China’s Digital Yuan Breaks Global CBDC Norms by Introducing Interest-Bearing Wallets

China’s digital yuan (e-CNY) entered a new phase on January 1, 2026, as verified wallet balances began accruing interest at demand deposit rates. This policy marks a major departure from the dominant global view that central bank digital currencies (CBDCs) should be non-interest-bearing and function purely as digital cash. While institutions like the European Central Bank, the US Federal Reserve, and the Bank for International Settlements have consistently argued that interest-free CBDCs are essential to protect financial stability, China has chosen a different path.

Globally, most central banks design retail CBDCs to mirror physical cash. The ECB has clearly stated that digital euro holdings would not earn interest, aiming to prevent deposit flight from commercial banks. Similarly, the Federal Reserve has warned that interest-bearing CBDCs could disrupt bank lending by encouraging households to move deposits directly to the central bank, increasing the risk of bank disintermediation and financial instability. The BIS and IMF have echoed these concerns, particularly during periods of financial stress.

China’s new approach effectively shifts the digital yuan from an M0 instrument, equivalent to cash, toward something closer to M1, which includes demand deposits. Under the People’s Bank of China’s updated digital yuan management framework, interest applies to verified individual and corporate wallets, while anonymous wallets remain excluded. Interest is settled quarterly, aligning the e-CNY more closely with traditional bank accounts. China has also revised the official definition of the digital yuan to include its broader payment system, signaling its evolution beyond a simple cash substitute.

Several strategic factors explain China’s decision. Digital yuan wallets are now covered by deposit insurance, reducing concerns that e-CNY holdings are inherently safer than bank deposits. Interest payments also encourage adoption in a highly competitive payments market dominated by Alipay and WeChat Pay. By late 2025, the digital yuan had already reached hundreds of millions of wallets, yet user retention remained a challenge. Additionally, China’s dual-layer CBDC architecture preserves the role of commercial banks as intermediaries, easing fears of large-scale disintermediation.

China’s move intensifies the global CBDC debate. As Europe maintains strict non-interest designs and the United States has formally rejected retail CBDCs, China’s interest-bearing digital currency could reshape assumptions about what digital money can be. The future of CBDCs may no longer hinge on whether they exist, but on what role they play in modern financial systems.