opportunists looking to fleece naïve newcomers. Hackers and rug pullers – developers creating new products and then absconding with the loot – have plagued the growing industry. According to one source, fraudsters stole $83.4 million between January and April this year.
Sen. Elizabeth Warren (D.-Mass.) fired off a letter asking SEC Chairman Gary Gensler what more Congress could do to empower the commission to rein in DeFi. Mr. Gensler needs no persuading. He has repeatedly made requests for additional authority to bring non-security cryptocurrencies under the SEC’s ambit. Dan Berkovitz, a commissioner at the SEC’s sister agency, the Commodities Futures Trading Commission (CFTC), recently agreed. While praising financial intermediaries, he described DeFi as a “bad idea, and “Hobbesian,” and questioned its legality.
The message from the Biden administration and its appointees is clear: Without us, scams will proliferate and retail investors will get hosed.
DeFi regulation is favored by all the wrong people
Bringing a nascent industry under the government’s thumb does have benefits for politicians and regulators. It provides politicians steady campaign contributions and lobbying perks. Regulators get employment, prestige and often lucrative post-public service landing spots. Industry incumbents use the rules to keep barriers to entry high.
But big government hasn’t been great at preventing fraud. Since the federal government started regulating the financial sector in earnest in the 1930s, the government’s track record has been downright dismal. A landmark study by future Nobel laureate George Stigler showed the rates of return in the 1950s mirrored those of the pre-SEC 1920s, dispelling the myth that 1920s Wall Street was rife with fraud and abuse.
Decades later, two scholars lamented, “[Ex]amination of the securities violations…reveals that no amount of technical exemption requirements will hinder the fraud artists from their endeavors…Fraudulent and deceptive schemes have unfortunately continued unabated and independent of formal registration or exemption requirements.”
Even Congress’s own research arm, the Congressional Research Service, is skeptical the SEC framework can remedy market manipulation.
Prosecutors should focus on fraud not DeFi regulation
Regulators should focus on prosecuting fraud and allow the industry to grow past its infancy without smothering it first with massive federal disclosure mandates. Many scams and rug pulls had glaring red flags, like anonymous developers and promises of outlandish returns like 10,000 percent interest. The market will weed these scammers out.
As the industry matures, industry gatekeepers will develop standards that imbue credibility. These standard setters will include trade associations, code auditors, insurance markets and standards bodies that provide reputation scores to counter the proliferation of bad actors.
Regulators should prosecute scams harshly. Federal courts have buttressed CFTC jurisdiction to prosecute crypto fraud. Politicians will score points and regulators will avoid blame by taking the path that gives them the most power and control. But some humility on the limits of their effectiveness would be welcome.
Previous attempts to rein in finance’s bad actors fell flat. The notorious Dodd Frank financial regulation law passed after the 2008 financial crisis has utterly failed. The push to regulate DeFi will, as well. At best, it will send DeFi underground.
Regulators should allow DeFi to flourish as it upends the decades-old order and renders entrenched industry players irrelevant. Suffocating DeFi in the name of investor protection will kill its promise and continue the entrenchment of massive industry insiders as overlords of the U.S. financial system.
The world is recognizing Bitcoin and other cryptocurrencies’ emerging utility. In the past decade crypto has risen from quirky cypherpunk play toy to global acceptance as a store of value, unit of account, and medium of exchange. Lesser known is its service as a dissident lifeline. Predictably, therefore, authoritarian regimes disdain it. Instead, these nations and nearly all others are developing government substitutes called Central Bank Digital Currencies (CBDC).
The coming official crypto is nowhere more ominous than China. The Asian juggernaut with its massive population, economic power, technical expertise, and penchant for social control poses a legitimate threat to global freedom via its digital yuan or Digital Currency/Electronic Payments (DCEP). Indeed, China plans to ban cash and force DCEP as the lone exchange medium. More concerning is its aim to globally export its model through international standard-setting bodies. If successful, China will thwart cryptocurrency’s promise of an individual-empowered world. But the US should influence global financial bodies to ensure China’s brand of digital tyranny remains domesticated.
China’s journey to digital yuan
China jumped on the digital money bandwagon early. Starting in 2014, it established the Digital Currency Research Institute (DCRI), a branch of its central bank, the Peoples Bank of China (PBOC). Last year it began testing DCEP in four cities and plans to sync a nationwide rollout with next year’s Beijing-based Olympics. It is also expanding cross-border pilots after a successful test with the Hong Kong Monetary Authority.
Ostensibly, China’s charge into digital currency is superfluous. Indeed, one billion Chinese already transact electronically. And digital transactions jumped 50% from 2018 to 2019 from 220 billion to 331 billion. Native commercial giants WeChat Pay and AliPay have volumes surpassing Visa and Mastercard.
Chinese Communist Party (CCP) leaders envy this private-sector success. Indeed, its DCEP goals involve reasserting payment-system dominance and harnessing private innovation. If its objectives ended there, it would be an unfortunate but domestic matter. But Chinese aims go much further.
Chinese will incorporate Digital Yuan into social credit system
DCEP is a springboard for nothing less than total financial population control and the global adoption of the DCEP system through the central-bank governing system. If Bitcoin is freedom money, DCEP digital tyranny.
China operates a social-credit system that gives local (and eventually central-government) functionaries ways to nonperson dissidents for real or imagined offenses. The Chinese Supreme Court placed journalist Liu Hu on a ‘List of Dishonest Persons Subject to Enforcement.’ The label meant he could not fly, travel by some rails, buy property, or borrow money. Officials in Inner Mongolia threatened the jobs and benefits of parents protesting the absence of Mongolian language instruction. Police entered homes and forced protestors to sign obedience pledges. Those that refused were subject to arrest and lifelong surveillance.
The near-certain infusion of DCEP data with the social credit system will combine financial authoritarianism with existing political oppression. Chinese officials, unconcerned with Western public relations sensitivities, openly admit this. The former DCRI head wrote in 2018 paper DCEP would “cut intermediary links in currency operation. . . [Thus] offering a new way for economic control.” Party stalwarts envision using DCEP to “enforce party discipline.” And an article by the aptly named Central Commission for Discipline Inspection stated DCEP would be used to thwart bribery, fraud, and “other crimes that cannot be tolerated.” In a country currently committing genocide, these statements should cause concern.
As the authors of an influential report by the Center for a New American Security (CNAS) state, “The [DCEP] technical architecture will allow for real-time or near-real-time financial surveillance of all users’ transactions, something currently not feasible by any country in today’s global banking system. DCEP is not just a technical experiment. It is a giant leap for the CCP’s control and influence in Chinese society.”
From Satoshi to Digital 1984
Satoshi Nakamoto’s Bitcoin vision of a peer-to-peer payment system sought to eliminate trusted intermediaries. And since his world-changing 2008 white paper, innovators have added breakthroughs in anonymity, programmability, and speed. But DCEP takes Satoshi’s individual-empowered idea and creates digital ‘1984.’ DCEP eschews Distributed Ledger Technology (DLT) or blockchain to verify transactions and diffuse power. Instead, the PBOC will verify and monitor every transaction. As a Citi report explains, “At the core of DCEP is its registration center, managed by the PBOC in a centralized approach without the need for a blockchain consensus mechanism, hence it can be more efficient.” Citi touts “regulatory transparency” and “risk control” as DCEP benefits over cash. The report further explains:
Each DCEP token has a standardized structure which entails information on user ID, transaction value, issuer, owner etc. Information gets updated with each transaction and is stored in a centralized registration center managed by the PBOC. As such, the PBOC would only need to extract information on one DCEP token to trace all underlying transactions. . . DCEP will also resolve difficulty in tracking transactions involving cash, as the PBOC could easily extract transaction details of every DCEP payment from the central data depository and authorization center (to find out the real identity of payer/payee).
According to Yaya J. Fanusie, co-author of the CNAS report “Anyone using a digital yuan pretty much concedes his or her financial privacy directly to the Chinese government.” It doesn’t stop there. Extractable metadata extractable could track personal and device movements.
Money laundering and other financial crimes may dwindle. And as Citi lauds, the CCP will no doubt benefit from DCEP’s efficiency, transparency, and risk control. But these virtues come with frightening tradeoffs. It is the complete real time control of a population unprecedented in history.
China’s Digital Yuan Signals Global Ambitions
The PBOC is eager to export their CBDC model worldwide. This process would involve acceptance by the Bank of International Settlements (BIS). Known as the bank for central banks, the BIS sets international currency standards. It is keen to avoid CBDC competition from private alternatives as it readily admits. To do this, it understands the need to coordinate and set standards. It realizes; however, cooperation of this magnitude won’t be easy:
[A] single [internationally coordinated] CBDC system raises a raft of policy issues for central banks. The (shared) management of the rulebook and governance arrangements for the shared system will be just one aspect. The wider implications of issuing a CBDC for monetary policy, financial stability and payments policy will need to be worked through for each central bank, potentially requiring trade-offs in the final design. For example, central banks will need to evaluate whether they are willing to relinquish some system control and monitoring functions to an operator, for which the governance arrangements would need to be (jointly) agreed. Negotiating these trade-offs across multiple central banks will be a challenge.
In this unsettled space China sees opportunity. Chinese officials say privacy as now understood is outdated. It should be reinterpreted into “controlled anonymity.” That is, transacting parties can hide from one another but never from the state. As Mu Changchun, current head of the DCRI recently remarked in a BIS speech, the BIS must balance privacy with “international consensus” on risk control. He further statedCBDC fund movements should be “synchronized” to help regulators “monitor the transactions for compliance.” In other words, “controlled anonymity” for all.
Digital Yuan forces a crossroads for the West
The world currently sits at a crossroads. Whilst dissidents strafing under authoritarian regimes use crypto to escape persecution, China tries to create a hegemonic financial system that will surveil everyone. Its growing economic might combined with its early mover status give it enormous sway on how the CBDC landscape will evolve. The U.S. and the West must fiercely counter this model not only for their economic self-interest but humanity’s future.
