The development and implementation of central bank digital currencies (CBDCs) represent a pivotal shift in the future of global finance. As one of the pioneers in this domain, China has made significant strides with its Digital Currency Electronic Payment (DC/EP), commonly known as digital RMB. With Shenzhen designated as a key pilot zone under the Pilot Implementation Plan for Comprehensive Reform of Shenzhen's Leading Demonstration Zone for Building Socialism With Chinese Characteristics issued in October 2020, the nation is actively shaping the infrastructure and policy framework necessary for a modern digital economy.
This article explores the foundational concepts of digital RMB, analyzes current challenges in its systemic development, and offers strategic recommendations to strengthen both domestic adoption and international influence—while ensuring compliance with financial stability, legal clarity, and technological innovation.
Understanding Central Bank Digital Currencies
Central bank digital currency (CBDC) refers to a digitized form of a country’s official currency, issued and regulated by the central monetary authority. In China’s case, the digital RMB—also referred to as DC/EP—is a legal tender backed by the People’s Bank of China (PBOC), functioning as electronic cash within the M0 money supply category.
To qualify as a CBDC, a digital currency must meet two core conditions:
- It must be base money, meaning it is issued directly by the central bank.
- It must be fully digital, existing in electronic rather than physical form.
Additionally, one of two necessary conditions must also be satisfied:
- Account independence: Transactions can occur without reliance on traditional bank accounts.
- Public accessibility: The currency is available for retail use by individuals and businesses, not just financial institutions.
Based on these criteria, global CBDC models fall into three primary categories:
- Wholesale CBDCs for interbank settlements (account-independent, institutional use).
- Retail CBDCs with accounts, similar to digital wallets managed by central banks.
- Retail CBDCs without accounts, mirroring physical cash in digital form—this is the model adopted by China.
China began researching CBDC technology as early as 2014 and has since focused on developing a retail-based, account-independent digital cash system. This approach aligns closely with everyday economic activity, enabling peer-to-peer transfers even without internet connectivity—a feature particularly valuable given China’s vast population and diverse geographic landscape.
Innovations in China’s Digital RMB Framework
To support large-scale deployment, China introduced two critical innovations:
- Two-Tier Operational System
Rather than direct distribution from the PBOC to the public, digital RMB flows through commercial banks. The central bank supplies digital currency to authorized financial institutions, which then distribute it to consumers and merchants. This layered structure maintains financial stability while leveraging existing banking infrastructure. - Graded Transaction Limits and Identity Verification
To mitigate risks such as money laundering and fraud, China applies a tiered verification model. Small transactions require minimal identity checks, preserving user convenience and privacy. Larger transactions trigger enhanced Know Your Customer (KYC) procedures, ensuring regulatory oversight where needed.
These mechanisms balance innovation with control, making the digital RMB both scalable and secure.
Key Challenges in Building a Sustainable CBDC Ecosystem
Despite its progress, China faces several structural and regulatory hurdles in fully integrating digital RMB into its financial ecosystem.
1. Absence of Dedicated Legal Frameworks
While existing laws governing physical currency provide some guidance, they do not fully address the unique aspects of digital money—such as traceability, programmability, and data governance. Currently, there is no comprehensive legislation specifically regulating the issuance, circulation, or supervision of digital RMB.
Moreover, the non-anonymous nature of digital transactions raises concerns about data privacy. Although transaction transparency supports anti-money laundering (AML) and counter-terrorism financing (CTF) efforts, it also increases the risk of surveillance overreach. A clear legal framework is needed to define when and how authorities may access transaction records, protecting individual rights without compromising national security.
2. Threats to Monetary Sovereignty from Non-State-Issued Cryptocurrencies
Private digital assets—such as speculative cryptocurrencies like Bitcoin and stablecoins like Diem (formerly Libra)—pose a growing challenge to state-controlled monetary systems. These decentralized or privately backed currencies operate outside traditional banking channels and often lack regulatory oversight.
China currently regulates such assets through departmental notices, such as the 2013 Notice on Preventing Bitcoin Risks and the 2017 Announcement on Preventing Risks of Token Offerings. However, these directives have limited legal authority and lack detailed enforcement mechanisms. Their status as administrative guidelines means penalties for violations are often minor, reducing deterrent effectiveness.
Additionally, the anonymity features common in many private cryptocurrencies complicate monitoring efforts, increasing compliance costs for regulators and potentially destabilizing domestic financial markets.
Strategic Recommendations for Advancing Digital RMB
To overcome these challenges and position digital RMB as a leading global CBDC, China should adopt a dual-track strategy focusing on institutional reform and international cooperation.
Institutional Reforms for Stronger Governance
- Enact Specialized CBDC Legislation
China should introduce a dedicated legal framework that defines the rights and responsibilities of all stakeholders—from issuers to users—and establishes rules for dispute resolution, fraud prevention, and cross-border usage. - Establish a National Digital Currency Supervisory Authority
A centralized body could oversee both state-issued digital RMB and monitor foreign digital currencies entering the domestic market. Equipped with real-time analytics and AI-driven monitoring tools, this agency would enhance regulatory efficiency and financial resilience. - Form International CBDC Alliances
By collaborating with other nations exploring CBDCs—such as those in ASEAN or BRICS—China can help establish multilateral agreements for cross-border payments, data sharing, and crime investigation. Such alliances would streamline cooperation in combating illicit finance while promoting interoperability among digital currencies.
Strengthening RMB Sovereignty in the Global Arena
- Engage Private Financial Institutions in CBDC Distribution
While maintaining sole issuance authority, the PBOC could allow licensed fintech firms and private banks to participate in distribution and wallet services. This would foster innovation, improve user experience, and absorb market volatility—similar to how private entities support payment platforms like Alipay or WeChat Pay. - Leverage the Belt and Road Initiative for Internationalization
Through bilateral currency swap agreements conducted via digital RMB, China can expand its monetary influence across participating countries. Offering efficient, low-cost cross-border settlement options positions digital RMB as an attractive alternative to traditional reserve currencies.
Such initiatives contribute to building a more inclusive global financial architecture—one aligned with the vision of a shared human destiny.
Frequently Asked Questions (FAQ)
Q: What is digital RMB?
A: Digital RMB is China’s central bank digital currency (CBDC), issued by the People’s Bank of China. It functions as electronic cash, equivalent in value to physical yuan, and is designed for widespread retail and commercial use.
Q: Is digital RMB the same as cryptocurrency like Bitcoin?
A: No. Unlike decentralized cryptocurrencies, digital RMB is centralized, state-backed, and legal tender. It is not volatile and cannot be mined or traded speculatively.
Q: Can foreigners use digital RMB?
A: Yes. During pilot programs, including major events like the Beijing Winter Olympics, foreign visitors were able to access limited-function digital wallets to facilitate spending.
Q: Does using digital RMB compromise personal privacy?
A: The system uses tiered identity verification—small transactions are semi-anonymous, while larger ones require identification to comply with AML regulations. Legal safeguards are still evolving to ensure balanced data protection.
Q: How does digital RMB differ from mobile payment apps like Alipay?
A: While Alipay is a private payment platform linked to bank accounts, digital RMB is actual money issued by the central bank. It works offline, requires no third-party intermediary, and carries no credit risk.
Q: Will digital RMB replace cash?
A: Not immediately. Cash will coexist with digital RMB for the foreseeable future. The goal is complementarity—not elimination—of physical currency.
👉 Explore how next-generation digital currencies are transforming cross-border payments worldwide.
Conclusion
China’s journey toward a fully functional digital RMB ecosystem reflects a bold integration of technological advancement, regulatory foresight, and strategic international outreach. By addressing legal gaps, reinforcing monetary sovereignty, and fostering public-private collaboration, China is laying the groundwork for a resilient and globally relevant digital currency.
As the world moves closer to a cashless future, the lessons from China’s CBDC experiments will undoubtedly shape the evolution of money itself—ushering in an era where efficiency, security, and inclusivity converge in the digital realm.