As China will be the first major country to launch the CBDC, the design of Digital Yuan implemented by China can be a guide for many countries that are still behind China in terms of CBDC development. Hence, it is important to analyse the rationale behind China’s designing of Digital Yuan in a specific manner which will not only affect China’s domestic economic structure but also influence global economy as China aims to promote internationalisation of its currency through its digital currency in the future.

This is Part 2 of the new series on Digital Yuan. Read Part 1 here

Several problems in China’s existing payment systems have stimulated the government to look for other alternatives. Among these alternatives, Central Bank Digital Currency (CBDC) has features that allow both convenient and secured transactions with the help of technology monitored directly by the government. Thus, the People’s Bank of China (PBoC) set up a task force in 2014 to explore the feasibility of Digital Yuan which assessed technology support, issuance mechanism and its potential impact on the domestic economy. Accordingly, PBoC designed the Digital Yuan so as to fulfil all its objectives stated in the 2021 white paper and also made frequent changes in it to eliminate potential challenges. As China will be the first major country to launch the CBDC, the design of Digital Yuan implemented by China can be a guide for many countries that are still behind China in terms of CBDC development. Hence, it is important to analyse the rationale behind China’s designing of Digital Yuan in a specific manner which will not only affect China’s domestic economic structure but also influence global economy as China aims to promote internationalisation of its currency through its digital currency in the future. 

Substitute to Physical Currency

CBDC implies the electronic form of a country’s sovereign currency issued by its central bank which has wide-ranging uses for households as well as for businesses. Similar to paper currency, it does not have its own intrinsic value and relies on the value assigned by the central bank of the country. However, digital currencies have more longevity and provides more convenience for its users than physical currency which has prompted many nations across the world to develop their own digital currencies.

With respect to China, PBoC defines Digital Yuan as the “digital version of fiat currency” which is issued by PBoC and operated through designated authorities such as commercial banks and selected private companies. Digital Yuan, along with physical Yuan, comprise currency in circulation (M0), also called ‘monetary base.’ PBoC has earlier clarified that it will continue to issue physical Yuan despite the launch of Digital Yuan. However, Deputy Governor of PBoC Fan Yifei has stated that Digital Yuan will have an advantage over physical Yuan for PBoC due to low production cost, durability and more robust monitoring of money circulation in the economy. Similarly, China’s post-pandemic recovery efforts require an increase in domestic consumption, for which a convenient and reliable payment system will play a crucial role. In accordance with that, Digital Yuan is convenient for users as it will take up less storage space compared to paper currency. Further, China’s rapid transition towards cashless society also aids faster adoption of digital currency. In fact, two small private banks in Beijing and Liaoning have already ceased cash-based services last year as a result of preference given to digital currency by customers. Hence, as the acceptance level of Digital Yuan rises among the citizens, it will reduce the use of physical currency and eventually replace physical currency in the future. 

Differences from Other Payment Systems

Along with physical currency, Digital Yuan is also expected to replace other payment systems. It is being designed in such a manner that it can eliminate problems of other payment systems for both the PBoC and users. However, PBoC has retained some features of other payments systems in Digital Yuan, especially of mobile payments, which can facilitate acceptance of a new system. In January 2022, China launched a Digital Yuan application, similar to mobile payment apps like Alipay and WeChat Pay as both systems use Near Field Communication technology and QR codes. 

However, there are several features of the Digital Yuan project that also distinguish it from mobile payment platforms. Mobile payment systems are completely managed by private companies such as Alibaba and Tencent along with transaction data also being held by these companies which gives limited scope for regulators to intervene. On the contrary, the Digital Yuan app is currently operated by nine authorised operators (7 state-owned banks and 2 private fintech companies) through which transactions are carried out and PBoC has an overarching control virtually over all transactions. Moreover, mobile payment applications can transact money from users’ accounts registered in Chinese banks, whereas Digital Yuan app does not have to rely on any bank account and can work independently, similar to physical cash in our wallets. Hence, mobile payments only work online and Digital Yuan apps can function without internet connection too. Recently, PBoC added a ‘tap to pay’ function to the Digital Yuan app which allows users to make payments even when their phones are switched off. Thus, Digital Yuan aims to eliminate the lacunae of mobile payments which do not allow the unbanked population to make transactions. Digital Yuan can also benefit people in remote areas that have no stable internet connections. This can help bring the entire population in China under the ambit of digital payments and thereby, help the government to monitor financial activities effectively. 

Other than mobile payments, Digital Yuan also aims to eliminate the popularity of cryptocurrencies as a safe alternative payment system in China. It had banned all cryptocurrency transactions in September 2021 as it posed a threat to the country’s financial system and opened avenues for financial crimes. However, this ban has not completely eliminated cryptocurrencies as it allows users to keep their transactions anonymous which is also adopted in the Digital Yuan system to a large extent. Moreover, Digital Yuan, unlike the volatile nature of cryptocurrencies, is fully backed by PBoC and thus, offers a secured payment alternative. Hence, laws banning cryptocurrencies in China are likely to succeed more as Digital Yuan continues to expand its wings. 

Managed Anonymity 

The 2021 White paper mentioned that China will follow the system of managed anonymity which implies anonymity for small value transactions and traceable system for high value transactions. It allows PBoC to balance users’ privacy and prevention of financial risks. This managed anonymity is implemented through categorization of digital wallets into four levels with different limits on transaction volume and quantity. For each level of wallet, there are different documentation requirements which become more stringent at each level. Thus, users will only have a high transaction limit if they submit more personal data to PBoC. For instance, the lowest level of wallet can be opened only by giving away a phone number which does not allow regulators to track transactions. These users also have the lowest transaction limit which minimises the risk of financial frauds. On the other hand, for users to make high volume transactions, they have to register by using their bank certification which also allows PBoC to track their transactions through banks. Thus, it allows both users and PBoC to make trade off between data privacy and transaction limit. 

However, these provisions do not comply with China’s existing personal information protection laws which enforces stricter data protection. For instance, postal savings bank Digital Yuan law specifies that users’ device information will also be collected while making transactions for security of users’ accounts. Thus, although Digital Yuan offers managed anonymity, data privacy cannot be guaranteed until regulators bridge gaps between existing data privacy laws and Digital Yuan privacy laws. Moreover, considering China’s efforts to set up a surveillance state, even these laws may not actually protect users’ privacy completely and instead, can become another surveillance tool. Surveillance through Digital Yuan can give more powers to the government to regulate the entire financial system which can also enable it to easily influence people’s financial behaviour.

Financial Disintermediation of Small Banks

The Digital Yuan system works with a 2-tier system where PBoC functions as a regulator whereas authorized operators identified by PBoC function as the second tier. These operators are also responsible for technology development and managing consumer-end services. On the other hand, the entire Digital Yuan ecosystem is managed by PBoC which is responsible for issuance, inter-operator coordination and digital wallet management. This system is in contrast with systems adopted by countries like Sweden, Denmark where digital currencies operate directly under respective central banks and other banks have minimal role in the new system. However, these countries already have very little intermediation of banks due to people’s preference for digital payments, unlike China. Similarly, it would be nearly impossible for China to manage transactions of 1.4 billion people entirely through a single institution. Moreover, this 2-tier model will help PBoC to offer convenience and easy accessibility of Digital Yuan since people are more accustomed to deal with commercial banks than directly with the central bank. This system also ensures that Digital Yuan is not seen as an alternative to bank deposits and does not affect profitability of banks. 

Below this, there is another tier-2.5 in which other banks and payment companies can provide their own services through different sub-wallets on the Digital Yuan app. It includes other commercial banks and payment service providers. As PBoC has chosen authorized operators in Tier-2 based on capital base and the level of technological sophistication, it will create an oligopoly in Digital Yuan market payment and other banks will remain in subordination to tier-2 institutions. This may affect the functioning of small banks as they will not be able to perform independently in the Digital Yuan system. Moreover, as Digital Yuan transactions do not require bank accounts, this can further lead to disintermediation of these banks in the Chinese economy. 

Novel Techniques to Attract Users through Pilots

The Digital Yuan pilot project is not only intended to test different scenarios and its challenges but also to generate wider acceptance for the new payment system. After six years of initial research, PBoC launched the first pilot project of Digital Yuan in four cities – Shenzhen, Suzhou, Chengdu and Xiong’an in April 2020. These cities were selected as the population in these cities ranged from 1 million in Xiong’an to as large as 20 million in Chengdu which also represented diverse economic sectors. However, PBoC had to devise novel techniques to induce people to use Digital Yuan. For instance, many international brands like Starbucks, McDonalds, Subway, etc. were given incentives to allow consumers to make transactions in Digital Yuan. Similarly, local companies like taxi service app Didi and a restaurant chain Qingfeng Baozi also joined pilots to allow customers an option to pay in Digital Yuan. Further, PBoC periodically pumped a certain amount of Digital Yuan through red envelopes (红包) to nudge users such as the case during the 2023 spring festival when around 200 Digital Yuan activities were conducted across China worth over 180 million Yuan.  

Currently, pilots have been carried out in around 23 cities across 17 provinces mainly in the economically important eastern and central region. Digital Yuan can now be used for over 200 services ranging from educational fees to tax payments. Both provincial and central governments have provided several incentives like cashbacks to encourage people to use Digital Yuan. These measures have helped PBoC to increase acceptance rate of Digital Yuan among retail users. 

Beyond domestic consumers, China has also launched Digital Yuan’s pilot for cross-border trade settlements when it announced its decision to participate in the multiple CBDC (m-CBDC) project in partnership with Hong Kong, Thailand and UAE. Although it was a temporary project, it demonstrated China’s ambitions to use Digital Yuan to promote its currency in cross-border transactions. During controlled trials in the last two years, efforts are also being made to connect Hong Kong’s Faster Payment System (FPS) and Digital Yuan which will facilitate faster currency exchange from Hong Kong Dollars to Yuan. Further, Digital Yuan was also promoted during 2022 Beijing winter Olympics where 4 lakh domestic and foreign citizens used Digital Yuan. Through these pilots, it was revealed that Digital Yuan wallets can also be accessed through smart cards, bracelets and other electronic tools which eliminates the necessity of carrying mobiles. It was widely accepted by foreigners largely because it did not compel them to open an account in a Chinese bank and thus, protected their data privacy. Moreover, introduction of Digital Yuan at international exhibitions provided China with an opportunity to lure foreign businesses to consider trading in the Digital Yuan in future. Thus, China aims to promote Digital Yuan in domestic and global markets simultaneously, albeit challenges in both scenarios remain mutually exclusive. 

Digital Yuan’s design ensures that it establishes state control over financial activities in China and also provides convenience for users to make transactions. China has shifted its focus to domestic consumption as a main driver of the economy which makes the role of digital payments critical, especially for the post-pandemic economic recovery. Thus, Digital Yuan is being designed in such a way that it will fulfil needs of its users and would encourage consumption. Concerns about data protection are also being addressed through features like managed anonymity. However, Digital Yuan has created a shadow over the future of the banking system with certain banks being given more importance. It also affects circulation of money in the economy as it gradually replaces physical currency and other payment systems. Further, as China aims to promote Digital Yuan at global level, its implications will not remain limited to domestic boundaries.  These implications will be covered in the next part of the series. 


Omkar Bhole is a Senior Research Associate at Organization for Research on China and Asia (ORCA). He is a Chinese language student and completed Masters in China Studies from Somaiya University, Mumbai. He has completed the HSK 4 level of Chinese language proficiency and works as a Chinese language instructor. His research interests are China’s foreign policy in Asia, China’s economic transformation and China’s domestic politics. He has previously done internships at the Institute of Chinese Studies (ICS) and What China Reads. He has presented papers at the 1st All India Conference of East Asian Studies and 16th All India Conference on China Studies. He can be reached @bhole_omkar on Twitter or him email at

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