Police arrested suspects in Fujian, China.

China busts US$28 mln digital yuan money laundering case

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China has appeared to take advantage of its digital yuan’s “managed anonymity” feature to combat money laundering, as Chinese police this month busted a criminal group allegedly involved in laundering money worth nearly 200 million yuan (US$28 million) using the e-CNY — the nation’s new central bank digital currency (CBDC) in testing.

Police in Longyan, a prefecture-level city in Chinese southeastern Fujian province, said on Sunday they arrested 20 suspects last week on suspicion of illegal business operation and engagement in money laundering using the e-CNY, in a law enforcement campaign dubbed “Hundred-day Action.”

Police said the suspects used the e-CNY and virtual tokens to offer illegal fund settlement services for overseas gambling and telecom scam activities.

The move underscores the People’s Bank of China’s (PBoC) efforts to require e-CNY wallets that hold higher balances and engage in larger transactions to go through a know-your-customer (KYC) process to support what the central bank calls “managed anonymity.”

“These definitely are the world’s dumbest thieves,” Richard Turrin, a Shanghai-based fintech consultant who published “Cashless: China’s Digital Currency Revolution,” told Forkast.

Turrin said there is no practical way for a criminal to effectively launder the digital yuan, as the authorities could track transaction history if they obtain a warrant.

Since last year, scams and money laundering cases related to the e-CNY have emerged across China, with the police reportedly starting to investigate digital yuan flows to crack money laundering and fraud cases in Inner Mongolia, Jiangsu and Henan.

China has also been ramping up its e-CNY tests. As of the end of May, the country saw over 264 million digital yuan transactions, with a total value topping 83 billion yuan, according to official data released in July.

Besides e-CNY crimes, the world’s second-largest economy has seen a large amount of illicit fund flows with cryptocurrencies involved. On Monday, Chinese police said they have busted a large criminal group allegedly behind a 40 billion yuan (US$5.6 billion) crypto money laundering case, and have arrested 93 suspects across the country.

Although China banned cryptocurrency trading in September 2021 to crack down on what it calls a sector that has disrupted economic and financial order, the country still claimed the 10th spot on Chainalysis’ 2022 list of top crypto adoption countries published earlier this month.

The PBoC said on Monday it has continued to clamp down on crypto trading on the Chinese mainland and its global share of Bitcoin trading volume has significantly dropped. The central bank, however, didn’t disclose by how much the crypto trading size shrank.

Taming money laundering

In a white paper released in July 2021, the PBoC noted the e-CNY is not a 100% anonymous system, but supports “managed anonymity” with tiers of complexity based on KYC needs while protecting privacy and user information. 

Mu Changchun, director-general of the PBOC’s digital currency institute, has made it clear that complete anonymity will never be a feature of its CBDC. Mu wrote in an article published on Thursday on local media Modern Bankers that the central bank has designed four types of e-CNY wallets in a way that fulfills the principle of “anonymity for small value, and traceability for large value.”

The type-4 wallet, which can be set up simply with a mobile number, only allows up to 2,000 yuan for a single transaction. Transactions through such types of wallets, in Mu’s words, are anonymous, as holders don’t need to link up bank accounts.

However, in the event of theft or fraud, the authorities could get a warrant to unveil the identities of such e-CNY users, Turrin said.

“If a criminal gang specialized in low-value theft — below 2,000 yuan — the authorities would (still) be able to unmask their identities through digital means,” Turrin added. 

Striking a balance

Mu said anonymity on the basis of risk control is what central banks around the world have generally agreed upon.

Mu wrote in the article that CBDCs will only be leveraged for illegal use if authorities only pay attention to personal privacy protection without proper oversight and control.

Turrin said the recent policy papers released by U.S. and European authorities have made it clear that there will be no 100% anonymous digital dollar or digital euro. “This is not a position that is unique to the PBoC’s,” Turrin added.

Amnon Samid, chief executive officer of Israel-based cybersecurity firm BitMint, who participated in developing e-CNY trials in 2018, told Forkast that in the first digital yuan pilot back in 2018 in Shanghai, there was “controlled anonymity” put to test, which examined anonymity levels from zero to 100%.

But later it was changed to “managed anonymity,” which is designed to prevent personal information from being obtained by merchants or third parties that are not authorized by law, Samid added.

“Freedom without control is not real freedom,” Mu wrote.

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