The benefits and risks of a central bank digital currency (CBDC) hinge entirely on its specific design. When developing a CBDC, policymakers must weigh multiple factors, including preventing the disintermediation of commercial banks, safeguarding user privacy, designing appropriate incentives, and mitigating financial risks. China's digital yuan, with features like its "two-tier distribution model" and "non-interest-bearing" nature, offers a valuable case study. We can expect the digital yuan to continue evolving toward greater comprehensiveness, security, and standardization.
Robust data governance is essential for designing and issuing a CBDC to prevent digital wallet providers from creating new data silos. Centralizing the integration and ownership of CBDC payment data with the central bank is effective for security and privacy, but it's equally crucial to leverage this data's productive potential. For cross-border data governance, establishing multilateral collaborative platforms is a promising avenue worth exploring.
Cryptocurrencies like Bitcoin are more accurately described as digital assets than as true currencies. China's current ban on crypto trading supports short-term policy goals such as anti-money laundering (AML) and capital account management. However, the underlying technologies in the crypto space—including tokenization, distributed ledger technology (DLT), and blockchain—hold significant potential for the formal financial system. A prolonged ban risks causing China to miss critical opportunities to advance these digital technologies, and such a prohibition may prove difficult to sustain over the long term.
— Huang Yiping, Chairman of the Academic Committee of CF40 and Director of the Peking University Digital Finance Research Center
* This article is based on a keynote speech delivered by the author at the “Central Bank Digital Currency: Trends and Prospects” roundtable during the “FinTech: Digital Technologies Unleashing Digital Productivity” plenary session of the 4th Bund Financial Summit on December 11, 2022. It was translated and edited by the Secretariat of the China Finance 40 Forum (CF40). Subheadings were added by the editor.
CBDC Design, Trends, and Regulatory Approaches
Effective CBDC design requires a multi-dimensional approach.
The People’s Bank of China (PBOC) initiated its digital RMB pilot in 2014 and has since conducted extensive trials. According to the "Digital RMB White Paper," the PBOC's motivations are threefold: first, to diversify the forms of currency by offering a digital complement to physical cash; second, to enhance financial inclusion and security, improve payment efficiency, and ensure equitable access to payment services; and third, to potentially support cross-border payments in the future.
Beyond these official reasons, several unofficial theories have circulated. Some suggest the digital RMB aims to compete with existing mobile payment platforms. Others believe it is designed to centralize payment data under the central bank's oversight. A third theory posits that its ultimate goal is to advance the internationalization of the RMB and challenge the U.S. dollar's dominance. However, these interpretations lack official endorsement.
CBDCs are among the most significant financial trends of recent years. Their potential benefits and drawbacks depend entirely on how the underlying digital currency system is architected.
The digital RMB's design is explicit: it is a retail CBDC distributed through a two-tier system and operates independently of traditional bank accounts. This allows users to make small, direct token-based payments without earning interest. In my view, its core design driver is payment utility—which is why officials consistently frame it as a digital replacement for M0, not M1 or M2. The "two-tier distribution + non-interest-bearing" model is crucial, as it mitigates potential disruption to financial intermediaries like commercial banks—a paramount concern for any central bank.
Designing a central bank digital currency (CBDC) involves trade-offs, such as in privacy protection. Inadequate safeguards could discourage public adoption. For example, some small vendors have reportedly stopped accepting mobile payments after learning the government planned to tax digital transactions. While integrating digital payments into the national tax system is essential, this case shows how incentives—positive or negative—can shape behavior. Proponents argue CBDCs could boost financial efficiency and increase the velocity of money, while critics warn they might lead to bank disintermediation, potentially raising financing costs and slowing economic growth. The final outcome will depend on the specific design. The same goes for financial stability: whether CBDCs introduce new risks or help central banks better monitor and mitigate them also hinges on their architecture.
The Future of the Digital Yuan
The digital yuan could evolve in several ways. First, while currently available only to individuals, it may later be extended to institutions. Second, its use is domestic for now, but the People’s Bank of China (PBOC) has joined the Bank for International Settlements’ multi-CBDC bridge (mBridge) project, suggesting cross-border payments could become a key feature. Third, the PBOC does not pay interest on digital yuan holdings currently, but that could change in the future. Fourth, the possibility of private-sector stablecoins backed by the digital yuan is a sensitive but important question: what would the real trade-offs be?
After several years of pilot testing, the digital yuan has yet to see mass adoption. As Mu Changchun, Director of the PBOC’s Digital Currency Research Institute, has pointed out, three key challenges remain: first, building a more comprehensive ecosystem with widespread use cases across the country; second, further refining the system to ensure financial stability and security; and third, establishing a stronger legal and regulatory framework for its use.
Balancing Data Security and Innovation
China's mobile payment market is dominated by WeChat Pay and Alipay, which operate as relatively closed systems. Funds from one Alipay account, for instance, can typically only be sent to another Alipay account. While each platform holds vast amounts of data, these datasets exist in silos, isolated from each other. Yet this data has fueled innovation, enabling new services and products. For example, sophisticated big-data credit models now assess "credit-invisible" individuals—those without formal credit histories—by analyzing their behavior within these ecosystems, allowing platforms to offer loans. Of course, storing such sensitive data with private companies continues to raise valid concerns about user rights and protection.
One speculated motivation behind the central bank's development of the digital yuan is to consolidate payment data. Within the digital RMB system, nine authorized institutions operate their own digital wallets, which can transact with each other—for instance, a buyer sending funds from an ICBC wallet to a seller's Alipay wallet. Unlike current WeChat Pay-to-WeChat Pay transfers, this setup fragments transaction data: ICBC holds only half the information, while Ant Group holds the other. The central bank, however, will have access to the complete dataset. Objectively, this could enhance data security and privacy protection.
This centralization raises a new question: once all data resides with the central bank, will it prioritize security over leveraging big data analytics to boost productivity? This represents another critical trade-off.
A proposal from Tobias Adrian, Director of the IMF's Monetary and Capital Markets Department, and others for a multilateral cross-border payment platform is noteworthy. Such a platform could serve as new infrastructure for international payments. Furthermore, it could facilitate data exchange between nations, allowing countries to retain ownership of their data. Instead of sharing raw data, they could provide algorithms, verifications, or other outputs to access services.
Future Regulatory Frameworks for Crypto Assets May Need Updates
Several factors must be considered when formulating stances on cryptocurrencies. First, assets like BTC are not strictly currencies but digital assets, largely due to their lack of intrinsic value. More critically, research suggests around a quarter of BTC addresses—and half of all BTC transaction volume—are linked to illicit activity.
Second, a country's regulatory approach to cryptocurrencies and digital assets depends on the maturity of its financial system and regulatory framework. As is widely known, the Chinese government currently prohibits cryptocurrency trading. A primary reason is China's ongoing significant challenges with anti-money laundering (AML). Additionally, China maintains strict capital account controls; allowing unrestricted trading of digital assets like cryptocurrencies would create far more problems than benefits.
Finally, long-term trends must be taken into account. While banning cryptocurrencies might offer a short-term fix, its long-term viability is questionable. The underlying digital innovations—such as tokenization, distributed ledgers, and blockchain—hold significant potential for the formal financial sector. A prolonged ban on crypto trading and related activities could cause a country to fall behind in adopting these pivotal technologies, and such restrictions may not hold up over time. For developing countries in particular, there is no consensus on how to regulate cryptocurrencies in a way that ensures financial stability while harnessing their benefits. Nonetheless, developing an effective regulatory framework remains an essential goal.