Breaking Beyond m0: Why China's Digital Yuan Must Evolve Beyond Cash-Only Design

China’s digital yuan (e-CNY) stands at a critical juncture. For years, critics have noted its seemingly sluggish adoption compared to booming stablecoins like USDT. But this observation misses the fundamental story: the digital yuan was never meant to compete in those early stages—it was deliberately constrained by an m0 framework that made sense theoretically but limited its real-world impact.

The shift from m0 to m1 isn’t a reversal of past strategy; it’s the necessary next chapter in a carefully architected evolution. Understanding this transition reveals something far more significant than product tweaks: it exposes how central bank digital currencies must fundamentally rethink their relationship with market forces to achieve genuine circulation.

The m0 Prison: Theoretically Sound, Practically Limiting

The original m0 positioning of DC/EP (Digital Currency/Electronic Payment) was not born from conservatism, but from rigorous theoretical analysis. When the People’s Bank of China designed the digital yuan, it referenced the BIS’s “Money Flower” framework, which systematically classifies currencies across multiple dimensions.

A striking insight emerged: among all mainstream currency forms, cash remained uniquely non-digitized. While deposits, transfers, and payment accounts had already moved into digital systems through banks and platforms like Alipay and WeChat Pay, physical cash still occupied its own domain. The logical mission for a central bank digital currency, therefore, was not to reinvent existing electronic payment infrastructure—it was to fill the last gap.

Guided by this m0 logic, DC/EP prioritized capabilities like dual offline payment: peer-to-peer value transfer without network access or real-time verification. Technically sophisticated and resilient, this design brilliantly solved edge cases—scenarios with weak infrastructure, network outages, or emergency situations.

But here lies the core tension: these scenarios are inherently low-frequency by nature.

When internet payments function frictionlessly across most environments, a product optimized for “safety net” functionality faces an uncomfortable reality—users have no behavioral incentive to adopt it. A currency locked in m0 fulfills an important but niche mission. It becomes what many inside observers saw it as: a demonstration project showcasing technological capability rather than a vehicle for natural market adoption.

One telling anecdote: when discussing the digital yuan with a Tencent executive in the early rollout phase, his assessment was notably calm. “They pose no threat to us,” he said—not dismissively, but accurately. From the perspective of a payment platform operator, an m0-constrained currency addressing cash digitization creates no direct competition with the core battlegrounds of high-frequency payments and user engagement.

This wasn’t failure. It was an m0 design fulfilling its intended purpose—it just couldn’t be more than that.

The System Difference Nobody Acknowledges: Why CBDCs Aren’t Stablecoins in Competition

Before discussing m1’s significance, one critical distinction must be clarified: CBDCs and stablecoins are not competitors operating on the same field—they are expressions of entirely different credit systems.

Stablecoins succeed because they are issued by commercial institutions, backed by corporate balance sheets, and compete freely in markets. They can experiment rapidly, adapt based on demand, and absorb failures because they’re not systemic. Their flexibility isn’t an advantage born of cleverness—it flows directly from their non-sovereign nature.

CBDCs, by contrast, are credit instruments of the central bank, backed by sovereign guarantees. This creates an asymmetric responsibility structure. Any overly aggressive CBDC design doesn’t just affect individual users or companies—it ripples across the entire financial system. Regulatory caution isn’t dysfunction; it’s an inevitable consequence of different institutional roles.

This is why stablecoins can freely embed themselves into DeFi protocols, liquidity pools, and leverage markets while CBDCs have maintained deliberate boundaries. The question these frameworks pose to each other isn’t “which is better”—it’s “what becomes possible when the highest-credit currency begins learning from market mechanics?”

The m1 shift represents exactly this experiment.

m0’s Successor: When Digital Money Enters Asset Allocation for the First Time

The true significance of m1 lies not in technical innovation, but in a fundamental repositioning of what digital yuan means to its users.

Under m0, the digital yuan operates as digital cash: a settlement mechanism, nothing more. Users interact with it only out of necessity, not choice. You don’t hold more cash because cash itself is attractive—you hold cash because you need it to complete transactions. When a currency is confined to this transactional frame, shifting user behavior becomes nearly impossible.

m1 changes this premise entirely. m1 represents money that can be held, that participates in wider financial activities, and that carries yield potential. Even minimal returns create a decisive psychological shift: most users aren’t bothered by “low yield,” but many reject “no yield at all.”

This nuance is critical. The digital yuan in m1 isn’t meant to replace wealth management products or money market funds. Rather, it serves as the foundation layer—high-frequency liquidity parking with basic returns, while users maintain separate vehicles for enhanced gains. This tiered approach mirrors actual user financial behavior better than any single-product solution could.

For the first time, the digital yuan gains an asset attribute. It becomes something worth choosing to hold long-term, not merely something required for transactions. This distinction transforms the entire competitive landscape. USDT and USDC dominate offshore scenarios partly because they offer liquidity and composability, but also because they impose minimal constraints on holding. Once the digital yuan enters m1, even with meager returns, it begins competing on this previously absent dimension.

The Liberation Signal: Why Reduced Central Approval Matters More Than It Seems

A seemingly technical bureaucratic shift carried enormous strategic weight: the digital yuan no longer requires State Council-level special approval for major rollouts.

This change signals a fundamental recalibration from “major engineering project” to “normalized financial infrastructure.” Previously, the approval-heavy approach ensured security and controlled risk deployment—essential for early stages. The cost was clear: limited pace, restricted scenarios, minimal room for market-driven experimentation.

When approval requirements decrease, authorities effectively signal: “Within managed risk boundaries, more players may participate, more application forms may emerge, some trial and error is acceptable.”

Currency isn’t designed by committee—it’s filtered through use. Only when digital yuan transcends its role as a demonstration project and enters everyday financial infrastructure can it generate the network effects necessary for organic adoption. This governance shift doesn’t relax supervision; it transforms supervisory method from pre-defining the entire path to observing market self-organization within established guardrails.

The Cascading Implications: How m1 Restructures Financial Architecture

The m0-to-m1 transition isn’t isolated optimization—it triggers a chain of structural changes reverberating across the financial system.

Recalibrating Development Paths: Domestic CBDC, Offshore Stablecoins

An underappreciated reality is that China need not choose between “CBDC or stablecoin.” Domestically, promoting CBDC represents the optimal path for sovereign currency and financial stability. Offshore, especially in internationalized hubs like Hong Kong, preserving stablecoin issuance space remains pragmatic.

This isn’t inconsistency—it’s tiered governance: domestically, digital yuan solidifies sovereign currency infrastructure; offshore, stablecoins and market mechanisms connect to global liquidity. This division of labor could become decisive for RMB internationalization strategies.

Pressure on Non-Yielding Stablecoins

When sovereign credit currencies gain m1 characteristics, structural vulnerabilities of interest-free stablecoins become evident. Most stablecoins lack inherent yield—they’re efficient payment tools but don’t reward holding. Once digital yuan carries even minimal yield within m1 framework, the long-term capital allocation calculus shifts. Competition historically centered on “whether it can be used”; future competition becomes “whether it’s worth holding long-term.”

Central Bank-Commercial Bank Relations Enter Complexity

This may be the most consequential impact. As digital yuan approaches m1, the central bank increasingly confronts public-facing liability management—traditionally commercial banking territory. This structural shift raises fundamental questions about central bank functions, institutional role definitions, and the Central Bank Law itself.

The Architecture Worth Serious Consideration: Dual-Track Domestic-Offshore Design

If the digital yuan is to achieve genuine international traction, one proposal deserves serious consideration: institutionally separating “onshore digital yuan” from “offshore digital yuan.”

Domestically, the onshore version maintains current safeguards: tiered accounts, real-name requirements, scenario limitations. These ensure anti-money laundering, counter-terrorism financing, and financial stability remain protected. This approach makes sense within domestic contexts.

Offshore, however, replicating identical constraints becomes self-defeating. USDT and USDC spread globally partly because they offer stronger default anonymity—addresses function as accounts, identity isn’t pre-linked, regulatory intervention occurs after-the-fact rather than before.

The proposal: introduce cryptographically-enhanced privacy for offshore digital yuan, enabling “selective disclosure” and “conditional traceability.” This isn’t uncontrolled anonymity but mathematically-bounded privacy:

• Daily transactions require no full identity disclosure
• Traceability activates through compliance procedures when specific legal conditions trigger
• Control logic shifts from “comprehensive prevention” to “managed post-intervention”

This dual design wouldn’t weaken domestic regulation—it would clarify labor division. Onshore digital yuan serves as financial infrastructure and policy tool; offshore, it functions as international settlement currency and RMB digital export vehicle.

If realized, this represents far more than payment system upgrading—it becomes a strategic tool for RMB internationalization.

The Real Bottleneck: Market Freedom Under Controllable Conditions

After layers of analysis, the deepest challenge emerges clearly: the digital yuan’s primary constraint is neither technological nor legal—it’s institutional willingness to grant sufficient market freedom under managed risk.

Consider stablecoins’ actual development path: USDT and USDC succeeded not through regulatory approval but through organic emergence from imperfect, sometimes gray-area market uses. Cross-border transfers, on-chain composability, DeFi integration, settlement intermediation—virtually none originated as “officially approved use cases.” They grew from genuine demand, proved viable through use, then regulators adapted frameworks accordingly.

By contrast, administrative promotion and subsidies alone cannot generate network effects. A currency forever “required to use” rather than “actively chosen” remains perpetually dependent on external support mechanisms.

This clarifies the true dividing line: legal tender status isn’t the limitation—it’s the foundation. The real question asks whether central bank digital currencies can operate within market exploration frameworks while maintaining sovereign backing and financial stability, accepting that market innovation precedes rather than follows rule-making.

The dual-track framework isn’t regulatory relaxation—it’s conscious risk stratification. Exploratory, higher-risk applications test within offshore systems; stable, predictable demands operate within onshore frameworks. This strategy accepts innovation mistakes as acceptable costs.

If m0 addressed “can the central bank issue digital currency,” then m1 poses the deeper question: can a central bank digital currency learn coexistence with market forces without losing control?

Conclusion: The Stage Has Changed, But the Route Remains

The digital yuan’s apparent early “lukewarmness” now makes sense: m0 constraints, though theoretically justified, prevented genuine circulation.

Today’s shift from m0 to m1, from engineering-driven advancement to infrastructure-based operation, and from singular domestic logic to dual onshore-offshore design carries unmistakable signal: the route hasn’t reversed—the stage has evolved.

The next chapter won’t ask whether the digital yuan is “legal.” Instead, it confronts a harder question: Can it truly learn to operate like money while preserving sovereign credit and financial stability?

That answer, more than any technical specification, will determine whether the digital yuan remains important infrastructure or becomes global currency.