What impact will interest-bearing digital yuan have on Hong Kong's digital finance?

Written by: Jason Jiang | Web3.01

At the end of 2025, the People's Bank of China will issue the "Action Plan on Further Strengthening the Management and Service System and Related Financial Infrastructure Construction of Digital RMB", marking the official transition of digital RMB from "Digital Cash 1.0" to "Digital Deposit Currency 2.0".

The core change is that, starting from January 1, 2026, the balance in a digital RMB wallet will begin to accrue interest, and its legal status will change from a direct liability of the central bank to a legal tender with the characteristics of a commercial bank liability.

Common Dilemmas of Global CBDCs and the Breakthrough of the Digital Yuan

The practice of CBDCs by more than 130 monetary authorities worldwide has generally fallen into an irreconcilable paradox: how to prevent the introduction of digital currencies from undermining the foundation of the traditional banking system? The root cause lies in the vigilance against financial disintermediation—the concern that central banks directly providing safe and convenient digital fiat currency to the public will lead to the outflow of commercial bank deposits and impact the credit creation function.

Therefore, whether it's the European Central Bank's discussion about setting a holding limit for the digital euro or the Bank of Japan's explicit warning, the underlying logic is defensive. They ensure financial stability by strictly limiting retail CBDCs to non-interest-bearing digital cash (M0) and reducing their attractiveness to bank deposits. However, this often leads to CBDCs struggling to gain traction due to a lack of incentives from users and banks, resulting in a disconnect between function and objectives.

Building on this foundation, the digital yuan will become the world's first CBDC to pay interest on ordinary users' wallet balances. Digital yuan 2.0 restructures the monetary-debt relationship through institutional innovation, attempting to mitigate risks and create new momentum within the banking system. Its difference from other global retail CBDCs lies in:

This model transforms the digital yuan from an "external circulation" tool that could potentially impact banks into "internal blood" deeply integrated into banks' balance sheets.

Commercial banks have management and profit rights over digital RMB deposits, shifting their motivation for promotion from "passive responsibility" to "proactive operation," thus forming a sustainable market-oriented promotion mechanism. Meanwhile, clear deposit insurance eliminates credit concerns among users.

This not only solves the incentive problem, but also means that the digital yuan has been formally incorporated into the traditional monetary creation and regulation framework, providing the central bank with a new policy variable that can be directly applied (the digital yuan interest rate). Its transaction traceability also creates conditions for implementing precise structural monetary policies.

Defining a new model: a "hybrid" of CDBC and tokenized deposits.

Digital Yuan 2.0, due to its interest-bearing and banking operation characteristics, bears some resemblance to tokenized deposits promoted by commercial banks. The latter are digital certificates of bank deposits on the blockchain (such as JPMorgan Chase's JPM Coin), aiming to improve the efficiency of inter-institutional settlements. However, this similarity is merely superficial; the two differ fundamentally in their credit foundation and strategic level.

Digital Yuan 2.0 actually creates a new hybrid form: it absorbs the efficient appearance of tokenized deposits, but its core is the complete credit of a national sovereign currency.

This distinction is crucial. The credit of tokenized deposits is deeply tied to the balance sheet of their issuing banks, and their essence is to optimize the efficiency of existing financial intermediaries. In contrast, the credit foundation of the digital yuan 2.0 remains national sovereignty, and its goal is to build the fundamental financial infrastructure that supports the future digital economy.

A report from the Tsinghua University Institute for Financial Technology also points out that this digital currency, backed by national credit and possessing programmability, provides a core support for building a dual-platform model of "blockchain + digital assets".

Therefore, the upgrade of digital yuan 2.0 is far more than just the evolution of payment tools; it also lays the groundwork for the upcoming era of large-scale asset tokenization, providing a "settlement track" with the highest credit rating.

The empowerment of Hong Kong's digital financial ecosystem by interest-paying digital yuan

The strategic upgrade of the digital yuan will have the most direct and profound impact on Hong Kong, which is unique in its geography and system.

The key variable of interest payment has completely changed the nature of the digital yuan in cross-border and financial scenarios, transforming it from a "payment channel" into a "strategic asset," thereby providing substantial empowerment for Hong Kong's construction of an "international digital asset center" on multiple levels.

First, interest payments address the incentive for cross-border funds to remain idle, directly strengthening Hong Kong's function as an offshore RMB pool.

In cross-border payment networks based on multilateral central bank digital currency bridges (mBridges), interest-free digital currencies serve merely as a medium of exchange, incentivizing businesses to settle transactions quickly to reduce capital tied up in cash. With interest payments, the digital yuan gains the ability to compete with offshore RMB deposits in Hong Kong. Multinational corporate treasury centers can use it as an interest-bearing liquidity management tool, allowing it to remain within Hong Kong's compliant system for a longer period.

Currently, digital RMB accounts for over 95% of transactions on mBridge. The interest payment policy is expected to transform this flow advantage into a stock advantage, which will help expand and deepen Hong Kong's offshore RMB capital pool and consolidate its hub status.

Second, interest payments enhance the credit appeal of the digital yuan as a currency for the issuance and settlement of tokenized assets in Hong Kong.

Hong Kong is actively promoting the tokenization of assets such as bonds. In such direct-to-consumer (DvP) settlements, the credit rating of the settlement currency directly affects the product's risk pricing and market acceptance. The digital yuan, which pays interest and is backed by the national credit, has a credit rating far exceeding that of any single bank's tokenized deposits.

The Hong Kong Monetary Authority's Ensemble project has explored interoperability for tokenized deposits, and the digital yuan 2.0 can be integrated into this ecosystem as a higher-level settlement asset. Leveraging the programmability of the digital yuan, bond interest payment processes or trade finance terms can be automated, significantly improving efficiency and reducing operational risks.

This provides a potential, superior underlying financial infrastructure option for Hong Kong to issue high-end products such as tokenized government green bonds.

Third, interest payments have activated the space for financial service innovation around the digital yuan, bringing synergistic opportunities to Hong Kong's fintech industry.

When the digital yuan becomes a liability that banks can operate and generate interest on, services related to deposits, wealth management, financing, and smart contract management will emerge.

Hong Kong, with its internationally aligned common law system and vibrant financial market, is an ideal "sandbox" for testing such innovative services. For example, it could develop compliant gateways connecting digital RMB wallets to virtual asset platforms, or design structured wealth management products based on their interest-bearing characteristics.

This innovative synergy will give Hong Kong a head start in product design and rule-making in digital finance.

Fourth, the interest payment deepens the differentiated and collaborative strategy between the digital RMB and Hong Kong's "digital Hong Kong dollar".

Hong Kong has clearly prioritized the development of a wholesale-type "Digital Hong Kong Dollar," focusing on large-scale transactions between financial institutions and capital market applications. The interest-bearing Digital Yuan 2.0 will primarily serve cross-border retail payments, trade settlements, and related derivative financial services closely linked to the mainland's real economy.

The two are not substitutes, but rather form a clear complementary relationship: the digital Hong Kong dollar optimizes the efficiency of local wholesale finance, while the digital yuan deepens cross-border economic ties. This synergy enables Hong Kong to simultaneously strengthen its local financial infrastructure and its function as a cross-border bridge.