CHINA is about to start paying interest on its official digital currency in a fresh push to get more people to use it after about a decade of development and testing.
From Jan 1, commercial banks that operate digital yuan wallets will pay interest to clients based on the amount of virtual currency they hold, Lu Lei, deputy governor at the People’s Bank of China (PBOC), wrote in an article published on Financial News, a newspaper affiliated with the central bank, on Monday (Dec 29).
The move represents China’s latest step as one of the global leaders in developing an official digital currency. It will redefine the legal and technical framework of the digital yuan, a project the central bank launched in 2014, by giving it the same legal status as deposits held at commercial banks.
China’s digital yuan rollout has faced some obstacles. While the currency, known officially as E-CNY, has been piloted in more than half of mainland provinces, it has yet to be formally launched nationwide and has struggled to gain traction amid competition from established platforms such as WeChat Pay and Alipay.
Beijing’s international ambitions have also run into difficulties. An attempt to create a multilateral cross-border payment platform, known as the mBridge, suffered a setback a year ago when the Bank for International Settlements withdrew from the project amid concerns the system could be used to circumvent sanctions on Russia and potentially undermine the US dollar.
Whether the new interest-bearing arrangements will promote significantly wider adoption of the E-CNY remains unclear. After years of rate cuts, the interest rate on demand deposits at China’s biggest banks has fallen to just 0.05 per cent. Banks are also struggling to deal with large volumes of deposits as households increase savings and loan growth weakens to record-low levels.
The PBOC appears to be accelerating work on the digital currency in recent months. In October, the Communist Party called for “steady development” of the E-CNY in the next five-year plan. In September, the PBOC launched a digital yuan operations centre in Shanghai with platforms for cross-border payments, blockchain technology and digital assets.
Unlike the US and other countries that have embraced privately-issued stablecoins – digital assets backed by cash-like assets, China is doubling down on its official E-CNY. Despite initial signs of interest in stablecoins over the summer, Chinese authorities made clear that they remain worried about risks such as speculation, fraud and financial instability.
The country has processed 3.48 billion digital yuan transactions as at the end of November, with a total amount of 16.7 trillion yuan (S$3.1 trillion), Lu said. BLOOMBERG
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