Recently, thirteen ministries and commissions, including the People's Bank of China (PBOC), and seven major industry associations have successively issued statements emphasizing the risks of virtual currencies and the regulation of stablecoins. Meanwhile, PBOC Governor Pan Gongsheng, in his keynote speech at the recent 2025 Financial Street Forum, stressed that the PBOC will further optimize the management system for the digital yuan and promote its development. The background to these events is that the global monetary system is entering a new phase, with the simultaneous emergence of US dollar stablecoins, central bank digital currencies (CBDCs), the digital yuan (e-CNY), and the multinational CBDC settlement network mBridge. These represent different monetary powers, different clearing paths, and different sovereign implications. So what is the relationship between them, and what are their similarities and differences? In reality, it's not a simple matter of "who replaces whom," but rather a rewriting of things at different dimensions and levels: who issues the currency, who handles settlements, which path cross-border payments take, and whether the state still holds monetary sovereignty. To explain this clearly, we need to start with a seemingly silly question: Whose liability is the money in the various apps on your phone? The truth about modern money: Central banks issue base money, and banks create deposit money. Most of us are raised with the intuition that money is printed by the central bank, and banks are just holding it for you. The reality is quite the opposite: The central bank issues only a small portion of base money, while the long string of numbers you use every day represents currency that is actually recorded by commercial banks. (1) The central bank's money: cash + reserves + future CBDC If you have a 100 yuan note, from a balance sheet perspective, this is the case: The central bank owes you 100 yuan, which is a liability of the central bank. Similarly, commercial banks have a reserve account with the central bank, which contains a string of numbers. These reserves are also liabilities of the central bank (currency held by commercial banks), except that the object is the bank rather than the individual. For CBDC (such as the digital yuan), it is essentially also a central bank liability, only in digital form instead of paper money. Therefore, cash, banks' reserves at the central bank, and CBDC are all one family—they are all "the central bank's money." (2) Bank money: The balance on your bank card is owed to you by the bank, not by the central bank. Looking at your bank app on your phone, it says: Balance: 10,000 yuan. This 10,000 yuan is not money given to you by the central bank, but rather a debt owed to you by the bank. If the bank goes bankrupt, this 10,000 yuan will theoretically be discounted or even disappear; the only difference is whether or not there is deposit insurance to cover it. More importantly, banks can "create" this balance through lending. For example, if you borrow 500,000 yuan from a bank to buy a car, after approval, the bank won't take 500,000 yuan in cash from its vault, nor will it "look for money" anywhere beforehand. Its action is very simple: in its internal ledger, it writes "+500,000" in your account and simultaneously records "+500,000" in the "Loan Assets" column. From then on, the world has an additional 500,000 yuan in "deposits," created entirely through bookkeeping.
Banks only need to hold a small amount of reserves at the central bank (such as a certain percentage of total deposits) to support a deposit balance far exceeding the reserve size (because loans create new deposits). This is the actual operation of the "fractional reserve system".
(3) If the reserves are not sufficient, why don't banks experience daily bank runs?
Some observant students have noticed that since commercial banks only need a small amount of reserves to lend, if all depositors go to the bank to withdraw money at the same time, the bank will not have enough money to pay the depositors (because the money has already been lent to the borrowers and has not yet been recovered).
But in reality, there are three hidden safeguards here. First, most of the time, people simply transfer money to each other, rather than actually withdrawing all the funds and keeping them at home in cash. When a company pays its employees' salaries, a small amount is deducted from Bank A's account and a small amount is added to Bank B's account. The vast majority of the funds remain at the "numerical" level and are never actually withdrawn. Second, when banks settle accounts, only the "net" amount is settled. Suppose that within a day, an ICBC customer transfers 1 billion yuan to a CMB customer, and a CMB customer transfers 970 million yuan to an ICBC customer. The two banks only need to settle the difference of 30 million yuan through the central bank's reserves, instead of paying out each small transfer of 1,000 yuan individually. This greatly reduces the actual amount of "central bank money" that needs to be used. Third, there is the central bank as the "lender of last resort." If a bank experiences a liquidity crunch in the short term (insufficient reserves), it can use high-quality assets such as government bonds as collateral at the central bank to obtain emergency reserves. Therefore, the stability of the modern banking system does not depend on "how much money is piled up in the underground vault", but on the three things that support it: central bank credit, clearing system, and supervision. (4) Where do banks' reserves at the central bank come from? This point is also crucial, because we will discuss the "100% reserve" logic of digital RMB later. There are three main sources of reserves: Central bank asset purchases: For example, when the central bank buys government bonds or policy assets, it deposits money into the bank's reserve account, increasing reserves out of thin air. Cash deposit conversion: Depositors deposit a stack of cash into a bank, the bank hands the cash over to the central bank, and the central bank adds a number to its reserve account; the two are interchangeable. Banks borrow from the central bank: Through tools such as the Medium-term Lending Facility (MLF), banks use bonds as collateral, and the central bank provides them with reserves. Therefore, reserves are essentially "central bank money for banks to use." CBDC and digital yuan are new forms of this money that the central bank is attempting to deliver directly to the public. Figure 1: Two-tiered monetary structure. Why CBDC Must Emerge. Only after clearly understanding "central bank money" and "bank money" can one understand why CBDC has suddenly transformed from academic discussion into a major central bank project in the past five years. The emergence of CBDC is actually the result of three major trends converging. First, cash is quietly disappearing. In many countries, the proportion of cash usage is declining year by year, with some shops even refusing cash. Once cash runs out, the public will only have two types of money left: money owed to them by banks and money in their tech platform wallets. These are essentially debts of commercial institutions, not liabilities of the central bank. In the era of paper money, the central bank at least had the power to directly distribute money to the public. In the digital age, if even this is lost, the central bank will have withdrawn from the people's wallets. The first goal of CBDC is to preserve a way for the public to directly hold central bank money in an era where cash is disappearing. Secondly, there's the dominance of technology companies over the payment system. In China, almost all small daily payments run through WeChat Pay, Alipay, and other payment companies' systems; similar large technology payment companies exist in the US and other countries. From an efficiency and user experience perspective, everyone loves using these services; however, from the perspective of national security and financial sovereignty, it's not so simple. Once payment infrastructure becomes highly dependent on commercial platforms, technical glitches, commercial disputes, and even regulatory battles can directly impact a country's daily economic operations. Therefore, central banks around the world have begun to realize: Payments can be handled by commercial institutions, but the underlying infrastructure must be controlled by the state. CBDC is that underlying infrastructure. Thirdly, cross-border payments have long been strangled by the dollar system and SWIFT. Today, payments for goods from China to Thailand, Indonesia, and Brazil likely go through US dollar intermediary banks and the SWIFT messaging network, taking one or two days or even longer, and incurring substantial fees and compliance costs. Even more troubling is the possibility of being "kicked out of the system" by the other party in the event of sanctions or geopolitical tensions. Therefore, central banks around the world are considering: Could a cross-border settlement network be built through the interconnection of multiple national CBDCs, allowing for direct "local currency to local currency" transactions and bypassing the US dollar? mBridge emerged in this context, with the digital yuan playing a crucial but just one role. Figure 2: Institutional Pressures of CBDC The Renminbi: A Chinese-Style CBDC That Only Replaces Cash, Not Deposits In developing its CBDC, China has chosen an extremely restrained path: The digital yuan only serves as a digital substitute for M0 (cash), without encroaching on the territory of M1/M2 (deposits). This may seem conservative, but it is actually very carefully considered. The most crucial aspect is preventing digital bank runs and not disrupting the existing credit creation mechanism. In a world without CBDC, a bank run is a physical act: you go to a branch, withdraw cash, and run to the counter. Banks can use methods like limits to slow down depositors. Banks can also seek help from the central bank or artificially slow down the process. This process involves friction, time, and a regulatory "window of opportunity." Once a "CBDC usable by everyone" is available, if poorly designed, the scenario can become like this: A bank has bad news. Previously, depositors lined up to withdraw cash. With CBDC: depositors open their phones, click to transfer all their bank card balances into a CBDC wallet, and within 5 minutes, billions of yuan flow from the deposit layer to the central bank's digital currency layer. This is far more terrifying for banks than a traditional bank run, because if the central bank allows deposits to be converted into CBDC anytime, anywhere, at zero cost, the liquidity of the banking system could be instantly drained in a panic. China's solution is: the digital yuan only replaces cash, not deposits, and it does not accrue interest. In other words, the official stance is very clear: e-CNY is digital cash, not a more advanced version of demand deposits. Commercial banks must first use their own reserves to fully exchange for e-CNY before issuing it to customers; they cannot create e-CNY through loans. From a macro perspective, the digital yuan is like gradually replacing a portion of the existing paper currency in society with a programmable, controllable, anonymous, and usable digital form, rather than adding a "huge new barrel" to the total money supply. This design greatly reduces the impact of CBDC on the liability side of banks and avoids the extreme situation of "everyone moving to the central bank overnight." However, its side effects are also very real: commercial banks have almost no incentive to promote the digital yuan. From the bank's perspective, what does it mean for them if you exchange 10,000 yuan in deposits for 10,000 yuan in digital yuan?
Liabilities side: Deposits decrease by 10,000;
Asset side: Reserves decrease by 10,000;
Interest income: Decreases accordingly (because this part of the savings can no longer be used for lending to earn interest spreads);
Intermediate business income: In the future, this part of the payment will no longer contribute to card swipe fees and interbank clearing revenue;
Costs: We still need to provide you with e-CNY wallet services, risk control, customer service, and system maintenance.
This is a typical project that has only costs and no revenue. Therefore, the promotion of the digital yuan mainly relies on policy scenarios—such as government subsidies, public utility payments, public transportation, and small-amount convenient payments—rather than being actively promoted by commercial banks. From this perspective, the digital yuan is more like a layer of public digital currency infrastructure built by the state, rather than a product that focuses on user growth and GMV. Figure 3: Schematic diagram of digital RMB. mBridge: Cross-border settlement "without US dollars". Having discussed domestic payments, let's look at cross-border payments. If the digital yuan is about "digitizing RMB M0" domestically, then the mBridge project, promoted by the Bank for International Settlements (BIS), aims to do something more radical regionally: allow central banks from different countries to settle directly on a shared ledger using their respective CBDCs, without using US dollars or SWIFT. This sounds abstract, so let's break it down with a concrete example: Sino-Thai trade. Suppose a Chinese importer wants to pay a Thai exporter 1 million RMB, and both parties are within the mBridge system; China uses e-CNY, and Thailand uses THB-CBDC, with an exchange rate of 1 RMB = 5 Thai Baht at the time. First, the Chinese importer initiates a payment of 1 million e-CNY to a Thai company through their domestic bank's app. The corresponding 1 million RMB is deducted from the central bank's digital RMB ledger, and this central bank money is locked in mBridge's cross-border settlement module. The second step involves mBridge using the exchange rate provided by commercial banks. Note that this is crucial: the central bank does not report exchange rates or participate in the foreign exchange conversion process. Assuming the bank's rate is 1 RMB = 5 THB, the system knows that Thai companies should receive 5 million THB-CBDC. The third step involves the Bank of Thailand minting 5 million digital baht in mBridge's shared ledger. From a balance sheet perspective, this is a typical central bank monetary issuance action: the Bank of Thailand's liabilities increase by 5 million THB-CBDC (owed to Thai exporters), while its assets increase by a settlement claim against the Central Bank of China, recorded in units of 1 million RMB—this is the so-called settlement claim. Fourthly, the Thai exporter's wallet immediately gains 5 million THB-CBDC; this money is a liability of the Bank of Thailand, like a digital banknote instantly arriving in their hands. Note what happens throughout this process: the Chinese company uses e-CNY, the Thai company receives THB-CBDC, without any US dollars, SWIFT messages, US intermediary banks, or the "funds in transit for a few days" process. Moreover, all of this occurs at the central bank's bookkeeping level; it's a synchronized accounting between central banks. So, what exactly is a settlement claim? Intuitively, you might think: the Bank of Thailand issues 5 million baht out of thin air but only receives a receivable of 1 million yuan. If the yuan depreciates in the future, won't it suffer a huge loss? The key is here: a settlement claim is not foreign exchange reserves and is not revalued daily at the market exchange rate. It is a nominal right used for future settlement deductions. For example, a few months later, a Thai importer needs to pay a Chinese company 2 million RMB for goods. The Bank of Thailand can first use the previous 1 million RMB settlement claim on mBridge to offset half of this amount, and the remaining 1 million RMB can be made up by the Commercial Bank of Thailand buying RMB in the foreign exchange market (or through a foreign exchange swap of local currency to RMB). In this case, the gains or losses from exchange rate fluctuations are entirely reflected in the foreign exchange contract signed between the commercial bank and the company, and will not be reflected in the change in the value of the Bank of Thailand's settlement claim ledger. Therefore, a settlement claim is different from holding 1 million RMB in assets in the traditional sense. It's the right to have your future payments reduced by 1 million RMB within this multilateral ledger. It's neither revalued daily according to the exchange rate, nor does it subject the central bank to floating losses. To take it to an even more extreme point: what if there's almost no reverse trade between China and Thailand in the next ten years, with Thailand consistently exporting more than it imports, accumulating a large number of settlement claims against China? The answer isn't a loss or worthless paper, but rather settlement through other mechanisms between central banks, such as: Regularly conducting a net settlement: The two central banks agree to settle the balance sheet annually at the end of the year, checking how many unused settlement claims Thailand holds, and then settling part of the difference through currency swaps, asset swaps, etc. Using bilateral swap agreements: On the day the swap is signed, both parties lock in an exchange rate, which is no longer affected by market fluctuations, greatly reducing the central bank's exchange rate risk. Alternatively, the Bank of Thailand could use THB-CBDC to directly repay a portion of the nominal RMB rights owed to the People's Bank of China on mBridge, forming a digital payment from one central bank to another. In short, mBridge's design goal is very clear: Cross-border settlements can bypass the US dollar and SWIFT, but central banks cannot become black holes of exchange rate risk by engaging in multilateral clearing. Therefore, exchange rate realization risk is firmly locked between commercial banks and enterprises, with the central bank only responsible for "bookkeeping, issuing currency, and offsetting," and not participating in foreign exchange speculation. Figure 4: Four-step flowchart of China-Thailand trade on mBridge. Stablecoins: Internet Dollars. After discussing the digital yuan and mBridge, looking at stablecoins for the US dollar, you'll find it's actually a completely different path: instead of central banks issuing currency, it uses "digital IOUs (I owe you)" issued by private companies to extend the US dollar to every digital currency wallet worldwide. USDT and USDC, as examples of stablecoins issued by the US dollar, are essentially like this: you send $1 to the issuer, and they give you 1 USDT on the blockchain, promising to exchange that USDT back to $1 at a 1:1 ratio later. Legally, this is a digital receipt for "a company owing you $1," not money owed to you by the Federal Reserve. However, in practice, people don't care about this; they only care about whether the token can roughly stay around $1, whether it can be transferred at any time, and whether someone can be found to take over the token at any time. From the perspective of cross-border payments, stablecoins have several inherent advantages that mBridge cannot match: First, they don't require any country to "join the system"; as long as you have internet access and a wallet, you can send and receive payments. Second, they are available 24/7, eliminating the "bank closures on weekends." Finally, they are a natural US dollar-denominated unit, suitable for scenarios such as cross-border freelance income settlement, SME payments, and OTC currency exchange. In high-inflation countries like Argentina, Turkey, Nigeria, Lebanon, and Venezuela, hundreds of thousands of people are already using USDT as a "personal savings tool" to combat currency devaluation, no longer trusting their own national currencies. For them, USDT is more "like money" than their country's currency. This has created a de facto "Internet dollar zone": the dollar permeates the balance sheets of residents in these countries through stablecoins, almost without the intervention of their own central banks. From the US perspective, this is almost a dream come true: First, the dollar expands automatically through private technological tools, becoming a globally accepted "Internet store of value"; second, the US can temporarily avoid the risk of launching a politically controversial digital dollar CBDC, and also avoid the political cost of issuing its own retail CBDC and squeezing out its own banks; therefore, as long as dollar stablecoin products are regulated within a controllable regulatory framework through legislation, dollar stablecoins become a semi-official, shadowy extension tool—allowing the Federal Reserve to maximize the "right to use the dollar" worldwide without direct intervention. Overall, China is ahead in the race for "central bank digital currencies"; while in the race for "digitalizing the dollar's global reach," the US relies more on privately issued stablecoins. It is very hesitant about CBDCs, partly due to significant domestic political controversy surrounding privacy and the concentration of government power, and partly because the US banking industry strongly resists "central banks directly facing the public." Given this, allowing dollar stablecoins to be rolled out globally is a safer and more politically correct option. However, for countries like China with capital controls, exchange rate management, and financial security concerns, dollar stablecoins represent a risk that must be seriously addressed: Firstly, there is the issue of capital outflow channels. In theory, residents can exchange RMB for USDT domestically, then transfer it on-chain, and finally exchange it back for foreign currency in the overseas over-the-counter market. This entire process bypasses traditional banking channels. On a small scale, this constitutes a "gray market flow"; on a large scale, it poses a direct challenge to capital account controls. Secondly, there's the issue of monetary policy transmission. If residents increasingly use USDT for savings, the impact of domestic interest rate policies on them will weaken. The risk of asset devaluation during a currency crisis will be partially transferred to the domestic financial system and those still holding domestic currency assets, while holders of dollar assets will be relatively safe. This will lead to "dollarization of asset structure," weakening the position of the domestic currency in residents' assets. Thirdly, there are regulatory and anti-money laundering issues. Stablecoins jump between various blockchains, layering on mixing services, cross-chain bridges, and DeFi protocols, making it extremely easy to obscure the traces of funds, increasing the difficulty of anti-money laundering and counter-terrorism financial flow monitoring. Therefore, for the United States, dollar stablecoins are "tools to amplify the power of the dollar"; for China and many emerging market countries, dollar stablecoins are a "parallel dollar system that bypasses traditional channels," bringing convenience while also posing structural risks. This is also the underlying logic behind the recent continuous announcements in mainland China regarding the regulation of dollar stablecoins. Figure 5: USD Stablecoin Network Summary As mentioned at the beginning of the article: Recently, thirteen ministries including the People's Bank of China and seven major industry associations have issued statements emphasizing the risks of virtual currencies and the regulation of stablecoins. On the surface, these policies seem to be aimed at regulating the "crypto world"; however, their background is far more significant than speculative risks—the global monetary system is entering an unprecedented phase. During this phase, several forces are emerging simultaneously and evolving rapidly: stablecoins representing the US dollar's internet dissemination capabilities; central bank digital currencies (CBDCs) representing the digitization of national sovereign currencies; the digital yuan (e-CNY) representing China's digital infrastructure development; and the mBridge multi-CBDC settlement network representing a model of cross-border central bank cooperation. These are not competitors on the same track, but rather several different types of monetary structures, clearing systems, and strategic tools, each rewriting questions such as "who can issue currency," "how currency flows across borders," "whether clearing must go through the dollar system," and "how much monetary sovereignty a nation can still retain." If compressed into one sentence: The digital yuan is reshaping "how the central bank directly reaches the public"; mBridge is reshaping "whether cross-border settlement can be done without the US dollar"; stablecoins are reshaping "the way the US dollar spreads and reaches globally"; the US's choice is: let the dollar stablecoin run first, then slowly consider whether to develop a CBDC; China's choice is to first establish a solid digital foundation for the RMB, then open up cross-border opportunities through mBridge, while simultaneously managing the spillover risks of stablecoins based on the US dollar. From an ordinary person's perspective, you might simultaneously hold multiple types of "completely different kinds of money": Central bank liabilities (digital RMB, digital Euro, etc.); Commercial bank liabilities (bank card balances); Technology company wallet assets (payment platform balances); and even private institution liabilities (USDT, USDC). Behind these different forms of "money" lie different ledgers and different debt entities, implying entirely different risk structures, regulatory logics, and national strategic intentions. These intertwine to form the "main battlefield of currency" in the digital world over the next two decades. Understanding all of this ultimately returns to the seemingly foolish question posed at the beginning of this article: Whose liability is the money in the various apps on your phone? Only by clarifying this question can we truly understand why the digital yuan was created, why stablecoins are powerful, what mBridge aims to change, and how the future monetary system will fundamentally fork.
Miyuki
