China’s Digital Yuan Set to Offer Interest, Redefining CBDC Use

• Starting 2026, e-CNY wallets earn interest, boosting adoption and making digital yuan more practical for daily transactions.

• Digital yuan shifts to account-based deposits, aligning with M1 and enabling banks to manage balances like traditional deposits.

• Upgrades expand use in payroll, loans, government services, and cross-border trade while maintaining core digital currency functions.

China is making a big move with its digital currency, the e-CNY, as the new year starts. The People’s Bank of China (PBOC) will turn the digital yuan from a test program into a fully operational system that even pays interest to users.

This move could transform how millions of users interact with digital money, both domestically and internationally. PBOC Vice Governor Lu Lei confirmed that the digital yuan will evolve from a “digital cash” equivalent to an account-based “digital deposit money” system, aligning it with M1 money supply metrics.

For the past five years, the e-CNY has been in testing, attracting millions of users from the public and private sectors. Transaction volumes reached over 7 trillion yuan ($986 billion) by mid-2024, largely driven by retail and domestic activity.

However, current adoption faces limits, as the e-CNY lacked interest accrual and integration with broader banking functions. The upcoming changes aim to correct this, offering users interest on wallet balances and enabling banks to treat them like deposits under PBOC supervision.

Interest-Bearing Digital Yuan

Starting January 1, e-CNY holders can earn interest, creating new incentives for widespread adoption. Moreover, the system will categorize wallet balances by liquidity levels, requiring commercial banks to hold reserves.

Consequently, this structure strengthens financial stability and ensures regulatory oversight. Additionally, the upgrade enhances practical applications, allowing seamless use in payroll, loans, and investments. Besides retail use, the new model targets government services and cross-border trade integration.

The system retains compatibility with distributed ledger technologies while keeping core monetary functions intact. It will continue to serve as a unit of account, store of value, and medium for payments.

However, the shift raises questions about whether e-CNY will supplement or replace traditional bank deposits. The integration of interest and liquidity-based reserves may attract both individuals and businesses, offering higher returns and reduced conversion friction.