China plans to start paying interest on digital yuan holdings to help speed up adoption of its central bank digital currency, with interest payments scheduled to begin in January.
Citing an article written by People’s Bank of China’s (PBOC) deputy governor Lu Lei on Financial News, a newspaper affiliated with the central bank, Bloomberg reported that commercial banks that operate digital yuan wallets will pay customers interest based on their E-CNY balances.
This move represents a milestone in the development of the digital yuan, officially called “E-CNY”, which has been in progress since 2014.
The PBOC’s initiative is expected to reshape both the legal and technical structure supporting the digital yuan.
Although pilot programmes have been rolled out across more than half of mainland China’s provinces, the digital yuan still has not been formally launched nationwide and continues to compete with dominant digital payment services such as “WeChat Pay” and “Alipay”.
On the global stage, China’s efforts to expand the digital yuan have also faced obstacles.
The mBridge cross-border payment platform, a multilateral initiative, faced a setback when the Bank for International Settlements withdrew a year ago due to concerns about potential sanctions evasion and the impact on the US dollar’s dominance.
It is still unclear whether offering interest will meaningfully boost adoption of the E-CNY.
Interest paid on demand deposits at China’s biggest banks has fallen to about 0.05% following years of reductions.
At the same time, banks are grappling with elevated deposit inflows as households save more while loan growth has slowed to historic lows.
In recent months, the PBOC has stepped up its push on digital currency.
In October, the Communist Party added the “steady advancement” of the E-CNY to its five-year agenda.
A month before, the central bank also launched a digital yuan operations hub in Shanghai to work on cross-border payments, blockchain technology, and digital-asset initiatives.
Whereas countries such as the US have permitted privately issued stablecoins, China continues to prioritise its state-backed E-CNY.
Although there was some early interest around stablecoins, Chinese regulators have repeatedly raised concerns about potential risks such as speculation, fraud, and threats to financial stability.
Lu Lei said that by the end of November, China had handled 3.48bn digital yuan transactions, totalling 16.7tn yuan ($2.38tn).
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