Author: George Mangion
Published on Business Today on 13 May 2021

With the global economy racing to embrace digital payments, central banks are looking to the future and investigating how to support innovation while maintaining 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 largest trading economy, the Yuan punches 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, obsessed with control and highly averse to any foreign interference in its domestic affairs, realized that it was reliant 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 electronic money.

It is expected to give China’s government 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 Studies, 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-established 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 announced a proprietary virtual testing environment for central banks to facilitate 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 issuance, distribution and exchange of CBDCs between banks, financial service 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 interoperability with existing payment rails available for consumers and businesses today.

In its global reach for digital payments network, Mastercard wants to harness its expertise to enable the practical, safe and secure development of digital currencies. It is actively 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 reality, 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 guarantees.

In addition to printing money, central banks can issue CBDCs as a digital representation of a country’s fiat currency. In Asia, we note how China three years ago 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 shadow banking.

Then, digital currencies were branded as an easy platform to move money out of China, potentially adding to capital outflows that would undermine the Yuan’s value. The 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. Popular 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 money from their account at a commercial bank. This is similar to going to an ATM. They then use that money – dubbed Digital Currency Electronic Payment, or DCEP – like cash to make and receive payments directly with anyone else who also has a digital wallet.

Despite the unknowns, recent public comments by central bank officials in the West, have shed some light on the timeline for and motivation behind 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, albeit 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 unlike 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 US 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 the domestic use of its currency.

Author: George Mangion
Published on Business Today on 13 May 2021
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