The Digital Yuan Revolution: China Breaks the CBDC Interest Taboo

1 January 2026 marks a historic dividing line in global finance. With the start of the new year, the balances of digital yuan (e-CNY) portfolios in China began to accrue interest based on sight deposit rates.

This decision represents a decisive break with international orthodoxy, according to which central bank digital currencies (CBDCs) should remain non-interest bearing in order to preserve financial stability.

The end of the "Digital Cash" dogma

Until now, the global consensus led by the European Central Bank (ECB), Federal Reserve and the Bank for International Settlements (BIS) had crystallised on a cardinal principle: retail CBDCs should be the digital equivalent of physical cash, not a savings instrument.

The ECB has always been categorical: "As with cash in the wallet, no interest would be paid on digital euro holdings. The aim is clear: to prevent the digital currency from draining deposits from commercial banks, depriving them of the liquidity they need to lend. Even the Federal Reserve, in a 2022 paper, warned that an interest-bearing CBDC could trigger banking disintermediation, accelerating bank runs in times of crisis.

From Money-Base (M0) to Money-Banking (M1)

China has chosen to take the opposite path. Through the 'Action Plan for Strengthening Digital Yuan Management', the People's Bank of China (PBOC) has effectively repositioned the e-CNY from a simple M0 (circulating) instrument to something more akin to M1 (demand deposits).

The measure covers verified portfolios (categories 1-3) for individuals and companies, with interest payments on the 20th day of the last month of each quarter. Only anonymous fourth-category portfolios remain excluded. The analyst at Guoxin Securities, Wang Jian, described this transition as the move from 'digital cash 1.0' to 'deposit currency 2.0', a hybrid combining payment efficiency and innovative contractual capabilities.

Why did Beijing change course?

China's strategy rests on three pillars that differentiate it from Western economies:

1. Deposit insurance: e-CNY wallets are now covered by the same protection as traditional bank deposits, mitigating fears that CBDC will be perceived as "safer" than banks during a crisis.
2. Adoption incentives: Despite 230 million wallets and 16.7 trillion yuan of transactions recorded as of November 2025, e-CNY has to compete with giants such as Alipay and WeChat Pay. Interest acts as an incentive to maintain balances on the platform.
3. Two-tier architecture: The PBOC distributes currency through commercial banks, which maintain a direct relationship with the customer, reducing the risks of disintermediation.

A fragmented global landscape

While Europe aims to launch the digital euro by 2029 with strict holding limits to avoid its use as a store of value, the US has taken a radically different direction. Under President Trump, the US has become the only country to formally ban a retail CBDC, with the 'CBDC Anti-Surveillance State Act' currently before the Senate.

China's move now challenges Western academics. Research by the CEPR and the IMF suggests that an interest-bearing CBDC could actually improve the transmission of monetary policy. If the Chinese experiment succeeds, proving that deposit leakage can be managed with holding limits and insurance, the rest of the world may be forced to rethink its positions. The question now is no longer whether to issue a digital currency, but what monetary nature it should have.