Official explains why China CBDC should not be as anonymous as cash

China’s central bank digital currency (CBDC) should not be as anonymous as cash, the head of the People’s Bank of China (PBoC) digital currency institute declared.

Digital yuan project lead Mu Changchun spoke of China’s CBDC project at the 5th Digital China Construction Summit on July 24, local financial publication Sina Finance reported.

Since debuting the digital yuan in 2020, the Chinese central bank has never targeted complete anonymity for the project, Mu said at the event. Instead, PBoC has been working to enable only limited anonymity in compliance with global Anti-Money Laundering (AML) regulations, the official stated.

The Chinese authorities should be able to access CBDC data on people suspected of crimes, Mu noted. According to the official, partial anonymity is an important feature of the digital yuan project though, as it guarantees transaction privacy and personal information protection.

However, a completely anonymous CBDC would interfere with preventing crimes like money laundering, terrorism financing, tax evasion and others, he added.

While cash is associated with more anonymity, it’s less mobile and easy to use in large amounts than a digital currency, Mu emphasized. “The inconvenient nature of carrying cash increases friction for money laundering and terrorism financing. Therefore, the tolerance for the anonymity of cash is relatively low,” the official stated, adding:

“The central bank’s digital currency is more portable. If it provides the same anonymity as cash, it will greatly facilitate illegal transactions such as money laundering. Therefore, the central bank’s digital currency should not have the same anonymity as cash.”

Mu went on to say that regulators risk encountering “serious consequences” if they choose to only focus on privacy protection and ignore the risks associated with financial crimes. “Freedom without constraints is not true freedom,” he added.

Despite rejecting anonymous online financial transactions, PBoC has still been working to ensure the privacy of the digital yuan. According to PBoC governor Yi Gang, the digital yuan has ambitions to be more privacy-enhanced than payment apps.

Related: China’s BSN chair calls Bitcoin Ponzi, stablecoins ‘fine if regulated’

The problem of user privacy has emerged as one of the biggest issues associated with CBDC projects worldwide. Regulators became puzzled about how to preserve digital privacy while also tracking transactions to prevent illicit financial activity.

In May, the European Central Bank (ECB) suggested that “CBDC with anonymity” was preferable to traditional digital payments like bank deposits in another working paper related to the digital euro. The proposal came shortly after the ECB admitted that digital euro designs lacked privacy options.

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