News & Events

World news - 17/09/2020

The resurgence of crypto exuberance

Author: George Mangion
Published on The Malta Independent 17 September 2020

Another thing that appears to concern crypto evangelists are burning questions pertaining to the technical design China will be using for its digital money system.

Facebook’s attempt last year to launch its pioneering coin “Libra” was ill-fated. The original plan was for Libra to be backed by a basket of sovereign currencies, with dollars making up 50 per cent of the basket.

Not surprisingly, its plans to launch a blockchain-based payment system stirred strong resentment among governments, banks and financial regulators. In Europe, French and German central banks blatantly showed their anger against such a seamless system of settlement.

They attacked Facebook for its loose management of extensive customer databases used for marketing purposes. Without any doubt, the authorities’ biggest fear is the growing influence of this IT behemoth on their monetary hegemony.

But Facebook’s early attempts have not gone unnoticed or unrewarded. 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 currency.

In fact, 80 per cent of central banks surveyed are engaging in some form of Central Bank Digital Currencies (CBDCs) work, and about 40 per cent of central banks have progressed from conceptual research to experimenting with form and design. Recently, Mastercard announced a proprietary virtual testing environment for central banks to facilitate the evaluation of CBDC use in public.

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.

Welcome to the game – MasterCard. This is a leader in operating multiple payment trails and convening partners to ensure a level playing field for everyone – from banks to businesses to mobile network operators – in order to bring the most people possible into the digital economy.  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. Having discussed Facebook and MasterCard adventures into the arena, let us examine what is the state of play in Asia-notably China. 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 shadow banking.

Three years ago, 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 2020 shows a more relaxed picture.  In fact, officials from the People’s Bank of China have hinted in recent weeks that the nation is almost ready to launch a digital version of its currency, the renminbi, to replace physical cash for consumer payments.

One may question – 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 could 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. A late August report from influential Forbes magazine suggested it could go live as early as November/December.

There are a number of unanswered questions about how it will work, ranging from whether it will use a blockchain or how private the system will be.  Despite the unknown, recent public comments by central bank officials have shed some light on the timeline for and motivation behind the project.

China’s digital currency would “bear some similarities” to Libra (mentioned above), but according to reliable sources, the forthcoming currency would strengthen the Communist People’s republic resolve to improve its controls against the proliferation of anonymous payments thereby fighting money laundering.

This creates an advantage since the new digital tokens could be used even without an internet connection, a feature that Libra’s creators have not promised. This leads us to comment on the origins of a leading coin Bitcoin in Asia. Since 2012, the Hong Kong Bitcoin Association has been one of the strongest local communities focused on Bitcoin. It stresses that a golden rule for Bitcoin is that transactions are irreversible and preaches to the faithful that it is not suitable for money laundering.

Back to China’s potential new venture, 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.

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. Another thing that appears to concern crypto evangelists is burning questions pertaining to the technical design China will be using for its digital money system.

So far – the answer is that we don’t know yet, but we might learn soon enough.

George Mangion

 

Author: George Mangion
Published on The Malta Independent 17 September 2020
Get in touch: info@pkfmalta.com