A Tale of Two CBDCs: e-CNY v. Digital Euro

While it is still early days, CBDCs clearly have the potential to disrupt and revolutionize global payments and finance. China’s digital yuan (e-CNY or the digital yuan) was the first out of the gate in this regard, with all of the other major global settlement currencies now playing catch up (although the U.S. now appears to be taking a step back with President Trump’s recently signed Executive Order on digital assets prohibiting the issuance, circulation or use of a CBDC). One of the reasons why China’s e-CNY is so advanced on implementation is that it has been able to forge ahead with its agenda in this regard without having to reconcile the contrasting agendas and concerns of various EU member states. China views the issuing of its CBDC not just as a means of diversifying online payment options domestically, but also in the longer term as part of its broader goal of internationalizing the Renminbi yuan (RMB).

As global momentum appears to be building for the development of CBDCs, it seems like an appropriate time to compare and contrast the trajectories of two of the key actors in this fast-developing space, the People’s Bank of China (PBOC) and the European Central Bank (ECB) and their respective CBDCs.  This article compares e-CNY with the digital Euro, its counterpart in the European Union, and explores the implications of the e-CNY’s current and planned use cases.   On a very basic level, they start from two very different places: in China, the e-CNY is set up in a way that each transaction is reported automatically to the PBOC and is trackable by the Chinese government but the “managed anonymity” policy means that the personal information is stored securely in encrypted form by the operating layer bank (not PBOC) and can only be accessed by the operating layer bank or by other government authorities subject to certain safeguards and guard rails¹.  This may help to address AML and CTF-type issues, but commentators have pointed out that it does raise concerns about privacy.  In contrast, in the EU, the debate on the digital Euro has centred around protection of personal data and privacy rights of users when transacting using the digital Euro. 

The e-CNY is a retail CBDC issued by the PBOC.  It is de facto legal tender in digital form and is intended to replace physical cash.   As such, it does not accrue any interest and is pegged 1:1 with the physical RMB yuan.  However, there are no clear rules or policies on how e-CNY will be issued or used nationwide or on how it works; as of time of writing, the proposed revisions to The People’s Bank of China Law to include e-CNY as an alternative legal tender have not been passed.  

 From a user perspective, it has multiple layers, as described below: 

• Issuer layer: PBOC, which issues e-CNY; 
• Operator layer: Tier 2 operating institutions, who can open e-CNY wallets for end users and distribute e-CNY to wallets of end users.  Note that users do not need to have a bank account with the operating institution in order to create an e-CNY wallet, and digital wallets holding e-CNY will not be treated as bank accounts for regulatory purposes and hence are subject to less stringent KYC requirements. 
• End user layer: Businesses and consumers who can use e-CNY.

While the PBOC has not specified a clear timeline for the official launch of e-CNY nationwide within Mainland China, it has conducted several rounds of pilots in major cities.  Since its introduction, the coverage of the e-CNY trial program has gradually been expanded from the original “4+1” (i.e. closed testing within state-backed banks in Xiong’an district, Shenzhen, Suzhou, Chengdu, and the Beijing Winter Olympics), to encompass 29 cities in 17 provinces as of December 2022.   

Currently, the e-CNY is offered in two formats: (i) users can download and access and transfer e-CNY in the e-CNY Wallet App on their mobile phones; and (ii) users can also obtain hardware e-CNY wallets (in the form of charge cards with a preloaded balance) from a local branch of any of the ten designated participating banks².  e-CNY has limited use cases currently, as it cannot be transferred internationally³ or used to buy or sell gold or other currencies.   It can only be used in specific payments scenarios which are mostly small retail transactions including salary payments to civil servants, payments for public transportation services and e-commerce on certain local platforms.  

On May 17, 2024, the Hong Kong and Mainland authorities expanded the scope of the e-CNY pilot in Hong Kong to facilitate the setup and use of e-CNY wallets by Hong Kong residents, marking a further step forward in PBOC’s efforts to internationalize the RMB.   Hong Kong residents can set up e-CNY personal wallets, which only require a Hong Kong mobile phone number.   It can be used for cross-boundary⁴ payments (as well as in the Mainland pilot cities), and can be topped up via the Faster Payment System through 17 designated retail banks in Hong Kong. 

However, there has been no rollout beyond the confines of Mainland China and Hong Kong.

The de facto central bank in Hong Kong, the Hong Kong Monetary Authority (HKMA) has, since June 2021, been working on “Project e-HKD” to study the prospect of issuing its own CBDC-type instrument dubbed the e-HKD, covering both technical and policy considerations.  The project was later renamed e-HKD+, as its coverage has expanded from the e-HKD itself to a more comprehensive exploration of the digital money ecosystem.  

As of now, the HKMA has completed the pilot program phases 1 and 2, which analyzed domestic retail use cases in six categories by allowing 16 firms to participate in the trial.  Phase 2, which  commenced in September 2024 and will last for around 1 year, selected 11 groups to explore innovative use cases across three themes, including (i) settlement of tokenized assets, (ii) programmability and (iii) offline payments.  

While the HKMA continues to actively participate in international fora and monitor international developments on CBDC and other new forms of digital money, it has not yet reached a policy decision on whether or when to introduce e-HKD for use by individuals and corporates. Whilst politically part of China, Hong Kong operates under a different common law-based legal system to Mainland China and has no foreign exchange controls other than those relating to AML and CTF in stark contrast to Mainland China. As it is pegged to the U.S. dollar and freely convertible, it would be technically more straightforward for the e-HKD to be used in international transactions as a settlement currency.