Is China’s Digital Currency a National Security Threat? What You Need to Know

Imagine a currency that can expire, or that the government can require citizens to use only for specific purchases. Imagine no further because that is the power the Chinese government holds through its newly tested digital currency. 

China’s digital currency is backed by China’s central bank, but unlike traditional bank accounts, users cannot withdraw physical cash. The Chinese government has the power to direct the way users spend the money or how quickly they spend it because the currency is fully digitalized. The money is accessible through an app on users’ phones.

“I think it’s very likely that the Chinese will push into place a digital currency that will first partner with, and eventually probably supplant, paper money,” Dean Cheng, a senior research fellow in the Asian Studies Center at The Heritage Foundation, tells The Daily Signal. 

There are serious national security and global economic concerns should China choose to embrace a fully digital currency, Cheng says. 

Cheng joins “The Daily Signal Podcast” to explain how China’s digital currency works in practice and how it could affect global economic markets. 

We also cover these stories:

  • The Supreme Court announces it will hear arguments in a case challenging the abortion precedent set by Roe v. Wade. 
  • The popular social media app Parler is back in the Apple App Store. 
  • Target, Walmart, Starbucks, CVS, and other businesses announce an end to mask requirements for customers. 

Listen to the podcast below or read the lightly edited transcript. 

Virginia Allen: I am joined by Dean Cheng, a senior research fellow in the Asian Studies Center at The Heritage Foundation. Dean, thank you so much for being here.

Dean Cheng: Thank you for having me.

Allen: Over the past several months, China has been testing a fully digital currency. More than 100,000 people in China have actually downloaded an app that is connected to China’s central bank and that allows them to spend fully digital money. Could you explain how digital currency works?

Cheng: Digital currency, in some ways, is simply the next step of the electronification of financial transactions.

Once upon a time, you went to the bank, you cashed a check, you got cash, you went home. Then we all got bank cards. Then those bank cards were networked. And now you can go anywhere in the world, go to an ATM and get cash. The transactions that allow that to happen, for you to get money in a different city, even in different countries, is obviously electronic.

Meanwhile, credit cards have become ubiquitous, so you can buy things without going through your bank account, again, around the world. And that’s a function of the spread of the digital network that links the world together. So in some ways, the digital currency is an effort to replace paper money entirely with a digital account of cash.

Now, what does this do for you? It does several things. It removes the need for you to carry cash around. It allows you to go to anywhere—7-Eleven, to a grocery store, to a regular retail shop—and pay with electronic cash rather than your credit card, for example.

But what it also does is it allows the government in China, in particular, and certainly financial institutions, which in China are pretty much all owned by the government, to monitor your spending habits. The Chinese already do so as part of their social credit score system, but in addition, now they will be able to monitor what right now they would have trouble tracking, which is cash-based transactions.

The Chinese say, and so do a lot of other governments, something like this would allow you to constrain criminal activities. Criminal gangs obviously prefer to work in cash. But in the case of China, it would also allow them to crack down on dissidence by basically throttling them, by strangling them, by not allowing them to do anything based on a cash transaction.

The other thing, and we’ve seen this in Europe, is that it gives the government a very powerful tool to regulate spending.

Right now, governments can’t really force people to spend money. The best they can do is offer negative interest rates, so savings accounts actually lose value over time. But as we saw in Cyprus during the early 2000s in a financial crisis, the Cypriot government actually went in, and the term was a haircut, they literally took a percentage of every savings account in the country.

So something like a digital currency would actually allow the government almost to go into your wallet and say, “OK, look, we need you to spend more money and we’re going to take away, as of say next Friday, 10% of any cash holdings you have.” Now, you’re going to be incentivized at that point to go out and spend.

Allen: Wow. So … the Chinese government would have total control, total access over its citizens’ bank accounts. I mean, that is frightening to hear. What are the implications for not only the Chinese people but as we begin to think about that globally, what are those implications?

Cheng: Well, first off, let’s be clear. In theory, the Chinese government gets total control. The reality, as we saw in the Soviet Union and every other authoritarian, totalitarian regime, is that there will be a black market. There will be people operating below the radar.

There will be people who operate, for example, with cash so long as there’s any legal tender, physical currency running around. It’s just that those prices will be inflated. They won’t be reported. And you really are going to push certain people and certain transactions to the margins.

But the implication for China, in particular, is that you’re going to wind up with a government really able to clamp down even harder on the population. If you are a Uighur, at that point, it’s going to be very hard to get out of a camp but then make your way anywhere across China. How would you get train tickets?

Right now if you have some cash, you might be able to buy it on your own or you might get somebody else to buy it for you. Once it’s digitalized, the system would be able to say, “Hey, wait a second. Why are you buying a train ticket to Guangxi or someplace else?” Especially if the other parts of the Chinese electronic records say you never left the city that you bought the ticket for.

Globally speaking, it sets a precedent for other countries to pursue this kind of electronic currency. It creates some really major potential Achilles’ heels, vulnerabilities, because if it’s electronic, your country’s cash supply is only as secure as your cybersecurity. And so, you could wind up with criminals, but also state actors, notably China, engaging in cyber-economic warfare, manipulating bank accounts, cash supplies.

Allen: Wow. So what could Chinese digital currency specifically mean for America and the U.S. dollar?

Cheng: The United States has the global reserve Currency, and that has a lot of implications. It’s essentially the thing that key commodities are priced in. It is the unit by which multiple transactions across other currencies are modified to.

What do I mean by that? If a Japanese company, Japan’s economy being denominated in yen, buys or sells things to, say, Israel, which I believe uses the shekel, how do you set the prices of the shekels and the yen? And in particular, if there are American components in the equipment, that starts affecting all of the prices.

So every major financial transaction around the world eventually wants to put dollars somewhere in the equation, conversion to conversion, from setting parity to paying suppliers, etc. It doesn’t have to become renminbi. It doesn’t have to become a euro or a yen.

Oil is an even better example, actually. Oil is priced in dollars. So no matter the country, if you are buying oil or selling oil, you’re working in dollars. The fear is that by making the renminbi more a part of global financial transactions, you’re setting China up to challenge the global reserve currency, namely the dollar.

Now, there’s a lot of reasons why the Chinese themselves are very hesitant about doing this, most important of which is the global reserve currency is free-floating. That removes the power of setting the “price” of money—How much is a renminbi worth?—out of the hands of China, into potentially the hands of international currency traders.

But this would certainly be at one way of making the renminbi more popular. Right now, anywhere you go in the world pretty much, dollars are welcomed. This would potentially, by making it more accessible, make the renminbi more popular.

Allen: Is this something that we should view as a national security threat? I mean, obviously, there are massive implications for the people of China, and like you’re saying, … it could have implications on the U.S. dollar. So should we be concerned that this actually is a threat to our security?

Cheng: Well, let’s begin with the reality that economics and security are not two separate fields. They are intimately linked, fundamentally intertwined.

The United States and the Allies in World War II won not only because we had Sherman tanks and Mustang fighters, but because we had much larger economies than either Nazi Germany or Imperial Japan. At the end of the day, the Soviet Union could not maintain an economic competitiveness with the West, and that eventually led to its collapse.

So anything that really strikes at the foundations of Western economics and the role of the dollar is definitely one of those foundational aspects, is a national security threat. How China might express that is a different issue.

Would China engage in cyberattacks simply because it now has a digital currency? I think that that’s probably too narrowly focused, but I would say that the Chinese push for a digital currency expresses both China’s concerns about its own internal security, but also gives us a hint of the direction that they are trying to head externally with regards to using economics as a tool of national security.

Allen: What do you think the likelihood is that, within our lifetime, we see China pretty much fully get rid of their paper money and move to fully a digital currency that is linked to China’s national bank and that is 100% trackable?

Cheng: Well, what we have already seen is China’s efforts to impose what can only be described as an Orwellian level of domestic surveillance with the Chinese social credit score system.

The Chinese population lives off of cellphones. They use their cellphones for everything, not just calling each other and not just texting each other, but fundamental access to the internet, paying bills, making doctor’s appointments, ordering dinner, scheduling taxis, etc. And all of that data is accessible to the Chinese government, both by law—Chinese passed a variety of laws, national security law, national cybersecurity law, which all say any time the government wants data, you have to provide it—but also because the Chinese Communist Party has a desire to maintain this level of surveillance in order to keep itself in power.

For this reason, internal security, internal surveillance, I think it’s very likely that the Chinese will push into place a digital currency that will first partner with and eventually probably supplant paper money because they have a system that wants that. They have a system headed by the CCP that wants to maintain that level of control. Whether or not that’ll eventually spill over to the rest of the world, how far they can go in pushing that onto other people, is an interesting question.

I will note, however, that already tourists, obviously not during COVID, but just before COVID shut everything down, tourists in China were noting that it was harder and harder to get by if you didn’t download Chinese apps onto your phone, that because of Chinese restrictions, you really couldn’t use Uber. You really couldn’t use a number of other app-based things to get around, to schedule things. You had to download Chinese apps, which pretty much allowed the Chinese to then access your cellphone.

Allen: Let’s say China goes pretty much full digital with their currency, and eventually the rest of the world feels pressured, they begin rolling out digital currencies. Is there a way for a fully digital currency to be secure, to provide users privacy, and to guarantee privacy from the government, or kind of any way you slice it is a digital currency just going to be something that ultimately is feeding all of your information, where every dollar you spend, that information is going to be going to the government?

Cheng: Part of the problem here is that there is something of a zero-sum relationship between convenience and privacy, especially when you consider that privacy isn’t just about from the government, but also potentially from technology corporations. So somebody is going to be able to monitor those electronic transactions. To some extent you want somebody monitoring it for cybersecurity reasons. …

The U.S. government right now cannot just willy-nilly go to Facebook and get data on you. Presumably, it needs a warrant or some national security overriding concern. But Facebook has absolute insight into you. So does Google. So do a lot … of these programs. And they, in turn, clearly are prepared to slice and dice that data and sell it to third parties.

So privacy in that regard is not necessarily affected by the government, but it is affected by large companies. And what exactly is your right to privacy relative to companies is even murkier. In the American system, we have a Constitution that says there is a right to privacy, as the Supreme Court has determined, but the Constitution and the Supreme Court have not said you have a right to privacy from Facebook.

Allen: Yeah. Wow. … You mentioned the fact that the money can expire, and I think that’s one of the most interesting things to me, terrifying things, as well. The government can track it, but then the government can also place these expiration dates on it.

So what are those broader implications if, let’s say, a certain region of China’s really struggling economically, then would the Chinese government be able to say, “Hey, you have to spend all of your digital currency within the next 48 hours”?

Cheng: … The idea of you have to spend some significant percentage of your holdings within a very short timeframe, one, would destroy the credibility of the currency to the Chinese people. That would actually push people away from digital currency, back to physical currency … or into other commodities, which the Chinese in particular, with their experience of inflation in the middle of the 20th century, there’s always been an emphasis on gold, real estate, things like that as a repository of value, but what it would give Chinese financial planners influence over is a longer term.

Look, sort of like interest rates, right? When our Fed announces that interest rates are going to go up or down, that affects the broader economy because banks, companies, etc., think of interest rates as the price of money. When they cut interest rates, they’re saying money will be cheaper. And everyone says, “Oh, that’s great. So I’ll go and borrow some money because it’s cheaper and use that to build factories or develop new technologies, hire more workers, etc.”

What this is doing is it is roping consumers directly into that. Right now, central banks, when they play with the interest rates, really what you’re most affecting are companies.

Secondarily, you’re also affecting, therefore, banks and their interest rates. Mortgages become cheaper. People are more willing to buy a house, but in a time of instability or a time of uncertainty, that may not be enough. People may want to still save their money, put it in a bank account. And this is what allows the government to go in and say, “Yeah, we don’t want you saving money. We want you out spending money.”

There are periods when that’s what you’d like to do, and up until now, governments, they can entice, they can suggest, they can hint, they can play with interest rates, but that’s something of a remove from the individual consumer. This really gives them a cudgel. The Chinese government already has a lot of cudgels. This adds to it. It’s a reminder of just how authoritarian the Chinese system can be.

Allen: So what is your predicted outcome? What do you think China will do next with the digital currency? And how do you think the world will respond to that?

Cheng: I think the Chinese will push ahead with the digital currency for all the reasons we’ve talked about.

The question is, given this convenience as the Chinese go abroad, as they have tourists that go abroad, as they invest abroad, as they have companies that are abroad, to what extent will foreign governments, foreign tourists, foreign shop owners say, “You know what? I have thousands of Chinese tourists every week, and they all say, ‘Why can’t I use a digital currency to pay for this?’ I think I would like to sign up to be part of that network.” That is how the Chinese can advance their financial influence.

Already, when you go to shopping malls, especially ones that have large numbers of Chinese stores, Chinese credit cards are accepted. Alipay, which is a digital form of payment—more like PayPal, however, than digital currency—is already becoming more and more accepted around the world. Tying these countries, certainly tying these companies to a Chinese payment system, but more importantly, tying their governments also more and more to China.

So I think that in the longer term, 10 years, 20 years out, we are probably going to see this as one of the phases of the U.S.-China economic competition. Who is the global reserve currency? Who manages the global financial networks? How are international business transactions denominated?

Because especially with oil, for example, at what point will a Middle Eastern country say, “China’s our largest export market. China buys more oil from us than the United States does. Maybe it’s time to denominate oil in renminbi”? And that won’t necessarily be tied directly to additional currency, but it will absolutely be a huge factor in determining who is economic top dog, not in terms of size of [gross domestic product], but in terms of global influence

Allen: It sounds like there’s a big role for convenience that digital currency, in some ways, is easy to sell to people because it is so convenient. And as people, we naturally love convenience.

Cheng: When credit cards first explored digital transactions, internet transactions, there was a lot of discussion about how to make it secure, dual key codes, and how would you do that? And would everyone walk around with some kind of fob or others random number generators so that you could have the kind of security that people thought consumers would want before they started just giving out their credit card numbers?

As it turns out Americans, for sure, and actually most of the world, were more than happy to type their credit card numbers onto their computers and use it to buy things electronically.

Convenience absolutely triumphs over security. That precedence suggests that if the Chinese can demonstrate how a digital currency would make your life more convenient and, as important, would make working with China profitable, they may find that people are every bit as willing to work with China now as they were willing to pipe their credit card number into their computer back then.

Allen: Very fascinated. Dean, thank you so much for your time today. We really appreciate you coming on and explaining what is going on in China and breaking down digital currency for us.

Cheng: Thank you for having me.

The post Is China’s Digital Currency a National Security Threat? What You Need to Know appeared first on The Daily Signal.

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Author: Virginia Allen


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