Recently authorized patents shed light on the surveillance capabilities of China's digital currency

The People's Bank of China (PBoC) has in recent weeks received authorization for 15 patent applications related to its central bank digital currency (CBDC) known as DC/EP, short for Digital Currency Electronic Payment.

These authorizations come at a time when the government appears to be expanding real-world testing of the currency. The patents were authorized in three batches — on August 11, September 29 and October 9, public records show.

Each one focuses on an aspect of the CBDC’s technology design, including the process for opening or disabling a digital currency wallet, connecting or disconnecting a wallet with a bank account and transferring digital currency in and out of a bank account.

The background descriptions for several of the authorized patents indicate that the PBoC's design for DC/EP was somewhat inspired by the nature of cryptocurrency and put an emphasis on tracing transactions.

Residents of China are used to most of their payment transactions leaving a digital footprint. Mobile apps are the dominant mode of payment, and popular services like AliPay and WeChat Pay keep digital logs that track transactions — data that includes timestamps and names of the parties involved. 

It’s unclear if or how much the government already monitors transaction data from AliPay and WeChat Pay. Either way, it has been widely speculated that it could use the DC/EP system as a financial surveillance tool. 

One of the newly-authorized DC/EP patents describes "a method and system for digital currency's customized tracing capability." It explains that the CBDC can be programmed to track where it is spent across multiple layers and parties, and thereby provides greater visibility of the entire capital flow chain.

"In the current technological environment, tracking capital flows relies on connecting with commercial banks one by one to obtain information on where a transaction comes and goes," the patent document reads. "As such, the current capital flow surveillance depends on aggregating transaction logs from different commercial banks in order to analyze backwards a comprehensive capital flow chain."

Another authorized patent, entitled "a method and system for exchanging digital currency with bank savings," describes a digital currency that is “completely different from existing virtual currencies like bitcoin and is based on sovereign credibility and is initiated by a central bank.” The document adds that the system can achieve "controllable anonymity," which essentially means a combination of front-end anonymity with back-end real-name identification.

Real-world ramp-up

PBoC officials have been hinting for more than a year that China’s digital currency, which is poised to be the first one issued by a major central bank, is close to being ready. During the past six months, the central bank has ramped up its real-world testing efforts.

In April, it was reported that a trial for DC/EP in Suzhou involved issuing transportation allowance for some civil servants in the form of digital currency. Traditionally, such allowances are issued in either cash or bank deposits.

In August, China Construction Bank (CCB), one of the big four state-owned commercial banks, briefly opened up a wallet service to the public for testing DC/EP. Though it disabled the feature shortly afterward, users who were able to register for the wallet had to first sign up with their real identification and were assigned a unique DC/EP wallet ID.

Just this week, China completed what was by far the largest test of the DC/EP system. The trial entailed giving away $1.5 million worth of digital money — which was spendable at more than 3,000 stores in the city — to 50,000 residents in Shenzhen by way of a lottery.

In total, 47,573 residents received digital currency and made 62,788 transactions worth around $1.3 million during the week-long test.