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China must prevent the abuse of its central bank digital currency (CBDC) in criminal activities, says a former central bank governor.

Zhou Xiaochuan delivered a speech at the 2023 China Digital Finance Forum, delving into how the East Asian country can improve its payments infrastructure to grow its stagnating economy. Zhou, an ex-governor of the People’s Bank of China (PBoC), believes that the digital yuan can transform China, but authorities must address some risks first.

“As technology costs continue to decrease and systems become more convenient, the cost of misuse also decreases,” he told the attendees.

This abuse and misuse include money laundering and arms trading, according to the economist. Zhou, who was at the central bank’s helm between 2002 and 2018, says that the digital yuan risks becoming a crime haven like ‘cryptocurrencies.’

“Many arms trades in military conflicts, as well as drug trades involving substances like fentanyl, are often facilitated using cryptocurrencies and stablecoins for payments, making this an area that requires focused prevention,” he noted.

It’s, however, essential to note that digital assets are not the crime haven some in mainstream finance allege.

In 2022, illegal activity accounted for $20.1 billion worth of digital assets, according to blockchain analytics firm Chainalysis. This equated to a mere 0.24% of the global transaction volume. For context, about $4 trillion goes to criminal activities annually in the U.S. alone.

The ex-governor also noted the rising use of digital assets in cross-border payments. He believes that the government must regulate the sector and protect users.

China remains a global leader among major economies in developing a CBDC. Over $250 billion had been transacted by July via the digital yuan.

However, the country continues to explore improvements to the CBDC to attract more users, especially the younger people accustomed to digital payments, including Alipay and WeChat Pay.

The latest proposal is a SIM-based digital yuan payment service. China Telecom, China Unicom, and the Bank of China (NASDAQ: BACHFtold attendees at the same event that this would make it more convenient to make payments in e-CNY as studies have found users are reluctant to install and use the CBDC app.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: CBDCs: The rules will apply, like it or not

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