China’s central bank will allow commercial banks to pay interest on digital yuan holdings next year as it looks to revive adoption and deepen the currency’s role in the country’s formal financial system.

Local media affiliated with the People’s Bank of China have cited the central bank’s deputy governor, Lu Lei, who said banks will pay interest on the amount of digital yuan held in user wallets starting January 1.

This is happening under a new “action plan”, according to Lu, that seeks to reclassify the e-CNY from functioning as digital cash to operating as “digital deposit currency,” marking a major shift in the project’s underlying legal and technical framework.

According to the PBOC official, the overhaul comes following more than a decade of development and pilot programs and will offer the digital yuan the same legal status as deposits held at commercial banks.

“The future digital yuan will be a modern digital payment and circulation means issued and circulated within the financial system, with technical support and supervision provided by the central bank, possessing the attributes of commercial bank liabilities, based on accounts, compatible with distributed ledger technology, and having the functions of a measure of monetary value, store of value, and cross-border payment,” Lei wrote.

Now, banks will be allowed to pay interest on verified digital yuan wallets in accordance with existing self-regulatory agreements on deposit pricing.

At the same time, digital yuan balances will receive full protection under China’s deposit insurance system, according to Lu.

Banks will also have more operational flexibility to manage digital yuan balances as part of their broader asset and liability operations.

Meanwhile, for non-bank payment institutions, the digital yuan reserve funds will be treated like existing customer reserve requirements, with a 100% reserve ratio applied, Lu added.

As a part of the renewed push, the PBOC has recently established a Digital RMB Operation and Management Center that will oversee infrastructure upgrades and promote the development of the e-CNY from its Shanghai base.

China’s digital yuan, or e-CNY, is a state-controlled, centralized central bank digital currency that is designed to replace physical cash for domestic retail payments and reduce reliance on private payment platforms like Alipay and WeChat Pay.

Its value is pegged 1:1 to the physical yuan and is distributed through a two-tier system involving the PBOC and commercial banks.

Since its inception in 2014 and subsequent pilot launches starting in 2020 across half of mainland provinces, the digital yuan has struggled to gain widespread traction, mostly due to competition from widely used alternatives offered by entrenched tech platforms.

However, China has continually pushed to expand its reach, including plans to integrate the digital yuan across the country’s free trade zones.

Per reports in June, the PBOC is actively working on policy blueprints to enable broader use in these zones.

More recently, last week, the PBOC pledged to expand cross-border use of the digital yuan through a planned pilot with Singapore and has also taken steps to establish cooperation with markets such as Thailand, Hong Kong, the United Arab Emirates, and Saudi Arabia.

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