China's cryptocurrency plan has a powerful partner: Big Brother

Photo / Angie Wang/ New York Times

When Facebook announced plans this year for a cryptocurrency called Libra, it said its goal was to reinvent money for the internet age. What the company probably didn't imagine was that its efforts might spur China to get there first.

China wants to start replacing the cash that people carry with a digital currency soon, a long-discussed project that went into overdrive after Libra was unveiled in June. Facebook has been fighting to defend its initiative against skeptical regulators, and key corporate partners have pulled out of the project. But Beijing's ambitions appear to be moving ahead at full speed.

The system emerging in China looks very different from bitcoin and other cryptocurrencies that enthusiasts have championed as tools of emancipation from big banks and governments.

A state-issued e-currency would help China's government know more — much, much more — about how its citizens spend their money, giving it sweeping new powers to fight crime and manage the economy while also raising privacy concerns.

"It's extraordinary power and visibility into the financial system, more than any central bank has today," said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

Not even half a year has passed since Facebook unveiled Libra, but the tech giant's foray into finance has been met with a steady stream of doubts and questions.

The Federal Reserve says it has "serious concerns." European officials have threatened to block the project from moving ahead on the Continent. Mark Zuckerberg, Facebook's chief executive, is set to appear on Capitol Hill next week to discuss the plans.

For Beijing, Libra has provided another urgent motive for digitising the currency. China blocks Facebook's platforms within its borders, but Chinese leaders see in Libra the potential start of a new world financial system, one that could bulldoze the traditional authority of governments and central banks — China's included.

"If Libra is accepted by everyone and becomes a widely used payment tool, then after some time, it is entirely possible that it will develop into a global, super-sovereign currency," Mu Changchun, a top official at China's central bank, said in a recent online lecture. "We need to plan ahead to protect our monetary sovereignty."

The idea of a national virtual currency is hardly new. Central bankers in Britain, Singapore and Canada have conducted experiments on how digital tokens might be integrated into the financial system. A board member at the European Central Bank said last month that Libra was a "wake-up call" that had revived the bank's electronic payment efforts.

Beijing's interest in the subject is just as long-standing, even if China has for years restricted the use of bitcoin and other cryptocurrencies within the country.

Beijing has long wanted China's currency, the yuan, also called the renminbi, to be used more in international trade and finance. Photo / Getty Images

The People's Bank of China started a cryptocurrency research group in 2014, and as early as 2016, the central bank's governor at the time, Zhou Xiaochuan, had mused about issuing a digital coin. But in 2017, as bitcoin's value soared and speculative frenzy raged, China shut down cryptocurrency exchanges and cracked down on fundraising through virtual coins.

After that, officials continued to discuss a government-controlled digital currency in speeches and articles, and after Libra was announced, China declared that it was accelerating its efforts.

Chinese officials have said little about when the project might start becoming a reality. At a news conference last month, Yi Gang, the central bank's governor, said the new coin would replace only a portion of the cash in circulation. The central bank did not respond to requests for comment.

China's proposed currency shares some elements with Facebook's, though aspects of Beijing's plans may not yet be firmed up.

Facebook says Calibra, its digital wallet for holding and spending Libra, will require ID verification, and the company is vowing to use your financial data responsibly. It says it will not, for instance, take note of your pain reliever purchases to push Instagram ads for clinics.

China has suggested that it, too, will keep spending information away from marketers — but not from the authorities. The banks and electronic payment companies that will distribute the new digital currency already require users to authenticate their names and identities. And officials have made clear that the central bank will be able to view data on transactions.

Chinese consumers have for years paid for everything with their phones, and the country's two dominant mobile payment services, Alipay and WeChat Pay, have become pillars of the Chinese economy. Alipay says it has processed as many as 256,000 payments per second. By comparison, Visa says it can handle 65,000. Libra is promising to do 1,000, at least at the start.

But many transactions on the Chinese platforms move exclusively between digital wallets, never making contact with the state-dominated banking system. That means the Chinese government has to go through the platforms' privately owned parent companies, Ant Financial and Tencent, if it wants to track and scrutinise those movements.

Not so with the new e-currency.

"This is highly controlled, manageable and decided by the central government," said Gary Liu, an economist in Shanghai. "This is very different from the original concept of a cybercurrency."

Chinese officials use something of an oxymoron to describe what their new currency will offer: "controllable anonymity."

Facebook's foray into finance has been met with a steady stream of doubts and questions. Photo / Getty Images

"As long as you aren't committing any crimes and you want to make purchases that you don't want others to know about, we still want to protect this kind of privacy," Mu, the deputy director of the central bank's payments department, said in another recent online lecture on China's cryptocurrency plans.

Clamping down on the true anonymity that paper money allows could bring real benefits in a country where corruption and fraud are widespread. But the government also risks alienating people in China who have grown increasingly sensitive to how their personal data is collected and used.

"Currencies should be neutral," said Flex Yang, founder of Babel Finance, a Hong Kong-based provider of financial services for cryptocurrencies. Their value, in other words, should not depend on whether they are being spent on bread or on cigarettes.

"Without anonymity, it can't be considered a currency," Yang said. "It can only be a payment vehicle."

Chinese officials have indicated that their aim is less to copy Libra than to get ahead of a potentially momentous shift in the global financial order.

Beijing has long wanted China's currency, the yuan, also called the renminbi, to be used more in international trade and finance. If Libra proves convenient for moving money across borders, then it could become a currency of choice in many countries, particularly those with unstable economies.

In a speech in July, Zhou, the former central bank governor, said the dominance of the dollar had eroded the economies of nations with "weak" currencies, and he warned that Libra and other future currencies might someday do the same.

"We need to prepare in advance to make the renminbi a strong currency," he said.

China's leaders would also love to have an alternative to SWIFT, the Western-dominated messaging network that helps money move across borders and between banks. Western governments have previously restricted access to SWIFT to punish Iran for its nuclear program, and as Washington and Beijing feud over trade and security, the Trump administration has considered sanctions of various kinds against Chinese companies.

A digitised yuan is not likely to become the world's new favorite currency overnight. China tightly regulates conversions of the yuan into other currencies to keep exchange rates stable, and similar strictures are likely to bind the crypto-yuan.

Regardless of whether Libra ends up thwarted by regulators, Facebook has set something unstoppable in motion, said Deng Jianpeng, a professor at Central University of Finance and Economics in Beijing.

"They were the first to open this Pandora's box," he said. "Once this box has been opened, if it isn't issued or doesn't succeed, there will definitely be another company that issues one or that succeeds in the end."

Written by: Raymond Zhong

Photographs by: Angie Wang

© 2019 THE NEW YORK TIMES