China’s Digital Yuan Set To Shift From Cash-Like Tool To Deposit-Based Currency: Report

The People's Bank of China has reportedly signaled that its Digital Yuan will be upgraded in its banking sector.

• The People's Bank of China is transferring the digital yuan from cash to deposits.
• The PBOC reportedly said interest on verified e-CNY accounts will link the digital yuan to traditional deposits and prevent migration to non-interest-bearing wallets.
• China's ban on Bitcoin and mining isn't stopping Shanghai from becoming a global hub for digital yuan.

The People's Bank of China is reportedly working to make the digital yuan more useful by transitioning it from a cash-like payment tool to a deposit-based digital currency that is built into the banking system.

The People's Bank of China (PBOC) said that in the next phase of its yuan-backed central bank digital currency (e-CNY), digital yuan balances in commercial bank wallets will be treated as deposit money rather than digital cash, according to a report by the Financial Times. 

This adjustment to the structure makes the digital yuan fit better with traditional bank deposits while retaining some features of the distributed ledger. It also makes it easier to use for monetary policy transmission, liquidity management, and financial stability, the bank said.

Why The Push?

The People's Bank of China wants to prevent the risks of financial disintermediation that happen when money moves from bank deposits to cash-like digital wallets by changing the digital yuan to be deposit-based money. Converting deposits into digital cash can make the financial system less liquid and lower the money multiplier, according to its policy framework. 

Putting the e-CNY into bank balance sheets is meant to keep credit creation going, keep deposits stable, and make sure that digital payments are completely connected to the traditional financial system.

Paying Interest On Digital Yuan

Under the new system, the PBOC also intends to allow interest to be paid on specific digital yuan balances maintained in verified bank wallets, the report said. By allowing interest accrual, comparable to traditional bank deposits, the central bank hopes to deter large-scale migration into non-interest-bearing cash-like wallets and strengthen the e-CNY's role in the official banking system. This method is intended to maintain deposit stability, connect digital yuan holdings with existing interest-rate policy, and ensure that the e-CNY serves as both a store of value and a payment mechanism, while avoiding bank disintermediation.

Shanghai As The Digital Yuan Hub Amid Blanket Ban On Bitcoin

Previously, the People's Bank of China prohibited banks from handling Bitcoin transactions in 2013. In 2017, they banned initial coin offerings and shut down crypto exchanges in China. In May 2021, the crackdown got worse as officials declared all cryptocurrency trading and mining illegal. Bitcoin was trading at $89,451, up 2.1% over the past day. On Stocktwits, the retail sentiment around it remained in the ‘bearish’ zone, accompanied by ‘low’ levels of chatter over the past day.

Now, the PBOC also indicated that it plans to establish an international digital yuan operations center in Shanghai. As part of China's larger effort to modernize payment and settlement systems, the hub will facilitate blockchain-based settlement, cross-chain transfers, and on-chain creation and registration of financial assets.

Read also: Coinbase’s Brian Armstrong Says Bitcoin Isn’t A Threat To The Dollar — It’s A Safety Valve For US Inflation

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