An overview of China’s digital yuan

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17 Mar 2024

What is the digital yuan?

The digital yuan, also known as the e-CNY and digital renminbi, is a central bank digital currency (CBDC) issued by China’s central bank, the People’s Bank of China (PBOC). The digital yuan is an electronic version of the Chinese yuan intended for online and offline transactions.
The PBOC launched the digital yuan system to improve retail payment infrastructures, promote economic growth and ensure financial inclusion. It supports equal access to digital payments, enhances central bank payment systems, explores international cooperation for cross-border payments, and it serves as a backup to prevent systemic risks from major tech failures.
The state-backed digital currency meets changing needs and makes financial services more accessible. It is backed by sovereign credit and functions as a legal tender. The PBOC intends to work with other countries cooperatively, responding to G20 initiatives and investigating cross-border payment schemes that respect each other’s sovereignty and adhere to regulations.
Digital yuan transactions reached 1.8 trillion yuan ($250 billion) for the first six months of 2023 in China, an eighteen-fold increase from the roughly 100 billion yuan in transactions between the digital currency’s launch in 2019 and August 2022.
With an average transaction size of roughly $260, the total number of digital yuan transactions reached 950 million, executed through roughly 120 million wallets. Public transportation in Jinan began accepting digital yuan payments on July 1, 2023, and the Shanghai Clearing House increased its support for digital settlements. However, despite China’s enormous population of 1.4 billion people, the adoption rate of the digital yuan is still relatively low.

Development timeline of the digital yuan

The key stages involved in the development of digital yuan include the following:

Initial concept and research (2014–2016)

Recognizing the need to digitize cash in circulation to increase financial inclusion and payment system efficiency, the PBOC began researching digital currencies and electronic payments in 2014 and established a special team in 2016. This team was tasked with researching and developing a prototype and laying the theoretical foundation for a secure and effective digital payment system.

Pilot programs and development (2017–2019)

The PBOC increased its research on digital currencies in 2017 and 2018, concentrating on the framework’s legal aspects, technical aspects and potential effects on financial stability and monetary policy.
In 2019, the development moved forward with closed pilot programs in multiple cities. These trials aimed to evaluate how well the digital currency would function in real-world scenarios like retail payments and interbank settlements.

Expansion of trial areas (2020–2021)

The PBoC extended the scope of its pilot programs to major cities such as the Xiongan New Area, Suzhou, Chengdu and Shenzhen in 2020. These trials, which involved lotteries to give citizens digital yuan to use in specific retail locations, were more widely publicized.
The scope of the pilot programs expanded in 2021 as the digital yuan was tested in more cities and use cases, such as for cross-border payments, on e-commerce platforms and during Beijing’s Winter Olympics.

Ongoing developments and international considerations (2022 to Present)

The PBOC has focused its efforts on enhancing the digital yuan ecosystem since 2022. Ensuring smooth interoperability with well-known payment platforms is a top priority. To investigate and promote the use of digital currencies across international borders, the PBoC is concurrently actively participating in international partnerships.
Beyond these fundamental aspects, the digital yuan is being developed to accommodate smart contracts, opening the door to sophisticated and automated financial transactions. On Jan. 17, 2023, the Meituan app, a prominent Chinese platform providing retail and food delivery services, introduced a smart contract functionality. The main objective is to expand the digital yuan’s utility and influence across various domains by integrating it into several sectors, such as services, retail and finance.

How does digital yuan work?

With the support of the PBOC, the digital yuan functions via payment service providers, ensuring improved privacy and anonymity while maintaining adequate tracking capabilities to tackle illicit activities, such as tax evasion and money laundering.
It functions as direct liability from the PBOC and is defined as M0 (similar to cash in circulation). It provides fully risk-free transactions devoid of interest payments. Only banks are able to convert digital yuan into bank deposits and vice versa; digital wallets that store digital yuan are not regarded as bank accounts.

Digital yuan’s operational structure

The digital yuan operates on a two-tier structure, with tier one comprising the PBOC and tier two consisting of institutions, such as significant state-owned banks and online banks like WeBank (WeChat Pay) and MYBank (AliPay), which are in charge of user onboarding and service provisioning in the two-tiered structure.
Seven commercial banks, including the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications, the Postal Savings Bank of China and the China Merchant’s Bank, can provide the digital yuan.

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Users obtain a digital yuan wallet through tier-two institutions. The digital wallet, known as shuzi qianbao in Chinese, is an online platform allowing individuals to monitor and store digital yuan.
Tier 2.5 institutions (banks and payment service providers other than those part of tier two) also provide digital yuan holders with a range of services. However, they are unable to perform digital yuan exchanges.
The companies, consumers and merchants at the bottom of the pyramid facilitate peer-to-peer transfers and set up the infrastructure for digital yuan payments. Tier two institutions assume significant responsibilities, including:

Customer service
Privacy protection
Know Your Customer (KYC) duties
Investment in retail digital yuan infrastructure

This two-tiered structure looks to promote adoption and integration within the financial ecosystem by ensuring effective management and broad accessibility of digital yuan services.

How to access and use digital yuan

Digital yuan can be accessed mainly via apps provided by commercial banks or through the e-CNY app, which is accessible in some Chinese cities. Users outside of China cannot access the e-CNY app.
Furthermore, foreigners in China can streamline the topping up of wallets and completing transactions. Major cities, such as Shenzhen, Beijing and Shanghai, also offer physical access to digital yuan wallets, indicating a phased rollout in specific regions before broader availability.
To use the e-CNY app, users must register using their phone number and name after installing the app. After that, they can deposit money by selecting a bank of their choice to open a sub-wallet. In pilot cities, digital yuan is widely accepted for payments.
Users can pay by utilizing the “touch” feature of the app for contactless transactions, scanning the merchant’s QR code or displaying their payment code for scanning. Online payments using the digital yuan are facilitated through integration with platforms, such as Alipay and Jingdong, and through mobile apps of the banks approved by the PBOC.

Types of digital yuan wallets

Digital yuan wallets are tailored to different user needs. Traditional payment methods linked to bank accounts lack anonymity due to real-name verification. E-CNY wallets provide varying levels of KYC verification, from real-name wallets to anonymous wallets. Level-four wallets, requiring only a phone number, offer anonymity for small-value transactions.
Transaction limits increase with KYC level, with level four allowing up to 2,000 yuan per transaction (roughly $280). The system collects less customer information compared with traditional models. For carriers, digital yuan wallets are categorized as soft or hard, with level-four soft and hard wallets serving as anonymous options for small transactions, including during events like the Winter Olympics.
Digital yuan wallets can be parent or sub-wallets, depending on the ownership of the authority. This allows users to safeguard their privacy by pushing sub-wallets to e-commerce platforms and preventing the disclosure of personal information during transactions.

Is there any limit on digital yuan holdings?

The wallet, which is connected to a bank account and features ID card verification, has a 50,000 yuan single payment limit (roughly $7,000), a 100,000 yuan daily cumulative limit ($14,000) and a 500,000 yuan balance cap ($70,000). On the other hand, anonymous transactions can be made using the wallet, which has a 2,000 yuan single payment limit, a 5,000 yuan daily cumulative limit ($700) and a 10,000 yuan balance cap ($1,400).

How is digital yuan different from third-party payment apps?

The digital yuan and other payment apps, such as WeChat Pay and AliPay, differ primarily in how they operate and are backed. The PBOC is responsible for issuing the digital yuan, which has the same legal tender value as the physical yuan and is recognized as the official state currency.
Furthermore, direct issuance from the central bank ensures that it is digital fiat money, which closely resembles China’s physical currency. On the other hand, Tencent-owned WeChat Pay and Ant Group’s Alipay serve as digital wallets that enable users to conduct transactions with their bank account’s existing fiat money.
Additionally, the e-CNY app’s control mechanisms differ significantly from those of WeChat Pay and Alipay. The digital yuan aims to improve financial efficiency, lessen the need for physical currency and strengthen the PBOC’s authority over the money supply and economic policies. By reaching those who do not have access to traditional banking services, it also seeks to promote financial inclusion.
To improve user experience and expand their ecosystems, Alipay and WeChat Pay, on the other hand, are focused on streamlining electronic transactions and broadening their array of financial services, encompassing investments, transfers and payments.
The digital yuan balances transaction privacy with government monitoring for regulatory purposes by providing controlled anonymity, which entails protecting and maintaining a degree of user identity anonymity while also enabling tracing capabilities by the central bank or law enforcement authorities when necessary.
On the other hand, third-party payment apps like WeChat Pay and Alipay keep transaction histories available to service providers for commercial purposes compliant with Chinese laws.
Although the primary purpose of digital yuan is domestic use, it has cross-border potential that could challenge global payment systems. While WeChat Pay and Alipay concentrate on cross-border e-commerce rather than a currency, they also offer their services internationally to Chinese expatriates and tourists.

Challenges to the global adoption of the digital yuan

Firstly, concerns about data security and privacy arise, particularly in light of China’s history of strict internet laws and surveillance practices. It’s possible that governments and users abroad won’t adopt the digital yuan due to concerns about user privacy and possible government access to transaction data.
Furthermore, the growth of the digital yuan outside of China may be impeded by regulatory obstacles and geopolitical unrest. A currency that is closely linked to China’s central bank is unlikely to be adopted by other nations due to political reasons or worries about economic interdependencies.
Another major obstacle is the lack of interoperability with current international payment systems. Integrating the digital yuan into the global financial infrastructure will take much cooperation and standardization work, particularly in areas where traditional banking systems or alternative digital currencies dominate. Finally, establishing credibility and trust in the global digital yuan’s stability and reliability as a medium of exchange and store of value continues to be challenging.
To overcome these challenges, China’s policymakers, foreign stakeholders and technology partners are working together to create a robust framework that will enable the digital yuan to be widely adopted outside China.