China’s Digital Yuan: What to Know About the First Major Central Bank Digital
Matt Stankiewicz, Partner at The Volkov Law Group, rejoins us for another posting on digital currencies.
With the rise of digital currencies, it was inevitably going to attract the attention of governments. Not just in the regulatory sense, but also in terms of utilization. The blockchain technology underlying these virtual assets provide certain advantages over traditional paper money, some of which are rather significant. This has led many to speculate that we must not be far off from central bank digital currencies (“CBDCs”), where a country issues its own digital currency in place of its fiat – or paper – currency.
Now, China has become the first major economy to introduce its own CBDC, the digital yuan. China indicated its interest in digital currencies early on and had been experimenting with the technology for several years. Now, its central bank will control a new digital version of its currency. This change has a variety of massive implications, both domestically and internationally.
Anonymity (or lack thereof) and Financial Surveillance
Many still unfortunately associate Bitcoin with the Dark Web. It was only a few years ago that its primary use was to buy and sell illicit goods online, just out of reach of law enforcement. Many assume that this means that Bitcoin, and by extension most other digital currencies, provide a high level of anonymity. This could not be more false. Bitcoin merely provides pseudonymity. Users are identified by a wallet address, a random string of numbers and letters. It can difficult to connect a wallet address back to a user, but not impossible.
If you were to get that information, it would then reveal that individual’s entire financial history. Bitcoin, for example, is underpinned by a public ledger. This ledger records each and every transaction ever conducted on that blockchain. Using a block explorer or some sort of blockchain data analytic platform (such as Chainalysis or CipherTrace) will allow you to see the complete flow of funds to and from a wallet address. So, for example, if you owed a friend some money, and they gave you their wallet address to send some Bitcoin to, you could plug that address into one of these tools and see EVERY transaction they’ve ever made from that wallet. Anonymity be damned, Bitcoin is actually extremely transparent.
So here, with China’s digital yuan, you can imagine it will be very similar. While their ledger is surely centralized at their central bank and not available to the public, you can also be sure that this authoritarian government will have full access to it and will certainly be tracking the movement of money amongst and between its citizens. This technology will allow for an entirely new level of surveillance on the financial transactions of its users. Contrast this with paper money – if I hand you a $5 bill, the government has no idea. As China shifts towards a fully digital currency, it will have unfettered surveillance on its citizens’ finances.
Airdrops – Streamlining Money Transfers
The COVID19 pandemic has led to a need for economic stimulus as governments around the world are providing direct payments to citizens. The U.S. has done the same. It hasn’t been easy though, as the Treasury Department has been tasked with distributing this money across the country. They’ve used methods such as paper checks and preloaded debit cards, but these have been slow, cumbersome, and many eligible individuals have not received the money they deserve due to a variety of problems. The Treasury Department has even set up a new office solely to handle these endeavors. There must be an easier way.
Veteran cryptocurrency users are surely familiar with “airdrops.” One of the more noteworthy airdrops in recent months was for the Uniswap governance token. In distributing their token, Uniswap announced they would airdrop 400 UNI tokens to…
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