Issue link: https://maltatoday.uberflip.com/i/1371271
8 OPINION 13.5.2021 W ith the global economy rac- ing to embrace digital pay- ments, central banks are looking to the future and investigating how to support innovation while main- taining monetary policy and financial stability as they issue and distribute cryptocurrencies such as bitcoin have foreshadowed a potential digital future for money, though they exist outside the traditional global financial system and aren't legal tender like cash issued by governments. As the currency of the world's larg- est trading economy, the yuan punch- es far below its weight. According to an International Monetary Fund study published in 2019, data from 2016 suggests that about 93% of China's imports and 95% of its exports were denominated in dollars. The Chinese Communist Party, ob- sessed with control and highly averse to any foreign interference in its do- mestic affairs, realized that it was re- liant on a global payments system that could be tapped by U.S. intelligence agencies and that Washington could deny Chinese banks access to dollar funding. China's version of a digital currency is controlled by its central bank, which will issue the new elec- tronic money. It is expected to give China's govern- ment vast new tools to monitor both its economy and its people. Domestic policy, rather than geopolitics is the actual motivation for the rollout of the digital yuan. Quoting Stephanie Segal, a senior fellow at the Center for Strategic and International Stud- ies, she argues that "a lot of financial activity in China is happening over platforms like AliPay and WeChat Pay, and the central bank and other regulators didn't have a lot of visibility into that activity". China has well-es- tablished electronic payment service platforms that a centrally-controlled digital currency would be a backup if private payment systems hit financial or technical problems. Back in the west, and Mastercard an- nounced a proprietary virtual testing environment for central banks to fa- cilitate the evaluation of a central bank digital currency (CBDC). This utilises technology to represent a country's official currency in digital form. The platform enables the simulation of is- suance, distribution and exchange of CBDCs between banks, financial ser- vice providers and consumers. Central banks, commercial banks, and tech and advisory firms are being invited to partner with Mastercard to assess CBDC tech designs, validate use cases and evaluate interoperabili- ty with existing payment rails available for consumers and businesses today. In its global reach for digital pay- ments network, Mastercard wants to harness its expertise to enable the practical, safe and secure develop- ment of digital currencies. It is active- ly driving innovation with the public sector, banks, fintechs and advisory firms in the exploration of CBDCs, working with partners that are aligned to its core values and principles. In re- ality, one can vouch that CBDCs are designed to be equivalent in value to a nation's paper currency and subject to the same government-backed guar- antees. In addition to printing money, cen- tral banks can issue CBDCs as a dig- ital representation of a country's fiat currency. In Asia, we note how China three years ago banned cryptocurren- cy exchanges and so-called initial coin offerings amid a broad effort to reduce risk to its financial system and clamp down on so-called shadow banking. en, digital currencies were brand- ed as an easy platform to move mon- ey out of China, potentially adding to capital outflows that would undermine the yuan's value. e weather chart in 2021 shows a more relaxed picture. In fact, officials from the People's Bank of China have hinted in recent weeks that the nation is ready to launch (on a pilot basis) a digital version of its currency, the renminbi, to replace physical cash for consumer payments. Why is the central bank still venturing in such a digital currency today when its own electronic payment methods are so developed? The answer is that the new platform will vastly enhance the control of monetary sovereignty and legal currency status in China. It is an understatement to say that to date electronic payment methods are already ubiquitous in China. Popu- lar mobile payment apps, handle vast amounts of payments per quarter, are quickly eliminating cash transactions. How will the new platform work? Consumers and businesses would download a digital wallet onto their mobile phone and fill it with mon- ey from their account at a commer- cial bank. is is similar to going to an ATM. ey then use that money - dubbed Digital Currency Electronic Payment, or DCEP - like cash to make and receive payments directly with an- yone else who also has a digital wallet. Despite the unknowns, recent pub- lic comments by central bank officials in the West, have shed some light on the timeline for and motivation be- hind the project. One notes how trials have been held this year in a handful of cities and tests have started with some e-wallets and online apps, albe- it slowed down due to the Covid-19 pandemic with its penchant for social distancing. Such COVID-19 restrictions have on the contrary ushered a new sense of urgency. One may comment, that un- like cryptocurrencies such as Bitcoin, dealing in the digital yuan won't have any presumption of anonymity, and its value will be as stable as the physical yuan, which will be circulating around too. Behind China's rush is a desire to manage technological change on its own terms. The general feeling in the West is that there is little chance that a digital yuan will threaten the S dollar's role as the global reserve currency, which is dependent on the unrivalled size and liquidity of U.S. debt markets, the flexibility of the dollar's exchange rate and an institutional framework of checks and balances, an independent judiciary and the reserve bank. Still, the race has started for the Chinese dragon to tighten control over domes- tic use of its currency. Rise of a digital yuan currency George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island