What is the Digital Yuan? An Analysis of the Background and Core Motivations Behind the Development of Central Bank Digital Currencies

What is the Digital Yuan (e-CNY)?

Digital Renminbi (e-CNY), also known as Digital Currency Electronic Payment (DC/EP), is a legal tender digital currency issued by the People's Bank of China (PBOC) (PBOC). It is primarily used to replace cash in circulation (M0), is equivalent in value to physical renminbi, is backed by the credit of the state, and has the status of legal tender.Digital Renminbi represents a liability of the central bank to the public and is interchangeable with funds in commercial bank electronic accounts; together, they constitute cash-like payment instruments.

In terms of its operational model, the Digital Renminbi employs a “central bank–commercial bank” dual-issuance system and a centralized management model. The People's Bank of China (PBOC) As the central authority, the central bank issues digital renminbi to designated operating institutions (such as the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, China Postal Savings Bank, China Merchants Bank, MYBank, and WeBank), which in turn provide exchange and circulation services to the public.

Key Features of the Digital Yuan

• Legal tender: Issued by the central bank and backed by the credit of the state, it has the same legal standing as physical cash in general circulation and is not subject to speculation.
• Controlled Anonymity: Provides limited privacy encryption designed to balance the protection of user privacy with the need to combat illegal activities such as money laundering, terrorist financing, and tax evasion. The central bank does not process individual transaction information; secondary operating institutions collect it as needed.
• Offline-to-offline Payments: Supports transfers and payments via a mobile phone with a digital wallet installed, even in the absence of an internet connection or a bank account.
• Not a Cryptocurrency: Fundamentally different from decentralized cryptocurrencies such as Bitcoin that lack legal tender status, the Digital Yuan is a centrally managed legal tender.
• Not a Third-Party Payment Tool: Unlike third-party payment tools such as Alipay and WeChat Pay, the digital yuan is the digital form of the legal tender itself, possessing monetary attributes such as savings and investment, rather than merely serving as a payment tool.

Background and Core Drivers of the Digital Yuan’s Development

People's Bank of China (PBOC) Research into central bank digital currency (CBDC) began in 2014, and the Central Bank Digital Currency Research Institute was established in 2016. In 2017, the State Council approved the research and development of the digital yuan, and commercial banks and technology companies (such as Alibaba, Tencent, Huawei, JD.com, and UnionPay) began collaborating on the project.From late 2019 to early 2020, internal closed-loop pilot tests for the digital yuan were launched in cities such as Shenzhen, Suzhou, Xiong’an New Area, and Chengdu, as well as in settings related to the 2022 Beijing Winter Olympics.As of the end of June 2021, residents in mainland China had opened 20.87 million personal wallets, conducted approximately 70 million transactions, and processed a total value of 34.5 billion yuan.Between 2020 and 2023, the pilot program was gradually expanded to multiple cities, including Shanghai, Hainan, Changsha, Xi’an, Qingdao, and Dalian, with application scenarios covering public transportation, salary disbursements for government employees, and cross-border crude oil settlements.

Core Drivers of Digital Yuan Development

• Providing cash in digital form: Meeting the public’s daily payment needs and offering a new payment method.
• Enhancing the Efficiency and Security of Retail Payments: Improving the performance of retail payment systems and reducing society-wide retail payment costs.
• Promoting financial inclusion: Providing convenience to those who have difficulty accessing traditional banking services and improving the efficiency of financial aid distribution.
• Breaking the Monopoly of Third-Party Payment Providers: Introducing competition to counterbalance the dominant positions of Alipay and WeChat Pay in the mobile payment market and enhance the resilience of the payment ecosystem.
• Addressing the Challenge of Private Cryptocurrencies: Plans by companies such as Facebook to launch cryptocurrencies like Libra (now Diem) have prompted central banks worldwide to actively develop CBDCs to safeguard national monetary sovereignty and financial stability.
• Enhancing the Effectiveness of Monetary Policy: In theory, this can reduce lags in monetary policy transmission, improve the efficiency of policy rate transmission, and provide real-time economic data to support decision-making.
• Combating Illegal Activities: By increasing the transparency of fund flows, it helps combat criminal activities such as money laundering, terrorist financing, and tax evasion.
• Promoting the Internationalization of the Renminbi: Exploring the application of the digital renminbi in cross-border payments to enhance the renminbi’s status in the international payment system.
• Aligning with Trends in Digital Economic Development: As the digital economy grows and cash usage declines, digital currency is an inevitable outcome of the evolution of monetary forms.

Key Stakeholders and Diverse Perspectives

The advancement of the digital yuan involves multiple stakeholders with diverse concerns.

• People's Bank of China (PBOC) (PBOC): As the issuer and regulator, the PBOC emphasizes the legal tender status of the digital yuan, its controlled anonymity, the two-tier operational system, and its role in enhancing payment efficiency, promoting financial inclusion, and maintaining financial stability.
• Commercial Banks and Related Commercial Institutions: As designated operating institutions, they are responsible for the exchange and circulation of the digital yuan and participate in its research and development.
• Technology companies (such as the Alibaba, Tencent, Huawei, JD.com, and UnionPay): They participate in the research, development, and pilot programs for the digital yuan and provide technical support.
• Users/the public: Focus on the convenience, security, and privacy protection of the digital yuan.

At the international level, a survey by the Bank for International Settlements (BIS) shows that 80% of central banks worldwide are researching digital currencies, and 60% have entered the testing phase, reflecting widespread global interest in central bank digital currencies (CBDCs).

Expert opinions, however, are diverse:

• Some commentators believe that the digital yuan could be a means for the government to monitor and control users and their financial transactions.
• Others argue that the launch of the digital yuan could provide China’s major commercial banks with an entry point to challenge the dominance of large tech companies in the payments sector.
• Widespread use of the digital yuan could lead to a decline in commercial banks’ ability to create bank money.
• At the international level, the development of the digital yuan depends on interoperability with other countries’ payment systems, and enhancing transparency is crucial to expanding its influence.