Advancing from digital cash to digital deposit money: Forging a sound and innovative path for e-CNY

Monetary theory begins with a simple question: What is money? Yet the answer keeps evolving with technology and the economy.

Over the past decade, the People's Bank of China (PBC) has been exploring an institutional question: Should e-CNY remain digital cash, or should it evolve into a deeper form of money? This is not a purely academic inquiry.

The answer is now taking shape. The Recommendations for Formulating the 15th Five-Year Plan for National Economic and Social Development set a clear mandate to "steadily develop the digital Renminbi (e-CNY)". Drawing on a decade of theoretical research, closed-loop testing, and broad regional pilot experience, the PBC has issued the Action Plan on Further Strengthening the Management and Service System and Related Financial Infrastructure Construction of e-CNY (hereinafter referred to as the "Action Plan"). With the rollout of the Action Plan, a new generation of e-CNY management framework, management system, operating mechanism, and ecosystem came into effect on January 1, 2026, marking the transition of e-CNY from digital cash (e-CNY version 1.0) to digital deposit money (e-CNY version 2.0).

I. Evolving with the Times to Recalibrate the Positioning and Development Direction of e-CNY

With the outbreak of the global financial crisis in 2008, crypto assets, virtual currencies, and new forms of payment began to proliferate. This reflects the digital transformation of the economy and finance. It has also created new micro- and macro-financial risks, including shadow banking and financial disintermediation. Facing this new landscape, central banks of major economies and international organizations initiated research and development on Central Bank Digital Currency (CBDC)/Digital Fiat Currency (DFC). In 2018, the Bank for International Settlements defined CBDC/DFC as digital cash issued by the central bank in a value-based or blockchain-based form. The European Central Bank described CBDC/DFC as "a central bank liability offered in digital form for use by citizens and businesses for their retail payments". These definitions reflect a perspective of digital currency through the lens of central banking responsibilities.

China began research and development of e-CNY relatively early. In 2014, the PBC launched theoretical studies and closed-loop testing. In 2016, we proposed the Digital Currency/Electronic Payment (DC/EP) framework: an electronic payment instrument with digital-currency attributes. Since then, we have advanced the e-CNY pilots prudently, scientifically, and steadily. Following repeated evaluation and progressively expanded pilots, an initial ecosystem for e-CNY has taken shape, carving out a distinctive development path for CBDC/DFC—one led by the central bank, supported by commercial financial institutions and the existing payment infrastructure, and enriched by the latest technological advances.

At present, the domestic and cross-border pilot deployment of e-CNY has delivered positive results, placing it at the forefront of CBDC/DFC initiatives being tested by central banks worldwide. A distinctive feature is its hybrid architecture. It is fundamentally account-based while incorporating value-based features enabled by distributed ledger technology (DLT). It also supports software and hardware wallets, as well as online and offline payments. Complementing this foundational design is its programmability. E-CNY leverages smart contracts to digitize contractual arrangements and enable automatic, enforceable execution. Equally important is its strong supervisory capability, reflected in a centralized management framework characterized by a high degree of transparency, standardization, and interoperability. As a result of these design choices, e-CNY has evolved into a universal currency. Replicable and scalable use cases have been implemented across a wide range of sectors—including wholesale and retail, catering and tourism, education and healthcare, public services, social governance, rural revitalization, and cross-border settlement—covering both online and offline use cases. By the end of 2025, the total transaction volume reached 3.57 billion, and the total transaction value reached 19.5 trillion yuan ($2.9 trillion). A total of 230 million personal wallets and 19.08 million corporate wallets have been opened via the e-CNY App. Project mBridge has recorded a cumulative transaction value equivalent to nearly 500 billion yuan.

At the same time, we remain clear-eyed that, as real-world demand for the development and application of digital currency continues to grow, digital currency initiatives led by central banks worldwide are facing four common theoretical and practical challenges.

In this context, it is essential to properly understand the challenges that rapidly evolving digital payment tools pose to central banks' monetary regulation. A wide range of crypto assets—and now stablecoins—have emerged in the form of payment instruments. In practice, this has given rise to new forms of "currencies" circulating outside the formal financial system, creating risks such as the rapid expansion of off-system payment instruments and sharp fluctuations in the prices of the financial assets to which they are linked. Central banks therefore face a dual imperative: to harness the advantages of digital payment tools—namely lower costs and higher efficiency—while ensuring the effectiveness of macroeconomic management and maintaining orderly market development.

It is also essential to properly address the risks of financial disintermediation associated with the development of digital currencies. Compared with broader forms of money, cash enables real-time payment. Yet apart from issuance and redemption, cash circulates outside the financial system and operates independently, without requiring financial intermediaries to provide transaction or settlement services. In monetary and financial theory, the advent of modern banking transformed cash into deposits within the banking system, and through lending activities, banks continuously created deposit money. This marked the true transition of the economy and society from the ancient "currency" era to the modern "money" era. Digital cash is simply the digital form of cash. The creation of digital cash wallets and the conversion of bank deposits into digital cash are essentially equivalent to an increase in cash in circulation. This reduces liquidity within the banking system and lowers the money multiplier. Such effects are not hypothetical—they reflect the real and ongoing impact of any digital payment instrument that operates outside the banking system.

A further challenge is to align the rights and obligations attached to central bank liabilities with the responsibilities of commercial banks. Theoretically, as a liability of the central bank to the public, CBDC does not require the participation of commercial banks and other financial institutions in its operation and maintenance. However, in the course of research, development and pilot programs, there exist distinct differences in the rights and obligations associated with CBDC compared with physical banknotes in circulation. Commercial banks are indispensable operators for the opening of digital wallets, use-case development and technical maintenance; their services run through the entire life cycle of CBDC circulation, and they bear direct responsibility for the security, reliability, continuity and non-loss of CBDC circulation, as well as for anti-money laundering, counter-terrorist financing and anti-tax evasion (AML/CFT/ATE). In practice, they have thus become the primary liable parties for CBDC. Establishing a scientific and rational symmetry of rights and obligations is an unavoidable issue in the institutional design of CBDC/DFC.

Another key challenge is to combine the strengths of centralized account governance with the efficiency of distributed ledger technology (DLT). In the practical operation of money as a means of payment, account-based systems offer advantages in safeguarding customer rights and interests, as well as in meeting the regulatory requirements for standardization and compliance such as AML and anti-fraud. By contrast, blockchain excels at reducing the costs of asset legal title transfer and trust. Reconciliation of these two models into an integrated framework stands as a key challenge in institutional design.

To solve real-world problems and mitigate financial risks, we adopt a problem-oriented approach. Building on the DC/EP framework and years of R&D and pilot testing, the Action Plan marks the shift from digital cash to Digital Deposit Money. The e-CNY will be issued and circulated within the financial system. At the retail level, it will have commercial bank liability attributes and an account-based structure, while remaining compatible with DLT features. The central bank will provide technical support, safeguards, and oversight. The e-CNY will continue to serve as a unit of account, a store of value, and a medium for domestic and cross-border payments.

II. Uphold Two-Tier Operation Framework Based on Unified Ledger

Unlike the prevalent technical approach of crypto assets characterized by "decentralization" – meaning the issuance of money outside the purview of central banks – and "disintermediation" – referring to the circulation and trading of money outside licensed and regulated financial institutions, leading to an external circulation outside of the real economy – Digital Currency Institute of the People's Bank of China (PBCDCI) has completed the design of the first-generation system (Cash-type e-CNY 1.0) and pioneered the successful pilot of the two-tier operational system between central banks and commercial institutions.

This design aligns with existing bank deposits in terms of legal and economic attributes. Since the establishment of the Sveriges Riksbank in 1668 and the Bank of England in 1694, the issuance and creation of money have constituted a well-established system under the two-tier central bank-commercial bank framework in the modern financial system. The central bank's issuance of base money and commercial banks' credit creation operations form a fundamental institutional underpinning for singleness of money and the close alignment of monetary and financial activities with the needs of the real economy.

In 2016, China proposed the two-tier model for e-CNY. Having withstood a decade of practical testing, this system has gained widespread recognition from central banks and international organizations worldwide, becoming a universal standard for CBDC/DFC and a fundamental institution that ensures the systemic circulation of the monetary system and safeguards financial stability. Building on the DC/EP theoretical framework, the Action Plan further optimizes this two-tier model. At the top level, the central bank is responsible for formulating the business rules and technical standards for e-CNY, as well as planning, developing and operating the relevant infrastructure. At the second level of participating authorized operators, commercial banks open e-CNY wallets for individuals and businesses through their own interfaces, take responsibility for the security of customers' e-CNY balances, provide payment and circulation services, and bear the corresponding compliance and AML obligations. Such e-CNY deposits are covered by deposit insurance and entitled to the same protection as conventional bank deposits. For non-bank payment institutions, e-CNY provided to customers is converted from the customers' own bank deposits, which constitutes a liability of the non-bank payment institutions and is subject to the requirements for e-CNY reserve in accordance with the regulation.

Beyond legal and economic alignment, this framework also mitigates the risks of financial disintermediation and shadow banking. While the application of digital technologies has markedly improved payment efficiency, it has also given rise to risks such as currency drain, financial disintermediation, circulation outside of the real economy and money laundering vulnerabilities. To further clarify the alignment of rights and obligations for authorized operators, and following rigorous validation, the Action Plan standardizes the e-CNY management framework: The biggest change is at the retail level. The e-CNY held by customers is no longer a direct liability of the central bank. Instead, it is now a direct liability of commercial banks. We have brought e-CNY onto the balance sheets of operators, making it an on-balance-sheet liability under a standard fractional reserve framework. The central bank pays interest to commercial banks at the statutory reserve rate, and in turn, banks can pay interest to users at standard deposit rates. This allows banks to use these funds for asset allocation, ensuring the financial system keeps running smoothly. For non-bank payment institutions, since they lack deposit-creation capabilities, they continue to provide 100 percent collateral. Building on the two-tier model, this institutional arrangement clarifies that e-CNY held by customers in commercial bank wallets constitutes a liability of commercial banks, marking the evolution of e-CNY from Cash-type 1.0 to Deposit-type 2.0.

A further objective is to satisfy incentive compatibility with cash-based payments and interest-bearing bank accounts. As a means of payment, cash retains several irreplaceable advantages, including real-time settlement, anonymity, and offline payment in today's digital economy, which relies heavily on terminals, networks, and mobile connectivity. The Action Plan calls for the comprehensive development of the e-CNY acquiring environment. Supported by efficient system architecture and the unified ledger, e-CNY enables real-time settlement and markedly reduces the transaction costs due to separation of information flows and fund flows. At the same time, the interest-bearing feature of account balances—unavailable to cash—creates incentives for individuals and businesses. For commercial banks, deposit money contributes to liquidity stability, which is a decisive consideration in any form of monetary innovation. Within the two-tier model, the Action Plan specifies that banking institutions shall pay interest on real-name e-CNY wallet balances, complying with the self-regulatory rules on deposit rate pricing. This arrangement, following the principle of substance over form, establishes an initial structure for incentive compatibility. As a result, commercial banks may incorporate e-CNY wallet balances into their own asset-liability management, and such balances enjoy the same level of protection of deposit insurance. For non-bank payment institutions, e-CNY reserves are regulated in the same way as the customer fund supervision.

III. Integrate the Strengths of Account-Based Governance and Blockchain-Driven Efficiency

Unlike the purely DLT-based approaches explored by some international organizations and central banks, China's e-CNY has, since 2016, followed a distinct development path characterized by a hybrid architecture that combines account-based features with token-based elements enabled by DLT. Throughout this process, meeting the payment needs of the real economy has remained the fundamental guiding principle. At present, crypto assets and stablecoins largely adopt DLT models as their core technological approach. This has given rise to a prevailing view that only DLT-based solutions constitute "true" digital currency. China's pilots point to a different conclusion: an account-based system, enhanced by smart contracts and other digital technologies, can provide lower-cost and more efficient digital currency payment services. In massive retail and wholesale use cases, leveraging account-based structures allows digital technologies to be applied while preserving centralized management and regulatory effectiveness. In specific use cases where enhanced trust is required, DLT can be utilized to enable collaborative transactions and improve adaptability to emerging technologies and use cases. This hybrid model represents a Chinese approach shaped through prudent exploration, rigorous analysis, and extensive testing. Building on an account-based foundation, the integrated application of digital tokens, smart contracts, and DLT has enabled e-CNY to evolve beyond traditional electronic payment toward a new stage of digital payment.

Digital currency and smart contract applications could be advanced within the existing account-based framework. The development and pilot of e-CNY do not start from scratch; rather, they build on the mature management advantages of bank accounts, which serve as the fundamental unit of payment. The Action Plan sets out a digital framework of "account systems + digital tokens + smart contracts", calling for an upgrade of the current account-based infrastructure and, on the basis of the new account form—e-CNY wallets—promoting the deployment of emerging technologies. This aims to enhance the digitalization and intelligence of issuance, circulation, and payment processes, and to upgrade e-CNY Smart Contract Eco-service Platform to support the creation of an open-source smart contract ecosystem. On the one hand, accounts can be seamlessly integrated into banks' existing business systems, offering advantages in standardization, compliance, identifiability, and interoperability. When combined with programmability and smart contracts, e-CNY gains distinctive precision and reach in more use cases. These include developing innovative supply-chain finance solutions for upstream and downstream firms, advancing intelligent "carbon inclusive" programs, strengthening consumer protection in managing prepaid funds, and enabling smart elderly-care services—all of which are undergoing rapid evolution. On the other hand, the regulatory penetration of tokens and the multi-tier fund management capabilities of e-CNY Umbrella Wallet System provide strong prospects for low-cost and high-efficiency applications in closed-loop use cases such as public utilities, medical and social insurance, corporate treasury management, green energy trading, and treasury fund operations.

Beyond the account-based framework, emerging fintech tools such as DLT should be leveraged to enhance the efficiency of cross-border payments. Among various digital technologies, DLT stands out for its features of immutability, multi-source information sharing, and peer-to-peer collaboration. These characteristics give it advantages in applications such as securities settlement, property-right transfers, registration, and supply-chain finance. In more complex financial use cases, DLT also holds the potential to integrate logistics, capital flows, and document flows into a unified framework, thereby reshaping trust-building mechanisms among multiple stakeholders.

The Action Plan proposes the establishment of e-CNY Center International in Shanghai and the further advancement of Project mBridge, both representing applications of DLT technology within the e-CNY framework. At e-CNY Center International, e-CNY Blockchain Service Platform and e-CNY Digital Asset Platform have been developed on the "Chengfang Ledger" infrastructure, featuring "Unified Ledger, Segmented Business Network". The platform provides on-chain settlement tools and cross-chain interoperability, while exploring compliant models for asset digitalization that support regulation. It enables the on-chain issuance, registration, custody, and settlement of financial instruments such as commercial bills, trade finance products, and carbon emission allowances. Over time, it is expected to deliver advantages including 24/7 operation, single-point access, diversified services, currency convertibility, and system interoperability. Project mBridge, by contrast, focuses on leveraging the DLT characteristics to address issues related to "business sovereignty" and "monetary sovereignty" across jurisdictions. It enables participating entities to operate on an equal footing in terms of identity, authority, responsibility, and interests, while ensuring synchronized data sharing among all participants. Moving forward, cross-border payments in e-CNY will continue to evolve through ongoing technological upgrades. Efforts will focus on expanding access, reducing costs, and facilitating trade as well as investment and financing activities. At the same time, it will support innovation in offshore financial services and contribute to a higher level of institutional opening-up. Throughout this process, we will uphold the principles of no disruption, compliance, and interoperability.

Looking ahead, the choice of business and technological models for e-CNY will continue to be guided by the fundamental objective of serving the real economy. We will adopt a principle of inclusive absorption and prudent selection for the development of account-based and token-based digital fiat currencies, and drive e-CNY to meet the demands of diversified use cases and various business entities.

IV. Build a Solid Risk Prevention System to Underpin e-CNY's Sustainable Development

To steadily develop e-CNY, stability comes first, and it is essential to continuously strengthen the safety net for risk prevention and control.

A clear separation between oversight and operations ensures full coverage of functional regulation. The Action Plan specifies that, on the oversight side, the PBC will establish an e-CNY Oversight Committee to coordinate relevant business lines and carry out functional regulation within their respective mandates, forming a unified regulatory effort. A self-regulatory office will be set up within PBCDCI to lead the formulation and implementation of self-regulatory standards for e-CNY operations, and to guide participating institutions in developing sound market-based incentive mechanisms. On the operational side, system security and continuity must be ensured. Under the management of PBCDCI, e-CNY Center and e-CNY Center International will be responsible, respectively, for the construction, operation, and security protection of the domestic e-CNY system and the cross-border system. Together, they form a dual-support structure supporting both domestic and international circulation. This separation of oversight and operations provides an institutional foundation that enables e-CNY to remain both well-regulated and innovation-friendly.

Equally important, regulatory technology and supervisory capabilities must advance in step with the times. Artificial intelligence and big data are increasingly empowering a new generation of financial regulatory tools. Through holistic data governance within the e-CNY system, the quality of data can be significantly improved. "Institution-to-institution" regulatory data interfaces and supervisory nodes on blockchain-based service platforms improve the timeliness and accuracy of regulatory information. They also enable more flexible, efficient, and intelligent risk identification, including look-through supervision. Continuous attention will be given to emerging technologies such as post-quantum cryptography, computing power, and smart contracts. With ongoing system updates and iterations, and supported by autonomous, secure, and reliable infrastructure, these efforts will help effectively prevent financial risks and safeguard financial stability.

At a new stage of development, e-CNY will continue to build on its two-tier model, upholding fundamental principles and pursuing innovation. Anchored in its fundamental mission of serving the real economy, it will strengthen risk prevention and management while advancing in a prudent and well-calibrated manner from digital cash and electronic payments toward fully-fledged digital currency and digital payment systems. Through these efforts, e-CNY aims to inject technological momentum and contemporary relevance into the pursuit of a strong and resilient currency, thereby laying a solid modern monetary foundation for the development of a strong financial system.

This article is translated from a Chinese article by Lu Lei, deputy governor of the People's Bank of China, originally published in Financial News on Dec 29, 2025. The relevant data cited in this English version have been updated to reflect figures available as of the end of 2025.