Issue link: https://maltatoday.uberflip.com/i/1481025
8 NEWS 6.10.2022 The steady progress of China's digital currency George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island C hina has accepted the digital yuan, known as the e-CNY, as payment. People have used it for shopping, dining, personal finance and business uses such as paying tax- es and employees. Still it is early days as the use of the e-CNY in pilot programs is a drop in the ocean compared with the vol- ume of commerce conducted us- ing China's other two dominant mobile payment systems. To bridge that gap, a large amount of future investment in technology will be required. No matter what form the e-CNY takes, a currency has three main functions: as a store of value, a unit of account and a medium of exchange. By defi- nition, for consumers, the most basic function is as a medium of exchange or payment. In fact, the e-CNY has the same valua- tion as the RMB. Unlike many other currencies, the RMB is a fixed exchange rate curren- cy rather than a free-floating currency whose value is deter- mined by the market. e value of the RMB is pegged to currency baskets, such as the China Foreign Ex- change Trade System RMB In- dex, which includes a number of advanced market currencies, including the US dollar and the euro. Readers ask - what is the state of play of digital curren- cies in Asia-notably China? A bit of background helps as China has in 2017, banned cryptocurrency exchanges and so-called initial coin offerings amid a broad effort to reduce risk to its financial system and clamp down on so-called shad- ow banking. Recently, digital currencies were branded as an easy plat- form to move money out of China, potentially adding to capital outflows that would un- dermine the yuan's value. e currency chart in 2022 shows a more relaxed picture. In fact, officials from the People's Bank of China have hinted in recent weeks that the nation testing the launch of a digital version of its currency, the renminbi, to replace physical cash for con- sumer payments. As of May 31 this year, the cu- mulative number of digital ren- minbi transactions in the pilot areas of 15 provinces and cities was about 264 million, with an amount of about 83 billion yuan, and the number of mer- chant stores supporting digi- tal renminbi payment reached 4.567 million. e People's Bank of Chi- na has been developing the digital yuan, a so-called cen- tral bank digital currency that aims to replace some of the cash in circulation. China has already concluded real-world trials for the digital currency in a number of cities including Shenzhen, Chengdu and Su- zhou. Needless to mention that the Chinese market is already very advanced in cashless pay- ments. e digital yuan would be a legitimate way to speed that process up. It will be legal ten- der in China and no interest will be paid on it. In the retail sector, the use of cash is de- creasing. Eventually cash will be en- tirely replaced by something in digital format. WeChat Pay will soon have a section of their apps dedicated to digital yuan. Meanwhile, smartphone makers could also create digi- tal yuan wallets for their devic- es. One may question - why is the China central bank ventur- ing in such a digital currency today when its own electronic payment methods are so devel- oped. e answer is that the new platform will vastly enhance the control of monetary sover- eignty and legal currency status in China. It is an understate- ment to say that to date elec- tronic payment methods are already ubiquitous in China. Popular mobile payment apps, handle vast amounts of payments per quarter, are quickly eliminating cash trans- actions. How will the new plat- form work. Consumers and businesses would download a digital wallet onto their mobile phone and top it with money from their account at a com- mercial bank. is is similar to going to an ATM. ey then use that mon- ey - dubbed Digital Currency Electronic Payment, or DCEP - like cash to make and receive payments directly with any- one else who also has a digital wallet. Despite the unknowns, recent public comments by central bank officials have shed some light on the motivation behind the project. China's digital currency would strengthen the Commu- nist People's republic resolve to improve its controls against the proliferation of anony- mous payments thereby fight- ing money laundering. is creates an advantage since the new digital tokens could be used even without an internet connection as it is blockchain controlled. Back to China's potential new venture, one notes how trials have been held in a handful of cities and tests have started with some e-wallets and online apps, albeit slowed down due to the Covid-19 pandemic with its penchant for social distanc- ing. Such Covid-19 restrictions have on the contrary ushered a new sense of urgency. Unlike cryptocurrencies such as Bitcoin, dealing in the digi- tal yuan won't have any pre- sumption 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 man- age technological change on its own terms. In the near future, consum- ers may use prepaid funds in digital wallets to buy wealth management products, and banks may provide loans and other financing for merchants. To increase public acceptance of the e-CNY, the central bank currently does not charge fees to banks and other operating institutions for the conversion and circulation of the digital yuan, and institutions do not charge customers for conver- sion. To guarantee the anonymity of the digital yuan, authorities plan to improve regulations, including establishing a mech- anism to regulate the use of customer information so that operating institutions will be able to apply for access to user information only for risk analy- sis and monitoring when illegal transactions are suspected. Quoting e Economist, it argues that China's technocrats aspire to build a payments sys- tem that is easier for its trading partners to use and harder for America to block. ey might also hope that such a system could make the yuan more influential abroad, without compromising China's capital controls at home.