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China’s central bank recently made a major redesign for its e-CNY, a state-backed digital currency. Kevin Warsh, President Donald Trump’s nominee to chair the Federal Reserve’s Board of Governors, has said China’s project “threatens the dominance of the US dollar.” One of the most important new features added to the e-CNY—interest payments to holders—could make it more attractive. China’s move is also relevant to one of the most contentious current US financial policy debates: whether to allow privately issued digital stablecoins to pay interest.
Virtually all central banks are exploring new forms of digital central bank money, generally referred to as central bank digital currency (CBDC). These projects can be either “retail” CBDCs that give the broader public access to digital central bank money for the first time[1] or “wholesale” CBDCs that leverage the distributed ledger and sometimes also blockchain technology behind bitcoin to improve payments between intermediaries like financial institutions.[2] The e-CNY has long been the most advanced CBDC among major economies, so its design choices are of international relevance.
China’s most significant change has paved the way to offer interest by eliminating any chance that digital yuan adoption will siphon off bank deposits and “reduce liquidity in the banking system.” Previously, regular yuan deposits converted into e-CNY left commercial banks’ pool of funds available for lending, becoming cash-like claims on the central bank, the People’s Bank of China (PBOC). But China’s new plan abandons the digital cash path, which the European Central Bank (ECB) and others are still pursuing, in favor of digital deposits.
The e-CNY will now remain a liability on the balance sheet of the commercial bank or payment company where it is held, just like regular deposits or funds in digital wallets. Commercial banks, not the PBOC, will pay interest on the holdings to the funds’ owners and can invest or loan the money to others. Most definitions of CBDC require it to be a “digital form of central bank money,” so the new design makes much of the e-CNY no longer a CBDC.[3] The move will do little to boost the e-CNY's attractiveness internationally unless interest rates on offer rise substantially. Current deposits in China earn a meager 0.05 percent.
In the United States, the Federal Reserve says it has not decided whether to issue a CBDC. Both Trump and much of Congress oppose the idea, but Warsh has proposed issuing one to compete with China. US legislation enacted in July 2025, dubbed the GENIUS Act, forbids cryptocurrency companies to pay interest on stablecoins[4] that they issue. And banks’ number one policy priority for 2026 is closing a loophole that currently allows US-dollar-denominated stablecoins, or USDCs, to earn as much as 3.5 percent interest as “rewards,” or 70 times more than what Chinese deposits earn. Banks share the same fear of losing deposits to stablecoins that China had about losing them to the e-CNY.
In Europe, retail banks are concerned about competition from a proposed digital euro that would be issued by the ECB, even though the digital euro would not bear interest and has other features designed to avoid disrupting the banking system.
In the end, China’s move is an indicator of a budding convergence with many central banks moving away from more divisive retail CBDCs towards “tokenized deposits” that can move money with new technology without disrupting banks.
Great expectations, disappointing reality for e-CNY
In January 2016, China became one of the first major economies to commit to launching a digital currency. China's plan involved digital cash with some of physical cash’s attractions: lower default risk as a direct liability of the central bank and the ability to transact without revealing one’s identity or paying fees. Yet a decade later, the e-CNY is still a pilot program.
The first reason for the slow start is risk aversion. No major economy has launched a CBDC, so the PBOC faces novel risks. Faith in government currency is the foundation of the entire economy, amplifying the fallout of potential problems. Would a CBDC lead to bank runs in a crisis or drain banks of funds to lend, requiring the central bank to reinvent the way that it conducts monetary policy? What if it were hacked and counterfeit digital yuan flooded the market? How should the governance, liability, and economic model work?
The PBOC designed a system that could mitigate the risks. It created an app for the e-CNY, launched promotions giving some e-CNY away for free to get people to try paying with it, and recruited merchants to accept it. It was also set up as a two-tier system that preserves a role for retail banks and payment platforms as intermediaries between the central bank and customers to handle purchases, redemptions, and payment orders with the e-CNY.
However, Chinese scholars have found that consumers “mostly stick to existing electronic payment [a]pps and are reluctant to switch to e-CNY.” China’s digital payments ecosystem was already one of the strongest in the world. Hundreds of millions of consumers already use digital wallets that are accepted just about anywhere, leaving limited room for the e-CNY to improve on the status quo. The PBOC reports that the e-CNY has handled cumulatively almost 3.5 billion transactions for 16.7 trillion yuan (CNY) as of November 2025, equivalent to $2.4 trillion. Those numbers seem impressive, but the roughly 4.2 trillion e-CNY in transactions in 2024 adds up to just 0.2 percent of the 1.3 quadrillion CNY in payments by bank cards and digital platforms like Alipay and WeChat in the same year.
The US and China banned what the other is building
China and the United States have pursued opposite strategies for the future of digital money. The United States is promoting private sector stablecoins, notably with the GENIUS Act, and Trump signed an executive order banning work on a dollar-denominated CBDC. China, on the other hand, has long banned foreign cryptocurrencies, including stablecoins, while promoting the state-backed e-CNY. Europe is pursuing elements of both, working on a potential digital euro while also permitting private sector stablecoins. Currently, 97 percent of the market capitalization of all stablecoins is based on the US dollar. China previously approved Hong Kong to experiment with stablecoins, but it has hit the brakes and scaled back a planned pilot.
The stablecoin versus CBDC debate is also about the future of global cross-border payments and currency competitiveness. The Trump administration envisions a future in which cross-border payments with dollar-backed stablecoins “cement the dollar’s status as the global reserve currency.”[5] Beijing, on the contrary, wants to reduce global dependence on the dollar and dollar-based financial systems. The e-CNY’s cross-border buildout is part of a broader strategy to ensure its currency is accepted widely enough for China could maintain many of its trade and financial relationships even if it ends up on the receiving end of US financial sanctions that cut it off from dollars.
China and Europe instead see a greater role for cross-border payments between CBDCs. The ECB’s Pontes and Appia initiatives are in this vein, as is mBridge, a system for direct CBDC-to-CBDC cross-border payments that includes China, Hong Kong, Thailand, the United Arab Emirates, and most recently Saudi Arabia. China’s announcement included new data on mBridge, which has handled a total of only 4,047 transactions for around $55 billion.[7] This confirms that the digital currency is not yet playing a meaningful role to drive internationalization of China’s currency.
Both stablecoin-based and CBDC-based cross-border payment projects will proceed in parallel. Considering, however, the strong role that central bank money with essentially no default risk plays in wholesale payment systems of systemic importance, it is not clear that lightly regulated stablecoins without government guarantees will be accepted as counterparties for many cross-border systems, especially outside the United States.
Fear of missing out loses to fear of bank deposit outflows
Much of the revamped e-CNY looks less like a stablecoin or CBDC and more like today’s financial system. The e-CNY will share many features with regular money, including deposit insurance coverage at the same levels, allowing banks to manage the assets and liabilities of their digital wallet balances. The policy changes preserve the status quo between banks and fintech platforms like Alipay. The central bank says there will be “no difference” between the e-CNY and regular funds for nonbank payment platforms. Just as before, retail banks can pay interest on deposits, but payment platforms need to hold 100 percent of reserves and cannot pay interest on digital wallet balances. The central bank will still set standards as well as build and operate the e-CNY’s infrastructure, similar to how many payment systems work today.
The most important factor that could make the e-CNY more widely adopted is not the miniscule interest but the new alignment between banks’ incentives and the e-CNY project. As long as these key players saw it as a threat to their deposit bases, they had no incentive to help build the ecosystem the e-CNY needs to gain market share. Interest payments remain an important change, and the PBOC could make the e-CNY more attractive by offering time deposits at higher rates down the line.
What differentiates the e-CNY from the traditional financial system are offline payments and some use of distributed ledger technology that will support smart contracts, e.g. programmable money. Proponents of the changes envision the Chinese authorities being able to use the e-CNY to issue stimulus money that must be spent in a limited time or vary transaction fees to discourage transactions in areas like property speculation. But these are examples of mostly latent potential that are unlikely to drive adoption in the near term. The government seemingly will also oversee the ledger for the e-CNY, giving it far more visibility into all transactions and balances than typical payments—exactly the factor that has created the most fear related to CBDC in the United States.[8]
International Implications
European policymakers will surely study why China gave up on digital cash and what that means for their own strategies. The fact that China, despite all its power over its financial system, has been unable to achieve desired adoption and has given up on a retail CBDC suggests a tough road ahead for a digital euro. That may not be enough, however, to dissuade the ECB from trying, considering that, unlike China, Europe does not have strong homegrown payments companies that would assuage its geopolitical concerns. US policymakers weighing whether to allow stablecoins to earn interest should consider why China has demonstrated so much concern about potential outflows from traditional bank deposits, even when the potential beneficiary would be the government itself.
Fascinatingly, some of China’s new digital currency direction looks like the Bank for International Settlement Innovation Hub’s Project Agorá, a public‑private initiative launched in 2024 with seven central banks (including the New York Federal Reserve Bank and the Banque de France representing the Eurosystem) and private-sector banks convened by the Institute of International Finance (IIF). Agorá, which just passed “a major milestone,” is testing how tokenized commercial bank deposits could be used for payments together with tokenized wholesale central bank money on a single programmable platform (“unified ledger”) to improve cross‑border payments, all without the need for stablecoins or the retail central bank digital currency China is no longer pursuing. China’s latest digital currency redesign might therefore be a surprising step closer to US, European, and other democracies’[9] ideas about the future of money.
Notes
1. The only form of central bank money the general public has access to in most countries, including the United States, is physical currency like banknotes and coins. Historically some central banks have allowed individuals to hold accounts, but this has generally been discontinued for many years.
2. Digital currency governance is a complex, fascinating topic beyond the scope of this blog post. But basically, Bitcoin, Ethereum, and other cryptocurrency projects are often fully decentralized, running permissionless ledgers. That means anyone can participate in the network, seeing all of its transactions, and the network is designed to function even if the participants do not trust each other. Central bank projects, however, tend to be “permissioned,” meaning only qualified parties can participate, and the design is different because they tend to have some degree of trust.
3. The People’s Bank of China has mostly referred to its own project as “digital fiat currency” to clearly separate it from digital currencies like bitcoin or Ethereum while being agnostic about whether it is a claim on commercial banks or the central bank. They have occasionally used the internationally more common CBDC to refer to the e-CNY, but use CBDC more often when referring to international developments.
4. Stablecoins are digital currencies designed to hold a stable value versus a reference asset, mostly US dollars today, but it can be related to any currency, a basket of currencies, or commodities like gold. They tend to hold a corresponding reserve of the reference asset to “back” the coin’s value.
5. Today, the US dollar is on one side of 89 percent of foreign exchange transactions globally, compared to the euro at 29 percent and the yuan at 10 percent.
6. The mBridge project was originally part of the Bank for International Settlements (BIS) Innovation Hub. The BIS exited in 2024 amidst heightened geopolitical scrutiny after Russia proposed a separate “BRICS bridge” idea that was seen as a way to bypass sanctions. BIS leadership rejected any connection with the BRICS bridge idea and said its exit was because the mBridge project had reached a stage where partner central banks could carry it forward. China now effectively leads it.
7. The announcement did not give a specific time window for the data, but almost all of these payments likely happened in 2025, as the BIS exited in late 2024 and before that only a small pilot had been completed.
8. The PBOC, however, may not have visibility into who owns each account, as it is possible to open small value e-CNY accounts with only a phone number. It currently has visibility into all Alipay and WeChat payments that cross wallet ecosystems (e.g. Alipay to WeChat or bank account transferred into the Alipay ecosystem) but may have much less ability to see “on us” payments between accounts of the same digital wallet provider.
9. The central bank participants in Project Agorá include also the Bank of Japan, the Bank of Korea, the Bank of Mexico, the Swiss National Bank, and the Bank of England.
Data Disclosure
This publication does not include a replication package.
