Mu Changchun, the Director General of China’s central bank Digital Currency Research Institute, clarified how the managed anonymity of China’s digital yuan works.
Talking about the central bank digital currency (CBDC) at DC Fintech Week, Mu Changchun said today, “There’s actually a big misunderstanding about the anonymity issue of the eCNY system.” Despite wallets for small value payments requiring a phone number, the central bank would need a warrant to access an individual’s identity linked to that number.
How it works
Digital yuan wallets have multiple tiers, and each tier is authorized to transact larger total values. The aim is to support anonymous small value payments but traceable larger amounts.
Apart from the small value fourth tier, users have to provide conventional proof of identity to open a wallet. The small value tier requires only a phone number as an identity. In contrast, other digital payments, such as via payment providers like Alipay or WeChat Pay, require conventional identification at onboarding.
It’s generally assumed in the West that the Chinese government can easily link the phone number to an identity, and hence it’s not anonymous. Mu Changchun said that’s not the case.
In August, the Chinese government formally passed the Personal Information Protection Law (PIPL).
“Under that law, the telecom companies cannot release any information, any identity information, to any third parties, including the central bank,” said Mu.
Hence neither the central bank, commercial banks, nor payment providers can access the personal information linked to that number. The only transactions accessible to the central bank are via the institutions.
However, if it’s suspected that some anonymous transactions are illicit, law enforcement agencies can present a legal warrant to the phone company to get the user’s identity.
Separately the digital yuan aims to enhance transaction privacy, making it harder for private firms to track a user’s activities between separate merchants. Hence all wallets have a sub wallet function in which each online retail store can have a separate wallet to avoid linking a person across retail outlets. This functionality uses tokenization and encryption.
“The eCNY system collects the least transaction information compared to traditional electronic payment systems,” said Mu.
“The concern personally I have is how to effectively prevent and combat money laundering, terror financing and tax evasion under an effective anonymous eCNY system.”
Some in the West have asserted that the purpose of China’s CBDC is to monitor payments. However, as previously reported, the central bank has considerable visibility into all other payments, including those via Alipay and WeChat Pay. That was confirmed by Mu’s predecessor.