Cash-for-Metaverse: How China’s Digital RMB and Metaverse Strategy Could Circumvent Sanctions

Introduction

On February 27, the State Council of the People’s Republic of China released its Digital China Plan (数字中国建设整体布局规划), outlining China’s latest strategy for its “digital economy” (The State Council of the People’s Republic of China, February 27). The Plan highlights the PRC’s ambitions for advanced innovation in the digital sphere, its intention to continue to build cloud and supercomputing centers, and, notably, its aim to create an “integrated international system for digital platforms.”

Although not explicitly mentioned in the Plan, China’s broader digital ambitions encompass two noteworthy components that deserve attention in their own right: the PRC’s ongoing rollout of its digital currency and the formulation of its metaverse strategy. Both of these technologies, whether they are to be used solo or in concert, could provide hard currency under conditions where China’s access to other sources of funds are limited through sanctions. China has been active in developing legal and whole-of-nation responses to US and other sanctions in laws such as the Anti-Foreign Sanction Law (中华人民共和国反外国制裁法), and the Law on Relations with Other Nations (中华人民共和国对外关系法), which took effect on July 1st (npc.gov, June 2021; gov.cn, June 29). Through the implementation of a two-pronged digital currency and a metaverse strategy, China may be exploring novel approaches to enhancing the resilience of its economy in the face of Western-led sanctions regimes.

Digital RMB

China’s digital currency, the Digital RMB (数字人民币) has entered a heavy pilot phase, now involving seventeen provinces, as well as multiple international use cases. As of late August 2022, Digital RMB transactions totaled more than 360 million, with a volume of around 100 billion RMB ($13.8 USD; cnr.cn, October 2022; China Daily, April 2022; Ledger Insights, November 2022). For China’s central government, a core objective is to introduce a digital currency that offers the same level of convenience as other forms of digital RMB payment such as Alipay and WeChat Pay, while ensuring transactions are easily trackable in digital ledgers kept by the People’s Bank of China (PBoC) and participating financial institutions.

If the Digital RMB were to be adopted as a method of payment in real or virtual economies, only the PBoC and participating financial institutions would keep a copy of the ensuing transactions (PBoC Digital RMB Research Working Group, July 2021). The Digital RMB is a Central Bank Digital Currency (CBDC) that utilizes a private blockchain network, also known as a permissioned blockchain (101 Blockchains, December 2022). In other words, the usage of this currency would not entail the transparency that decentralized blockchain technology affords, whereby a digital ledger could allow transactions to be traced directly by anyone who could access the relevant blockchain.

This protection may be important in order to safeguard user data and financial privacy, but in theory and practice the Digital RMB does not require the use of SWIFT or CHIPS financial routing systems in order to function. The effective enforcement of sanctions regimes often relies on detecting transactional information relayed in the SWIFT system to discern sanctions violations or violators. Such information includes the names of sanctioned individuals or entities appearing in transaction headers, or as part of the names of the transacting parties. The Digital RMB scenario entails financial and transactional data being solely accessible to the PBoC and participating financial institutions—and the possibility that sanctions violations could go unreported.

If the Digital RMB were to be adopted internationally, the PRC could gain an avenue for currency that would effectively circumvent traditional sanctions regimes. The Digital RMB ecosystem’s unique advantage is that it does not rely on the SWIFT network as its primary transaction channel. Consequently, the PRC’s digital currency would be largely unaffected by potential removal of Chinese financial institutions from the SWIFT system, as was done in the case of Western sanctions against Russia. Whether or not “participating financial institutions” would be responsive to requests by a government to disclose CBDC ledger data from the Digital RMB remains to be seen.

Metaverse Ambitions

The term Virtual Reality (虚拟现实) entered China’s 14th Five-Year Plan of 2021, ensuring a substantial response from local and municipal government in that year and ensuing years (The State Council of the People’s Republic of China, December 2021). Virtual Reality constitutes a substantial part of China’s overall strategy of developing its digital economy, ostensibly by drawing upon the robust 4G and 5G infrastructure that the country has created for itself during the first phase of its digitization strategy (The State Council of the People’s Republic of China, December 2021; People.cn, April 2022). Used interchangeably with the word metaverse (元宇宙), China’s virtual reality push is primarily being spearheaded by municipal governments, along with a selection of government ministries and the PBoC (Lingyi Knowledge Vault, November 2022).

China’s overall strategy established 2023 as a year to create metaverse champions and use-cases, which appears to remain a work in progress (36kr, April 26). While still in its initial stages of development, progress on China’s metaverse strategy were blindsided by US chip sanctions, a policy which may have limited the advanced computing equipment needed to render, host or design realistic virtual worlds. Local governments could be finding it difficult to procure the necessary funds due to China’s current lackluster economic situation. Local actors could also be in the process of reformulating their strategies for developing digital economies according to sudden sea changes in artificial generative intelligence (AGI) technologies, which may result in a pivot of resources and policy to focus on these applications instead of metaverse.

However, China has continued to invest heavily in the metaverse, with one account highlighting 850 billion RMB ($117.7 billion USD) being invested or pledged by at least 15 municipalities in 28 separate policy programs up until 2025 (36kr, April 26). “Industrial-use” metaverse applications have received significant definition in policy, including applications which would allow VR/AR to augment manufacturing on a factory floor or assist with the repair of complex machinery (gov.cn, November 2022). Additionally, “consumer,” cultural, and entertainment metaverses are also part of the virtual reality policy equation as proposed by the Ministry of Industry and Information Technology, the Ministry of Education, the Ministry of Culture and Tourism, the National Radio Television Administration and the General Administration of Sport in China in late 2022.

Early domestic metaverses in China have not had an easy going. Some have been banned due to the prevalence of fraudulent activity and transactions on their platforms, while others have been affected by regulations against aforementioned “fake” metaverse activity (VRAR Planet, May 4). Furthermore, other platforms such as the foreign-facing Party Island metaverse, have not generated enough interest to be worthwhile private sector endeavors, possibly due to China’s current regulatory environment (Pingwest, October 2022). Party Island was a “virtual social app” developed by TikTok owner ByteDance and was just one of a series of early metaverses developed by tech giants such as Tencent and Baidu. It allowed users to interact in an “online virtual community,” but never grew out of its beta, invitation-only phase.

A “Finished” Metaverse Project

Despite the aforementioned challenges, Chinese companies know how to make economically lucrative virtual worlds and content for a global audience, so creating such a metaverse for international rather than domestic consumption may not be far off given present levels of investment. Immersive Chinese-origin mobile games such as Genshin Impact generate billions of dollars in global revenue annually, and some game designers, animators and other members of China’s substantive video game industry could be recruited to work on a new version of Party Island—this time, with substantial local government backing (For the Win, September 2022).

A finished metaverse project could provide revenue to an underlying SOE using China’s Digital RMB or obtain hard currency in exchange for a virtual currency designed to be utilized within the metaverse system. Such a metaverse could be accessible from all over the world, but hosted in China, utilizing a digital ledger system that is solely accountable to Chinese financial institutions or companies. Metaverse participants would pay for virtual items, upgrades, virtual “real estate,” access to new regions of the metaverse, power-ups and more using cash in their home currency, all of which could also be converted to in-metaverse digital currency. As is often the case with existing video game currencies, it will likely prove challenging to convert metaverse digital currency back into cash.

Upgrading Sanctions?

As speculative as obtaining hard currency from a metaverse to avoid sanctions may seem right now, China does seem to have some of the necessary requirements: A functional, partially globally available digital currency, a well-primed and well-supported metaverse sector that is slated to produce results this year, and a globally competitive video game industry that could provide support to either of the two. A metaverse created for the international market could be less affected by domestic regulations surrounding the creation of metaverse and video gaming content, and it is straightforward to see how such a metaverse “champion” could emerge under conditions of increased foreign sanctions against the PRC.

What recourse could foreign governments have against such a metaverse champion? It would be difficult to argue for the metaverse app to be removed from the relevant app stores (Google Play, Apple App Store) if the company maintaining the metaverse app is not itself sanctioned or involved in sanctions violations. The logical step, then, is to sanction the company, but this may become a slippery slope and lack a legal foundation, since it would be impossible or at least difficult to determine where the metaverse’s revenue was going under the ledger system previously described, much less that it was being used to circumvent sanctions.

Thus, regulation of metaverse app platforms will come into focus as the technology proliferates and more companies besides Apple and Meta become involved in developing their own platforms. Some will be more easily persuaded to remove content from their platforms than others, and foreign governments may not have any expectation of jurisdiction over a Chinese app store. Financial institutions will remain a key focal point for the detection and prevention of sanctions violations, encompassing both traditional and blockchain or CBDC transactions.

Conclusion

Although China has made substantial progress in the rollout of its digital currency thus far, it remains unclear how the Digital RMB will become more open for transactions in foreign markets, including retail users. A complete opening to the world would require stronger controls over Digital RMB pricing than seem possible at present, in order to prevent fluctuations in the domestic price of the currency due to “foreign intervention.” Smaller exchanges could be created, raising the question of what holders of the currency could actually buy in these smaller markets, if the purpose of the currency is more than speculation and trading. In this vein, it is conceivable that the Digital RMB could be used to purchase virtual assets in a limited metaverse environment.

If such a Digital RMB exchange is not created for the metaverse champion, that would leave them the option of creating their own digital or in-metaverse currency, which would itself draw the attention of the authorities and financial regulators. In sum, China’s metaverse and Digital RMB challenges are as political as they are technical. As is often the case in China, political challenges have no guarantee of resolution.