On the twenty-ninth of December 2025, the People's Bank of China published a regulatory notice announcing a fundamental redesign of the e-CNY, its digital currency programme, with effect from the first of January 2026 [1]. The announcement attracted far less international attention than the scale of the change warranted, which is perhaps unsurprising given that most financial commentary on China in that period was concentrated on the extraordinary growth in digital yuan transaction volumes: 3.48 billion cumulative transactions, valued at 16.7 trillion yuan, approximately 2.37 trillion United States dollars, recorded through the end of November 2025 [2]. Those figures are impressive. They are also, in the light of what occurred on the first of January, something of a distraction from the more consequential story, which is that China quietly dismantled the architectural feature that made its digital currency experiment distinct from all other forms of digital money in existence.
The feature in question is the one that defines a central bank digital currency as such: that the instrument constitutes a direct liability of the central bank, a digital equivalent of the banknote held in circulation, sitting on the People's Bank's own balance sheet rather than on the balance sheets of the commercial institutions through which it circulates. This is not a merely technical distinction. It is the distinction that separates central bank money from commercial bank money, the same distinction that separates a banknote from a bank deposit, and it has been the organising principle of monetary architecture in every advanced economy since the nineteenth century. The e-CNY, in its original design, was the most ambitious attempt in the modern era to extend that principle into the digital realm. The January 2026 redesign abandoned it.
A Problem as Old as the Central Bank Itself
To understand why China abandoned the principle it had spent six years constructing, one must understand the problem that made abandonment tempting. The concern runs through the entire literature on retail central bank digital currencies, from the Bank for International Settlements working papers that began appearing in earnest around 2019 to the European Central Bank's successive design documents and the Federal Reserve's 2022 discussion paper [3]. The concern is disintermediation, and its logic is straightforward to the point of appearing inescapable: if ordinary citizens can hold money directly at the central bank, at no credit risk and with the convenience of a digital instrument, they have a rational incentive to shift deposits from commercial banks into CBDC wallets, particularly during periods of market stress when the quality difference between central bank and commercial bank liabilities becomes most salient. Commercial banks losing deposit funding cannot lend as readily. Monetary transmission weakens precisely when it is most needed. The central bank, in creating a superior instrument, undermines the system through which its own policy operates.
This is not a hypothetical concern. The Bank of England's 2021 discussion paper on the digital pound was candid about the risk, proposing holding limits as a structural mitigation [4]. The ECB incorporated the same thinking into its digital euro design, settling on a proposed ceiling of one thousand euros per wallet, a limit that, as several critics observed, is sufficiently restrictive to curtail the instrument's usefulness as a payments medium. The BIS, in its comprehensive survey of central bank digital currency designs, identified disintermediation as the central architectural challenge for any retail CBDC operating in an economy with a functioning commercial banking sector [3]. The question, for every institution pursuing a digital currency, was not whether disintermediation was a risk but whether any design could adequately address it while preserving the instrument's essential character as central bank money.
China's answer, arrived at after six years of piloting and presumably considerable internal deliberation, was that it could not. And so it changed the character of the instrument instead.
What the January 2026 Framework Actually Did
The December 2025 notice restructured the e-CNY in several interconnected ways, each of which, taken alone, might appear technical, but which collectively constitute a fundamental redesign [1]. Under the new framework, digital yuan balances held in wallets at authorised commercial banks are reclassified as liabilities of those commercial banks, not of the People's Bank of China. This means that if a citizen holds ten thousand yuan in an e-CNY wallet at the Agricultural Bank of China, those ten thousand yuan now appear on Agricultural Bank's balance sheet, not on the PBOC's. The PBOC's own balance sheet contracts accordingly. Commercial banks are required to pay interest on these balances in accordance with prevailing deposit rate regulations. The balances are covered by deposit insurance, just as ordinary deposits are. They are incorporated into the banks' reserve requirement calculations. Non-bank payment institutions, including Alipay and WeChat Pay, which distribute e-CNY through their own wallet infrastructure, are required to hold one hundred per cent reserves against the digital yuan they manage.
The Peterson Institute for International Economics, reviewing the announcement in January 2026, made the definitional consequence explicit: the canonical definition of a central bank digital currency, as established through the BIS's extensive research programme on the subject, requires that the instrument constitute a "digital form of central bank money" [5]. Wallet balances that reside on commercial bank balance sheets, are covered by deposit insurance, and earn commercial bank deposit rates are not central bank money. They are commercial bank money, denominated in yuan, distributed through a standardised payment rail managed under PBOC oversight. That is a description of something very useful. It is not a description of a central bank digital currency.
The Historical Irony
There is a peculiar irony in the direction of China's change that a student of monetary history cannot overlook. The evolution of note-issuing authority in England during the nineteenth century ran in precisely the opposite direction. Before the Bank Charter Act of 1844, the notes that circulated as money in England were issued by hundreds of commercial banks, each note a liability of the issuing institution and carrying the credit risk of that institution's solvency. Periodically, and disastrously, that risk materialised: a bank failed, its notes became worthless, and the holders suffered losses that the ordinary course of commerce had given them no reason to anticipate. The Bank Charter Act progressively consolidated note issuance in the Bank of England, transforming what had been commercial bank money into central bank money, and the reform was understood at the time as a straightforward improvement: the instrument was made safer, its issuer more stable, its character more uniform. Over the following century, that process of consolidation was repeated, with local variations, in virtually every developed monetary system on earth.
China, in January 2026, ran the reel backwards. An instrument that had been designed as central bank money, that had been announced to the world as central bank money, and that had been understood by every central banking institution studying it as a new species of central bank money, was redesigned as commercial bank money. Whether this constitutes progress or retreat depends entirely on what one thought the experiment was trying to accomplish.
China solved the disintermediation problem by ensuring there was nothing left to disintermediate. The e-CNY became ordinary bank money. The risk evaporated. So did the experiment.
What China Was Actually Trying to Accomplish
The most serious argument for the pragmatist interpretation of the January redesign is that the CBDC design problem China faced was not what most international commentary assumed it to be. The Western framing, derived from academic literature on optimal CBDC design, treated disintermediation risk as a constraint on an otherwise desirable project: the creation of a universally accessible, risk-free digital payment instrument that could reduce dependence on private payment oligopolies and give the state a direct monetary instrument in the digital economy. On this framing, the January 2026 redesign is a capitulation, a concession that the constraint could not be addressed without gutting the instrument.
But there is an alternative reading of China's objectives, which is that the CBDC label was, from the beginning, somewhat incidental to what the PBOC actually wanted to achieve. The observable priorities of the e-CNY programme were, in rough order of operational importance: reduction of dependence on Alipay and WeChat Pay, which had accumulated payment data and network positions that the state regarded as a systemic concentration risk; expansion of financial inclusion in rural and underserved populations; creation of a programmable payment infrastructure capable of targeted stimulus distribution; and the maintenance of comprehensive transaction surveillance. The January 2026 framework preserves all four of these objectives. The hundred per cent reserve requirement on non-bank payment institutions addresses the Alipay and WeChat Pay concentration directly. The interest-bearing commercial bank wallet model incentivises adoption. The programmability of the payment rail is unchanged. The PBOC's supervisory access to transaction data remains intact. What China abandoned was not the goal but the label, and possibly an architectural feature whose importance was always primarily theoretical.
This interpretation has real force. It is supported by the observation that the three countries which have successfully launched what are genuinely central bank digital currencies in the strict sense, the Bahamas, Jamaica, and Nigeria, did so in contexts where the commercial banking sector was insufficiently developed to perform the role that China's commercial banks now perform in the e-CNY ecosystem [6]. In an economy with a deep and functional commercial banking sector, the CBDC design tension does not admit a clean resolution; it admits only a series of compromises, each of which reduces the instrument toward something that already exists. China, having spent six years discovering this, chose to make the reduction explicit rather than maintain a theoretical distinction that its architecture could no longer support.
The Implications for Every Other Central Bank
The ECB has been designing a digital euro for the better part of four years. Its stated design continues to feature wallet holding limits, currently proposed at one thousand euros per citizen, as the primary mitigation for disintermediation risk [7]. The obvious question raised by China's January 2026 redesign is whether a holding limit of one thousand euros constitutes a solution to the disintermediation problem or merely an acknowledgement that the instrument has been constrained to the point where the problem cannot arise because the instrument is too limited to be useful as a store of value. An e-CNY wallet earning commercial bank deposit rates is, at scale, a more functional product than a digital euro wallet capped at one thousand euros. The ECB, confronted with China's experience, will need to decide which problem it is actually solving: disintermediation, or relevance.
The United States resolved the question by prohibition. Executive Order 14178, signed by President Trump in January 2025, explicitly forbids any federal agency from taking any action to establish, issue, or promote a central bank digital currency, and directs agencies to terminate any existing plans or initiatives in this area [8]. The political logic rests on privacy concerns and a preference for dollar hegemony through private sector stablecoins rather than public sector digital cash. Whether this preference is well-founded as monetary policy is a separate question from whether it is sustainable as geopolitical strategy, but the Trump administration appears to have concluded that the CBDC experiment, as demonstrated by its most ambitious practitioner, is not the instrument the proponents claimed it to be.
India's e-rupee, the second largest CBDC pilot by circulation, had reached ten billion and sixteen crore rupees in circulation by early 2026, a 334 per cent increase from the previous year, but still a figure representing a very small fraction of total money in circulation [9]. The growth rate is impressive; the absolute scale remains modest; and the design question, whether the e-rupee will eventually face the same disintermediation tension that the e-CNY encountered, has not yet been confronted at the volumes that would make it operationally acute.
The Question That Will Not Go Away
The fundamental question raised by China's January 2026 redesign is whether a retail central bank digital currency can exist, in any meaningful sense, in an economy with a functioning commercial banking sector, or whether every attempt to create one will eventually resolve into a form of digital commercial bank money that retains the CBDC name while abandoning the CBDC structure. The academic literature has not resolved this question, because the academic literature has been writing about theoretical instruments. China has been building a real one, at scale, in the world's largest economy, for six years. The answer it reached is not encouraging for those who believe the distinction between central bank money and commercial bank money matters at the retail level.
Bagehot observed, in one of his more underappreciated passages, that monetary reformers typically discover that the instrument they have devised is either too safe to be useful or too useful to be safe. The e-CNY, in its original design, was too safe: it threatened to drain the commercial banking system of the deposits on which monetary transmission depends. The January 2026 redesign made it useful by making it no safer than a bank deposit. Whether one calls the resulting instrument a central bank digital currency, or simply calls it what it is, turns out to matter less than the reformers originally supposed, but rather more than the present administration in Beijing appears willing to admit.
- People's Bank of China. "China to Enhance Digital Yuan Management with Deposit Features Starting 2026." PBC Notice. 29 December 2025. english.www.gov.cn
- Xinhua News Agency. "China's Digital Yuan Transactions Top 3.48 Billion." Xinhua. December 2025. english.news.cn
- Bank for International Settlements. "Central bank digital currencies: financial stability implications." BIS Papers No. 123. September 2021. bis.org
- Bank of England; HM Treasury. "New Form of Digital Money: Discussion Paper." Bank of England. June 2021. bankofengland.co.uk
- Peterson Institute for International Economics. "China Gives Up on State-Backed Digital Cash: The US and Europe Should Take Note, for Different Reasons." PIIE RealTime Economics. January 2026. piie.com
- Atlantic Council. "CBDC Tracker." Atlantic Council GeoEconomics Center. March 2026. atlanticcouncil.org
- European Central Bank. "Digital Euro: Design and Distribution." ECB. October 2023. ecb.europa.eu
- The White House. "Strengthening American Leadership in Digital Financial Technology." Executive Order 14178. 23 January 2025. federalregister.gov
- Caixin Global. "China to Allow Interest on Digital Yuan in Major Overhaul." Caixin Global. 29 December 2025. caixinglobal.com