The Foreign Service Journal, April 2023

THE FOREIGN SERVICE JOURNAL | APRIL 2023 23 The U.S. quickly added the petro to its sanctions list, making the token an untouchable asset for anyone wanting to remain in good standing in the international banking system. Observing the failed petro project, I turnedmy attention to other nations, like China, that were going about things differently. In early 2021, I coauthored a report withmy colleague Emily Jin at the Center for a New Ameri- can Security unpacking China’s digital currency project. A second report, looking at the pilot’s progress, is forthcoming. The PRC’s digital currency project is not motivated by immedi- ate sanctions evasion, but by a longer-term vision for the future of money. Since 2014 the People’s Bank of China (PBOC)—the nation’s central bank—has been researching digital currency technology. By 2020 it had launched its first trials of the CBDC, called the electronic Chinese yuan (e-CNY). This digital fiat cur- rency is also called the digital renminbi. In watching this project, I’ve become convinced that while the pilot is a tiny experiment relative to China’s overall economy and will not alter the ren- minbi’s international competitiveness (which is based on many other economic and political factors outside its technology stack), the U.S. needs to track its development closely. The geopolitical implications of the e-CNY are less about currency and more about what China is doing with data innovation. The e-CNY Up Close: A Central Banker’s Dream The electronic Chinese yuan is a payment instrument that is the digital version of China’s fiat currency, and it is created and managed by the People’s Bank. It is a retail central bank digital currency available for individuals and institutions to use and will coexist with physical renminbi. The e-CNY architecture is a two-tiered digital payment system. The PBOC is Tier 1 of the e-CNY system, and it issues digital renminbi to Chinese financial institutions that provide the currency directly to users through digital wallets. These institutions make up Tier 2 of the system. Typically, the way users acquire digital renminbi is by download- ing the People’s Bank’s e-CNY app. Then, users must select one of the financial institution wallets within the app in order to begin transacting in the digital currency. The e-CNY is a digital currency, but it is not a cryptocurrency. Its main operating system is not blockchain or distributed ledger technology. The People’s Bank is planning for permissioned, state-controlled distributed ledger technology elements to sup- port the e-CNY operating ecosystem, such as where the central bank conducts large-scale settlement operations to reconcile transfers between financial institutions. But the day-to-day retail transactions at the Tier 2 level use a centralized ledger, with a single point of control. People’s Bank calls the e-CNY a hybrid system, borrowing from blockchain architecture in parts, but allowing for flexibility in design as the system evolves. The electronic Chinese yuan will use “smart contracts” for programmable transactions, especially in wallet technology. Users can access various types of wallets in the e-CNY system; software wallets, hardware wallets (including wearables), and wallets asso- ciated with personal machines (like cars) and other devices. Users can also have sub-wallets for different types of payment categories. For example, they can create a sub-wallet specifically for electricity bills tomake fiscal management easier for payers and payees. The People’s Bank does not publish up-to-date statistics about the e-CNY pilots, but it reported that in late 2021, 123 million indi- viduals had e-CNY wallets and there were 9.2 million corporate wallets. As of August 2022, e-CNY pilots in 15 provinces handled 360 million transactions totaling 100 billion yuan ($14 billion), involving roughly 6 million retail merchants. By December 2022, the pilots spanned 17 geographical areas including municipalities and provinces. Architecturally, the e-CNY is groundbreaking because it is government-run infrastructure whose transaction data go straight to financial authorities. This is not how banking and fintech work generally. Today’s legacy payment systems are built on private financial institutions’ infrastructure. Governments, whether democratic or authoritarian, always have to acquire transaction data by going through those private firms. Until the exploration of central bank digital currencies, governments have never had the technical potential to capture all transaction data in real-time. A CBDC designed in such a way might be considered a central banker’s dream. In China, private sector mobile apps like AliPay and WeChat Pay have dominated the payment landscape for more than a decade. In recent years the Chinese Communist Party (CCP) has been wresting control of data silos from the private sector, seeing data as a factor of production that the state must harness to advance a more digital economy. The People’s Bank calls the e-CNY a backup system for retail payments; but I believe it is more accurate to call it the government’s preferred default system, one that gives it direct insight into the activities of the domestic population. In its pilots, People’s Bank is seeding e-CNY payment capacity into everyday services like groceries, public transporta- tion, utilities, and health care. People’s Bank claims that e-CNY transactions are de-identi- fied so that the central bank does not have direct access to the personal identification information attached to transactions