China’s Cryptocurrency May Increase Potential 'Risks and Abuses’ to Financial Privacy, Says Binance Research

A new report from Binance’s research arm has examined the anticipated features of China’s Central Bank Digital Currency (CBDC), revealing that the proposed cryptocurrency isn’t as anonymous as advertised, and may even pose a risk to individual financial privacy.  

China has been considering the possibility of a sovereign digital currency as early as 2014, initiating the project in order to circumvent the costs associated with money circulation and in order to levy more control over the monetary supply.

However, it wasn’t until Facebook announced their own foray into the world of digital assets with their Libra cryptocurrency, that the People’s Bank of China (PBoC) finally stepped up their game. Back in July, Wang Xin, the Director of the PBoC’s research bureau appeared notably concerned about the geopolitical reach of Libra on international monetary policy:

If [Libra] is widely used for payments – cross-border payments in particular – would it be able to function like money and accordingly have a large influence on monetary policy, financial stability, and the international monetary system?

Now, according to Forbes, China’s CBDC is poised for release in the coming months, with the PBoC issuing the digital asset to a handful of institutions including Alibaba and Tencent.

Worth The Risk?

Mu Changchun, the deputy director of the PBOC’s Payment and Settlement Department, noted that China’s CBDC sought to “strike a balance” between anonymity and Anti Money Laundering (AML) requirements.

Binance researchers similarly cite this attribute suggesting that the cryptocurrency would be “less likely to be an instrument of illegal activities,” as the PBoC retains the ability to freeze any account or indeed CBDC which is suspected to be involved in illicit activity.

However, according to a prototype version of the system, China’s CBDC holds information pertaining to user identification and owner information, with the CBDC creating a new string of data every time it is transacted, collecting information on each and every individual owner:

Unlike privacy coins, central authorities would be able to gather information. Eventually, identities would likely be tied to respective individual wallets, hence making it fully non-anonymous, unlike Bitcoin.

How Will It Work?

According to the prototype system outlined by Binance researchers, the CBDC will work via a two-tier stricture. The first layer dictates the PBoC’s direct issuance to institutions such as commercial banks, and strangely enough, partners including the aforementioned Alibaba and Tencent.

The second layer represents the distribution of CBDC’s to the general public, as well as businesses via commercial banks, with deposits and withdrawals working in much the same way as the existing system.

Sources: Digital Currency Research Institute of PBoC, Binance ResearchSources: Digital Currency Research Institute of PBoC, Binance Research

The aim of China’s CBDCis to become the official legal tender for China, and, if successful, will mark the country as the first major sovereign state to implement a digital currency.

By adopting the two-tier system on its digital currency, the People’s Bank of China would achieve its goal of replacing paper money without subverting the existing monetary issuance and circulation system, which is also two-tier based (i.e., commercial banks are required to maintain capital above the required minimum reserve ratio at the PBoC).

Regardless of its merits, it’s highly than likely that the more privacy-centric among China’s population will take acceptation to the CBDC’s questionable definition of anonymity.