China Breaks the Orthodoxy of Central Bank Digital Currencies: Starting to Pay Interest on the Digital Yuan...

The Chinese digital yuan entered a new era on January 1, 2026, as wallet balances began accruing interest at deposit rate prices.
This move represents a decisive departure from the prevailing global consensus that central bank digital currencies should remain interest-free. The European Central Bank, the Federal Reserve, and the Bank for International Settlements have long advocated this principle as fundamental to financial stability.
The Orthodox View: Digital Currencies as Digital Cash, Not Savings
The global digital currency community has largely converged around a core principle: central bank digital currencies should function as a digital equivalent of physical cash, not as interest-bearing savings tools.
The European Central Bank has been explicit on this point. FAQs state clearly: "Just like cash in your wallet, there will be no interest paid on holdings of the digital euro." The goal: prevent the digital euro from becoming a savings vehicle that drains bank deposits.
The Federal Reserve has expressed similar concerns. A 2022 discussion paper warned that the existence of an interest-bearing bank could fundamentally alter the US financial system. The main issue is the elimination of banking intermediation. Households might convert deposits to the central bank, reducing banks’ ability to lend.
The Investment Bank and the International Monetary Fund have reinforced this framework, noting that interest-bearing central bank digital currencies could accelerate bank runs during financial stress, as depositors flee to the perceived safety of central bank funds.
China’s Exit: From M0 to M1
China’s decision effectively repositions the digital yuan from a purely M0 tool—cash in circulation—toward something closer to M1, the broader money supply that includes demand deposits.
The policy stems from the "Work Plan to Promote Digital Yuan Management and Financial Infrastructure" launched by the Chinese central bank. It applies to documented wallets—categories 1-3 for individuals and commercial accounts. Interest follows demand deposit rules, with quarterly settlements on the 20th of the last month of each quarter. Anonymous category four wallets remain excluded.
Notably, China also amended the official definition of the digital yuan to explicitly include "linked payment systems"—a semantic shift recognizing the evolution of the electronic yuan beyond a mere cash substitute.
Analyst Wang Jian from Guoxin Securities described the transition as moving from "Digital Cash 1.0" to "Deposit Currency 2.0," calling it "a new type of bank account" that combines the efficiency of traditional payments with innovative contract capabilities.
Why China Chose a Different Path
China’s decision reflects several strategic considerations that may not apply—or may apply differently—in Western economies.
First, deposit insurance provides a safety net. The People's Bank of Pakistan confirmed that digital yuan wallets are now covered by deposit insurance. They receive the same protection as traditional bank deposits. This addresses a key concern about interest-bearing central bank digital currencies: that they might be considered "safer" than bank deposits during crises.
Second, incentives for adoption matter in a competitive market. By November 2025, the digital yuan had 230 million wallets and a total transaction volume of 16.7 trillion yuan. However, it faces competition from deeply rooted mobile payment platforms like Alipay and WeChat Pay. Paying interest provides a modest but meaningful incentive for users to hold digital yuan balances rather than treat them solely as transactional payment means.
Third, China’s two-tiered infrastructure keeps commercial banks as the primary interface. This may ease concerns about losing intermediation, which troubles Western central bankers. The People's Bank of China issues the digital yuan to operational institutions, which then distribute it to the public, maintaining bank-client relationships.
Implications for the Development of Global Central Bank Digital Currencies
China’s move raises uncomfortable questions for other central banks.
The European Central Bank, which plans to launch the digital euro by 2029, has committed to a non-interest-bearing model with strict holding limits to prevent competition with bank deposits. Recently, the EU Council supported setting limits on digital euro holdings specifically "to prevent its use as a store of value."
However, academic research increasingly challenges the orthodoxy of zero-interest policies. An analysis by CEPR in 2025 found that "significant improvements in social welfare" could be achieved when central bank digital currencies (CBDC) set interest rates at "either 0% or 1% below the current policy rate, whichever is higher." The IMF has also acknowledged that interest-bearing central bank digital currencies could "increase the economy’s responsiveness to monetary policy rate changes."
China’s approach suggests that the trade-offs feared by Western central banks—particularly deposit runs and credit contraction—can be managed through careful design choices such as holding limits, tiered remunerations, and deposit insurance.
A Divergent Landscape of Digital Currencies
What emerges is not a single model for retail central bank digital currencies, but a diverse landscape shaped by different financial traditions, structures, and strategic priorities.
The US has taken the opposite route—becoming the only country to explicitly ban a practical retail central bank digital currency, according to the Atlantic Council. In January 2025, President Trump signed an executive order prohibiting federal agencies from developing or promoting digital currencies. Congress followed during the "Digital Currency Week" in July, passing a state law against digital currency monitoring as one of three major digital currency bills—alongside the GENIUS law for stablecoins and the CLARITY law for market structure. The anti-CBDC (CBDC) bill, approved by the House with a 219-210 majority, is now pending in the Senate.
Europe appears committed to central bank digital currencies as an infrastructure for payments—efficient, inclusive, but deliberately unattractive as a store of value. China bets that a central bank digital currency (CBDC)# resembling deposits can coexist with its banking system while offering real interest to users beyond mere transactions. Meanwhile, the US has completely rejected this concept—leaving the global digital currency landscape divided along ideological and geopolitical lines.
While 137 countries representing 98% of global GDP are exploring central bank digital currencies, China’s experience with interest-bearing digital currencies will be closely watched. If successful, it could force a re-evaluation of the assumptions that have guided the design of central bank digital currencies worldwide.
The question is no longer whether to issue a central bank digital currency, but what kind of money it should be.