China’s Central Bank Digital Currency Reform
In a significant policy shift, China’s central bank will undergo an extensive reform regarding its digital currency beginning January 1, 2025. The People’s Bank of China (PBOC) revealed that starting next year, commercial banks will offer interest on holdings of the digital yuan, also known as e-CNY. This adjustment indicates a departure from the current operational model of the digital currency, which is expected to enhance adoption among the public and businesses alike.
Transition to Digital Deposit Money
PBOC Deputy Governor Lu Lei elaborated on these changes in a recent piece for Financial News, outlining how the digital yuan is moving from functioning purely as digital cash to serving as digital deposit money. This new approach is poised to cement the currency’s role in China’s economy, particularly since the digital yuan is already classified as legal tender, distinguishing it from leading private payment services such as Alipay and WeChat Pay, which do not enjoy the same official status.
Competitive Advantage of e-CNY
Due to its legal tender classification, merchants are required to accept payments made with the digital yuan, while acceptance of private payment methods remains voluntary, thereby granting the e-CNY a competitive advantage.
Functionality and Legal Protections
Similar in functionality to other mobile wallets, the digital yuan allows users to conduct purchases, transfer money, and oversee their accounts via mobile devices. However, the legal protections supporting e-CNY provide it with a level of government endorsement that cannot be matched by private alternatives.
International Expansion and Cross-Border Transactions
Additionally, the digital yuan’s reach is expanding internationally, as illustrated by the recent successful digital transaction in Laos. This landmark event underscores the currency’s potential in global trade and payment systems. The PBOC is also working on enhancing the mBridge platform, which has been upgraded to streamline these cross-border transactions, enabling real-time digital payments between various nations without conventional banking intermediaries, thanks to the collaborative efforts of multiple central banks involved in this initiative.
