YouTube Music has been prepared to replace Play Music since Google renamed its YouTube services last year, although we have not seen any big moves in this regard. About a month ago, YouTube Music has acquired the ability to act as a media player for local files, but only through other apps like File Manager. Now local playback in the app will be rolled out to pave the way for Play Music.
Google has decided to place the functionality in a new "Device Files" tab. However, with the banner in the picture above, your local audio files can not be added to queues and playlists containing songs from YouTube Music. Play Music has no such limitations, so we're not sure why they're here. The banner also indicates that local files can not be converted to other devices.
The screenshot we have shows device files in the Artists section of the Library tab. Presumably there will be a similar tab in the other four sections (downloads, playlists, albums and popular titles), but without further screenshots we can not be completely sure.
Since this is not displayed Our phones, even the latest version 3.13.52, are most likely a server-side rollout. While not so far, this is an important step in making YouTube Music a replacement for Play Music.