Digital Yuan holdings to earn interest under China's new framework

What to know:

The People's Bank of China (PBOC) will launch a new digital yuan framework on Jan. 1, letting commercial banks pay interest on holdings in a move to incentivize broader adoption of the central bank digital currency.

The so-called "action plan" will shift the digital yuan (e-CNY) from its current role as digital cash to digital deposit money, Lu Lei, a deputy governor of the People's Bank of China, wrote in an article published by state newspaper Financial News.

"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.

The plan also proposes to establish an international digital yuan operations centre in Shanghai.

The PBOC began working on the digital yuan program in 2014 under the name of the Digital Currency Electronic Payment or DCEP project to research benefits of the CBDC.

The central bank launched the digital yuan in April 2022. Since then, it has airdropped e-CNY as part of a pilot program to encourage adoption.