What is digital yuan?
The digital yuan, also known as e-CNY, is a digital currency issued by the People's Bank of China (PBOC). It is an electronic version of the yuan, designed to facilitate online and offline transactions.
The PBOC is rolling out the digital yuan system to improve retail payment infrastructure, promote economic growth and ensure financial inclusion. It supports equal access to digital payments, enhances the central bank payment system, explores international cooperation for cross-border payments, and serves as a backup to prevent systemic risks from major technical failures.
The state-backed digital currency addresses changing financial needs and makes financial services more accessible. It is backed by national credit and operates as a legal tender. The PBOC plans to cooperate with other countries, respond to G20 initiatives, and explore cross-border payment methods based on the principles of respect for sovereignty and compliance with regulations.
As of May 2024, the value of digital yuan transactions in China reached 6.6 trillion yuan (equivalent to 910 billion USD), nearly four times higher than the 1.8 trillion yuan recorded in 2023.
As of July 1, 2023, public transportation in Jinan City has accepted digital yuan payments, and the Shanghai Clearing Center has also increased its support for digital payments. However, despite China's huge population of 1.4 billion people, the adoption rate of digital yuan remains relatively low.
Roadmap for the development of digital yuan
The main stages in the development of the digital yuan include:
Initial idea and research (2014–2016)
Recognizing the need to digitize cash to enhance financial inclusion and payment system efficiency, the People's Bank of China (PBOC) began researching digital currency and electronic payments in 2014. By 2016, a task force was established to research and develop prototypes and build a theoretical foundation for a safe and efficient digital payment system.
Test and Development Program (2017–2019)
During 2017–2018, the PBOC intensified research, focusing on the legal, technical aspects and potential impacts of the digital yuan on financial stability and monetary policy.
In 2019, closed pilot programs were deployed in several cities, aiming to evaluate the feasibility of digital currencies in real-world scenarios such as retail payments and interbank payments.
Expanding the testing area (2020–2021)
In 2020, the PBOC expanded its pilot programs to major cities such as Xiong'an New Area, Suzhou, Chengdu, and Shenzhen. These programs, which included issuing digital yuan through lottery and encouraging people to use it at specific retail locations, attracted widespread attention.
In 2021, the testing scope continues to expand with more cities and use cases, including cross-border payments, e-commerce platforms, and the Winter Olympics in Beijing.
Continuous development and international expansion (2022 to present)
Since 2022, the PBOC has focused on perfecting the digital yuan ecosystem, prioritizing compatibility with popular payment platforms. At the same time, the PBOC has also actively participated in international cooperation to research and promote the use of digital currencies in cross-border payments.
In addition to basic features, the digital yuan is also being developed to integrate smart contracts, opening up opportunities for more complex and automated financial transactions. On January 17, 2023, Meituan, a major Chinese platform providing retail and delivery services, introduced smart contract features. The main goal is to expand the application and influence of the digital yuan in many areas such as services, retail and finance.
How does the digital yuan work?
With support from the People's Bank of China (PBOC), the digital yuan operates through payment service providers, ensuring greater privacy and anonymity while still maintaining the traceability needed to prevent illicit activities such as tax evasion and money laundering.
The digital yuan is considered a direct liability of the PBOC and is defined as M0 (similar to cash in circulation). It offers completely risk-free transactions and does not pay interest. Only banks can make the conversion between the digital yuan and bank deposits, and vice versa; digital wallets that store the digital yuan are not considered bank accounts.
How the Digital Yuan Works
The digital yuan operates on a two-tier structure, in which:
Tier 1 includes the People's Bank of China (PBOC), which is responsible for issuance and overall management.
Tier 2 includes organizations such as large state-owned banks and online banks such as WeBank (WeChat Pay) and MYBank (AliPay), which are responsible for providing services and managing users in this two-tier system.
Seven major commercial banks are allowed to provide digital yuan services, including:
Industrial and Commercial Bank of China (ICBC).
Agricultural Bank of China (ABC).
Bank of China (BOC).
China Construction Bank (CCB).
Bank of Communications (BoCom).
Postal Savings Bank of China (PSBC).
China Merchants Bank (CMB).
And 2 online banks:
WeBank (WeChat Pay).
MYBank (Alipay).
Users can open digital yuan wallets through tier-two institutions. The digital wallet, known as shuzi qianbao in Chinese, is an online platform that allows individuals to manage and store digital yuan.
Layer 2.5 institutions (including banks and non-layer two payment service providers) also provide various services to digital yuan users, but are not capable of conducting currency exchange transactions.
Businesses, consumers, and retailers at the bottom of the pyramid support peer-to-peer transfers and establish payment infrastructure for the digital yuan.
Tier two organizations perform many important roles, including:
Customer service
Privacy Protection
Conduct Know Your Customer (KYC) verification process
Investing in retail infrastructure for digital yuan
This two-tier structure aims to promote the adoption and integration of the digital yuan into the financial ecosystem, ensure efficient management, and enhance broad access to related services.
How to access and use the digital yuan
The digital yuan can be accessed primarily through apps provided by commercial banks or the e-CNY app, which is currently available in some cities in China. Users outside China cannot use the e-CNY app.
Additionally, foreigners in China can easily fund their wallets and make transactions. Major cities such as Shenzhen, Beijing, and Shanghai also offer access to physical digital yuan wallets, suggesting that the rollout is being done in stages in specific regions before becoming widespread.
To use the e-CNY app, users need to register with their phone number and personal name after installing it. They can then top up by selecting a bank to open a sub-wallet. In the pilot cities, the digital yuan is widely accepted for payment.
Users can pay by using the app’s “tap” feature for contactless transactions, scanning a merchant’s QR code, or showing a payment code to scan. Online payments using digital yuan can be made through integrations with platforms such as Alipay, Jingdong, and via mobile apps of PBOC-approved banks.
Types of digital yuan wallets
Digital yuan (e-CNY) wallets are divided into four levels based on the anonymity of the user, and all of them can be activated with just a phone number. According to the Cybersecurity Law and the Personal Information Protection Law, telecommunications service providers are not allowed to disclose customer information to third parties, including the People's Bank of China (PBOC). This ensures that e-CNY wallets, when activated with a phone number, maintain the anonymity of the user.
e-CNY wallets include two main types: soft wallets and hardware wallets. Of these, there are four types of soft wallets, and the hardware wallets they connect to are all designed to protect user anonymity, to meet the needs of small transactions with anonymity both online and offline. In particular, hardware wallets use a quasi-account system, which cannot be linked to the user's identity, thereby maximally supporting the implementation of small payment transactions without disclosing personal information.
In addition, the e-CNY wallet is also divided into a main wallet and a sub-wallet. Users can activate a sub-wallet under the main wallet to make payments on e-commerce platforms. It is worth noting that, since all user information has been anonymized, e-commerce platforms will not receive information such as bank account numbers or validity periods, except for the phone number used to activate the sub-wallet. This method helps protect users' privacy in online transactions.
How is the digital yuan different from third-party payment apps?
The digital yuan and payment apps like WeChat Pay and AliPay differ mainly in how they operate and where they come from. The People's Bank of China (PBOC) is responsible for issuing the digital yuan, which is considered legal tender and has the same value as the physical yuan, which is recognized as the official currency of the state.
Issuing it directly from the central bank ensures that it is a legal tender, similar to China's physical cash. In contrast, Tencent's WeChat Pay and Ant Group's Alipay are e-wallets that allow users to transact using fiat money already in their bank accounts.
The control mechanism of the e-CNY app is also distinctly different from WeChat Pay and Alipay. The digital yuan aims to improve financial efficiency, reduce the need for cash, and strengthen the PBOC’s control over money supply and economic policies. It also aims to promote financial inclusion by reaching people who are unable to use traditional banking services.
In contrast, Alipay and WeChat Pay focus on optimizing user experience and expanding their financial ecosystems, including services such as investment, remittance, and payment.
The digital yuan balances transaction privacy and government surveillance for regulatory purposes. It protects a certain degree of user anonymity while allowing the central bank or law enforcement to trace transactions when necessary.
Meanwhile, third-party payment apps like WeChat Pay and Alipay keep transaction histories and provide this information to service providers for commercial purposes, in compliance with Chinese law.
While the digital yuan is primarily intended for domestic use, it also has cross-border potential that could challenge global payment systems. WeChat Pay and Alipay, meanwhile, focus on cross-border e-commerce rather than developing a currency, but still provide international services to overseas Chinese and tourists.
Comparison between digital yuan and WeChat Pay, Alipay.
Criteria Digital RMB WeChat Pay and Alipay Operation Issued by PBOC, as digital fiat currency E-wallet for fiat currency transactions Value assurance Guaranteed by the central bank, with fiat currency value Based on user's bank account balance Control mechanism Strengthen PBOC's control, promote financial inclusion Transaction optimization, service expansion Privacy Balance between anonymity and traceability Transaction history provided to service providers
Challenges to global adoption of digital yuan
First, concerns about data security and privacy have emerged, especially given China’s history of strict internet laws and surveillance measures. Overseas governments and users may be reluctant to adopt the digital yuan due to concerns about privacy and government access to transaction data.
Additionally, the development of the digital yuan outside China could be hampered by regulatory hurdles and geopolitical uncertainty. A currency closely tied to China’s central bank is unlikely to be adopted by other countries due to political reasons or concerns about economic dependence.
Another major obstacle is the lack of compatibility with existing international payment systems. Integrating the digital yuan into the global financial infrastructure will require a lot of cooperation and standardization efforts, especially in regions where traditional banking systems or other digital currencies are dominant.
Ultimately, building credibility and trust in the stability and reliability of the digital yuan as a medium of exchange and store of value on a global scale remains a major challenge.
To overcome these challenges, Chinese policymakers, overseas stakeholders, and technology partners are working together to build a solid legal framework to promote widespread adoption of the digital yuan outside China.
