On January 1, 2026, the People’s Bank of China began paying interest on digital yuan balances held in user wallets. To some, it might have seemed like a small technical upgrade that was long overdue. Yet, it came with outsized implications: China has just made its central bank digital currency the first in the world to offer returns to ordinary holders.
As of the end of November 2025, the digital yuan has already processed over . By any measure, that is quite successful adoption. But that is just the baseline before the yield upgrade even took effect. Now, with interest-bearing status, the digital yuan is no longer just a payment rail, but rather it is a place to park money – and adoption from here is likely to accelerate.
Throughout the history of digital assets, we have mostly heard consensus messaging around interest-bearing CBDCs: the European Central Bank said no, the Federal Reserve said no, the Bank for International Settlements said no. Their position has been clear for many years – that CBDCs must function like digital cash, with no interest, and no exceptions.
And to some extent, their reasoning makes sense. An interest-bearing CBDC could potentially drain commercial bank deposits. It could trigger bank runs during financial stress, or it could fundamentally reshape how money flows through an economy. The explicitly states that no interest would be paid on digital euro holdings. The warned against exactly this scenario.
But China saw the same risks and chose a different path, and a different future for the digital yuan. Starting from January 1, digital yuan wallet balances now function as liabilities of commercial banks under PBOC oversight – and they pay interest – marking the first time any CBDC worldwide operates in such a way.
Most Western policymakers designed their frameworks assuming everyone would play by the same rules. They have built consensus around non-interest-bearing CBDCs to protect commercial banking, warned about disintermediation risk, and moved cautiously. China watched, learned, and then moved in a different direction. The new approach splits the CBDC playbook in half: with Western orthodoxy on one side, and Chinese pragmatism on the other. One approach prioritizes financial system stability, the other prioritizes monetary control and international competitiveness.
Originally, the digital yuan was supposed to replace paper money, making the digital currency easier to use (through mobile apps like Alipay) than its physical version. The new upgrade now sets it on a path to compete with bank accounts – with an expanded suite of use cases (payments, salaries, cross-border corridors).
Looking back, the problem with the digital yuan was never about choosing the wrong path. The real issue was how M0 positioning – treating it as digital cash – locked it into low-frequency scenarios. DC/EP followed every rule about central bank issuance and sovereign backing, but following the rules made it restrained. Correct in theory, but limited in practice.
At the same time, M0 had to come first . The People’s Bank of China built DC/EP on the BIS Money Flower framework, analyzing every dimension: issuing entity, digitalization, account structure, public access. One conclusion stood out – only cash had not been properly digitized yet. This was not conservative thinking, it was rigorous analysis that led to certain constraints.
M0 is cash – the bills in your wallet, the coins in your pocket. But cash exists to be spent, not stored. When China first designed the digital yuan, they built it as a digital version of exactly this. The technology was genuinely impressive – transactions could complete even without network access, a capability called "dual offline payment" – but that solves a problem most consumers encounter perhaps once a year, if ever.
The new shift is not throwing away the past – it is building on a proven foundation. Guoxin Securities’ Wang Jian called it moving from – the point where digital yuan begins to have a potential crowding-out effect on existing forms of electronic currency.
Moving to M1 means the digital yuan now functions like demand deposits, not just electronic cash, with interest accrued directly within wallets. Within the new M1 system, new scenarios are also unlocked: wages, subsidies, and public payments flowing through digital rails. Cross-institutional and cross-system settlement are becoming even more robust, and deep integration with financial products and contract-based payments are now a big opportunity to build.
The technical capability was always there, paved on M0 rails. What is now changing with the M1 move is how useful the digital currency is actually becoming – with significant potential unlocked for the rest of the continent.
The domestic implications are one side of the story, but the more consequential part plays out across borders. Cross-border payments still mostly run on infrastructure designed decades ago – SWIFT messaging, correspondent banking chains, multi-day settlement windows. The system is slow, expensive, opaque, and increasingly tangled in geopolitical friction. Sanctions regimes, compliance requirements, and great-power competition have made the plumbing of international finance feel fragile in ways it did not ten years ago.
China has been building different alternatives over the past decade. The mBridge project, developed with the Bank for International Settlements and central banks from Thailand, the UAE, and Hong Kong, already processes most of its transaction volume in digital yuan. But mBridge requires participating countries to operate their own CBDC infrastructure – a high bar for economies that lack the technical capacity or institutional readiness. The interest-bearing shift opens a different door entirely. Cross-border trade is overwhelmingly B2B: businesses moving working capital across jurisdictions. When you talk to CFOs and treasury managers about what actually drives their decisions, three factors surface repeatedly: is my money safe? is this easy to integrate? and what is in it for my company?
Fund safety was never the sticking point. Digital yuan carries the full backing of the People’s Bank of China – sovereign credit does not get more solid than that, and no commercial stablecoin can match it. Ease of use remains genuinely uncertain – integrating digital yuan into corporate treasury systems, accounting workflows, and banking relationships takes more than policy announcements. This is execution territory, and execution is where ambitious financial infrastructure projects tend to stumble.
Incentives are what the interest-bearing change addresses head-on. Working capital sitting in settlement queues now earns a return. For businesses running on thin margins – particularly SMEs in emerging markets where a few basis points on idle cash makes a real difference – the math shifts. Not dramatically, but enough to tip decisions at the margin – and the margin is often where adoption curves start to bend.
Hong Kong As The New Linchpin
Hong Kong’s role in this architecture is not incidental – it is load-bearing. For digital yuan to function internationally, it needs a jurisdiction that can translate between Chinese financial infrastructure and global standards. Hong Kong offers exactly that combination: a common law legal system familiar to international businesses, deep capital markets, established regulatory credibility, and proximity to the mainland that no other financial centre can replicate.
The LEAP framework Hong Kong introduced last year – consolidating digital asset regulation under a single authority with clear licensing pathways for stablecoin issuers – positions the city as the critical connector. Compliant stablecoins backed by offshore renminbi can serve as regulated on-ramps for international businesses – offering exposure to digital yuan settlement through a jurisdiction whose AML, CFT, and sanctions compliance frameworks they already understand. The LEAP framework still mandates full KYC requirements and real-time transaction monitoring, which means companies get the efficiency benefits of digital yuan rails without navigating an unfamiliar regulatory environment.
The phased approach emerging from policy discussions on the mainland follows this very logic. Initial pilots concentrate in the Greater Bay Area and select RCEP countries – Thailand and Malaysia seem to appear frequently in planning documents. From there, expansion follows across Belt and Road economies – eventually, a parallel network emerges alongside mBridge, one that accommodates jurisdictions without their own CBDC infrastructure.
Hong Kong is not the destination market in this vision – it is the translation layer – the jurisdiction where digital yuan becomes legible to the rest of the world.
Another interesting impact of the news is the debate between CBDCs and stablecoins’ positioning. Interest-bearing CBDCs shift the competitive dynamics with stablecoins, though not in the zero-sum way some have assumed.
Stablecoins achieved adoption by offering what CBDCs could not: flexibility, speed, and accessibility across borders with minimal friction. Most stablecoins designed to date work across a range of DeFi protocols, settle instantly onchain, and operate with lighter identity requirements than any government-backed system. That combination drove growth in ways official alternatives have not matched.
But most stablecoins do not pay interest (notably the two biggest stablecoins by TVL – USDC and USDT) – and that gap is about to matter more now. from its treasury holdings, yet shared none of that with the people actually holding USDT – and Circle operates the same way. The value proposition has always been utility, not yield.
Now with a sovereign-backed currency starting to offer return, even modest ones, the holding calculus is changing. It is not built on speculation or DeFi trading – those use cases care about different things. But for treasury management, working capital, and cross-border settlement, the contexts where safety and yield both matter, interest-bearing digital yuan is starting to look competitive.
According to Fan Wenzhong, the Head of International Department at the China Banking Regulatory Commission (CBRC) in Beijing: "This 'public-private hybrid' framework offers a balanced path: it allows nations to benefit from the reach of global stablecoins while introducing a sovereign-backed 'stabilizer' – effectively insulating them from the systemic risks of a purely private stablecoin market”.
All in all, stablecoins will not disappear. But they will face pressure in segments where their zero-yield reality becomes a disadvantage against a central bank alternative that is equally safe and now returns something extra.
With these news, it would be easy to frame this as China cracking a code that has stumped every other central bank. But the truth is messier – and much more interesting.
Interest-bearing digital yuan addresses a real gap that was unsolved for many years, if not decades. It creates holding incentives that M0 positioning never could, it gives commercial banks reason to participate actively rather than comply reluctantly, and it opens pathways for cross-border applications that current infrastructure handles poorly.
But success depends on factors that have not been tested under real conditions. Will businesses actually integrate digital yuan into treasury operations, or will it remain a policy priority that never quite translates into daily practice? Will the offshore architecture through Hong Kong achieve the flexibility international adoption requires without sacrificing the control Beijing wants to maintain? Will trading partners trust Chinese financial infrastructure enough to route their own settlements through it?
The original designers of the digital yuan asked a reasonable question: how do you bring cash into the digital age? The M1 shift suggests they have realized that was never the question that mattered most. The harder question – the one every central bank is now watching China try to answer – is how you build a currency that people choose when they have alternatives. Mandates can force usage, but it is only genuine utility that creates preference.
We are about to find out which approach works at scale – and the answers will shape how money moves for the next decades.