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---

### Overview and purpose
- The rise of central bank digital currency (CBDC), stablecoins, payment service providers (e.g., mobile network operators), and other monetary vehicles implies an "unprecedented change in the retail and wholesale payments system."
- Central banks and infrastructure providers are examining new ways to facilitate transfer of value across wholesale payments platforms.
- Two contrasting perspectives on implications for monetary policy:
  - Historical-parallel view: past changes (card-based retail payments, netting systems, new cross-border systems) were absorbed by central banks.
  - Disruption-opportunity view: speed of change, rapid transmission across payment arrangements, and attractiveness of non-bank/non-regulated structures could stress systems and risk central bank irrelevance; alternatively, new monetary instruments could enable more targeted policy responses via adjustment of multiple interest rates or monetary aggregates.

### Core questions addressed
- The paper focuses on three central questions:
  - (i) Can digital money affect the interest rate channel?
  - (ii) Would it require a new instrument for the central bank?
  - (iii) What are the implications for currency-in-circulation, monetary base and seigniorage?

### Macroeconomic framing
- Distinction of policy contexts:
  - Traditional policy aimed at affecting overall real interest rates.
  - Quantitative easing or tightening focused on altering differentials between returns on asset categories (maturity premia, risk premia, liquidity premia).
- Distinction in operative frameworks:
  - Implementing policy by targeting nominal interest rates.
  - Implementing policy by targeting monetary aggregates when interest rates are hard to observe or control timely.
- Working perspective: controlling relevant interest rates is the macroeconomic goal of the monetary authority; monetary aggregates are used as a target by authorities that find interest rates difficult to observe or directly control on a timely basis.

### Additional central bank goals and priorities
- New payment systems can introduce financial stability risks requiring policy responses.
- Different forms of new money yield different seigniorage revenues; if seigniorage is an important part of a central bank’s mandate, policies may need to influence the mix of payment arrangements.
- Focus of the paper: implications for central bank operations (not exhaustive coverage of all design motivations).

### Paper structure (section list with exact numbering)
- Introduction ......................................................................................................................................................... 2
- I. Payments Assets, Old and New ...................................................................................................................... 3
- II. Interest Rate Channel ..................................................................................................................................... 6
- III. New Instruments for Other Goals ................................................................................................................. 7
- IV. Central Bank Operational Issues ................................................................................................................. 8
- V. Payment Service Providers and Demand for Money ................................................................................. 13
- VI. Conclusion ................................................................................................................................................... 16
- References ......................................................................................................................................................... 18

### Key descriptive findings (Introduction and Section I excerpt)
- Existing money largely in two varieties:
  - Central bank debt used as physical currency.
  - Bank money: debt of commercial banks acceptable for payments.
- Central bank money is fiat currency, issued essentially without cost.
- Commercial bank money promises redemption in central bank debt and is backed by reserves, regulatory structures, deposit insurance, and lender-of-last-resort arrangements.
- Money commands a liquidity premium because it is useful for payments; issuers can reap profits by supplying it for payments purposes.
- Seigniorage: the central bank trades its monetary asset for non-monetary assets (for example Treasury bonds) and profits from the difference between the interest payable on the bonds and the interest cost it pays (typically zero) on the monetary asset.
- Commercial banks profit from the spread between interest received on loans and lower interest paid on transactions deposits, net of reserve carrying costs.
- Public preference for cash versus demand deposits depends on convenience and relative cost.

### Typology of innovations considered
- Two basic types of monetary innovations considered:
  - (i) central bank digital currency (CBDC);
  - (ii) bank electronic money and fintech-issued electronic money.
- The paper considers only moneys whose rate of exchange with existing money is intended to be "fixed."1/
- Primary difference: nature of guarantee of fixed redemption:
  - CBDC redemption guaranteed by central bank's ability to issue currency to redeem CBDC.
  - Electronic money redemption depends on backing: whole or fractional; backing assets may be central bank reserves or short-term government assets; liabilities may be liabilities of the payment institution or ring-fenced backing assets held in custody for holders of the electronic money.

### Box 1 — Types of Central Bank Digital Currency (selected points preserved)
- Motivations for CBDC include financial inclusion, spurring retail payments innovation, simplifying wholesale and international payments, breaking the zero-nominal interest rate lower bound, and protecting central banks from irrelevancy.
- Design variations include retail vs. wholesale CBDC; account-based central bank implementation vs. wallet-based via intermediaries; non-interest bearing vs. interest bearing (or possibly negative) CBDC; restrictions on amounts or additional smart-contract functionality.1/
- Focus of this paper: a non-interest bearing asset issued by the central bank, useful for payments, acting as a substitute for CiC, and freely redeemable in CiC (with authorized firms likely handling customer service for wallets).2/
- Notes on interest-bearing CBDC:
  - Interest-bearing retail CBDC would behave similarly to savings vehicles substituting for time deposits.
  - Wholesale interest-bearing CBDC would quickly replace other forms of central bank reserves; remunerating the stock of CBDC at the policy rate could convert central banks from net recipients of interest to net payers—"a dramatic shift" central banks would not willingly contemplate.

### Box 2 — Stablecoins are Money if Backed by Central Bank Reserves (selected points)
- Nature and scale:
  - Stablecoins are designed as a medium of exchange and are anchored at a par value (example: par value of $1).
  - The market for stablecoins backed by high quality liquid assets is around $180 billion.
  - Sizable growth is expected for US dollar backed coins.
  - To maintain a stable value, issuers need to back the coins with a riskless asset, such as short-term US Treasury obligations.
- Implications for OMOs and reserves:
  - With stablecoins backed by safe assets like Treasuries, the money supply no longer needs to be backed exclusively by central bank reserves—Treasuries can serve similarly.
  - As stablecoins grow, the central bank's ability to influence the money supply through OMOs will be reduced.
  - Reserves remain in demand for instantaneous transmission over large value payment systems; Treasuries are safe but less liquid for those purposes.
- Central bank options and access:
  - An alternative is to allow or encourage stablecoin issuers to use central bank reserves as backing rather than Treasuries.
  - Nonbank stablecoin issuers would likely favor direct access to reserves through a Fed master account and access to central bank payment rails.
- Interaction with interest rate channel and CBDC:
  - New means of payment are unlikely to change target interest rates for real investment as a first-order effect.
  - New payment assets can change spreads between bank funding costs and lending rates by either increasing competition or enhancing efficiency.
  - If monetary aggregates are targeted, money multipliers for new payment media will differ from existing multipliers and vary with external shocks.
  - Introducing a CBDC does not alter the fundamental conduct of monetary policy because CBDC is another central bank-issued asset and the outside money supply becomes the total of CBDC and cash in circulation.
  - A CBDC can increase the central bank's control over monetary policy and ability to reap seigniorage if it draws demand away from private monetary assets.
  - Use of CBDC might increase the velocity of money, reducing the aggregate amount of money needed for the same transaction volume.
  - When private electronic money is backed by central bank reserves, it restores some central bank power to affect the liquidity premium.
- Financial stability and regulatory implications:
  - Different new forms of money yield different seigniorage revenues; central banks may need new instruments if objectives expand (e.g., liquidity management via CBDC, nonbank access to wholesale CBDC).
  - If institutions providing new payment instruments remain regulated and insured, the existing division of labor can continue.
  - Payments institutions may require different risk premia for deposit insurance depending on backing (central bank reserves vs liquid assets).
  - Electronic payments might increase the speed of bank runs, possibly necessitating more generous deposit insurance.
  - Main financial stability concerns arise from unregulated or underregulated payments institutions that can create regulatory arbitrage and systemic risks.
  - Ensuring the benefits of joining the regulated sector (for example, access to the payments backbone) outweigh regulatory costs is a key protection.
- Seigniorage, monetary base, and mobile/e-wallet effects (illustrative evidence):
  - Widespread use of mobile operator payments systems can reduce the monetary base by swapping cash in circulation to demand deposits and by operators reducing demand deposit holdings—this increases the velocity of money.
  - An illustrative scenario shows base money shrinking from 16 to 10 percent of GDP under three paths:
    - Severe scenario: reduction takes place in the next six years where MB/GDP falls by 1 percent per year.
    - Baseline scenario: reduction in the next 12 years where MB/GDP falls by ½ percent per year.
    - Mild scenario: reduction in the next 24 years where MB/GDP falls by ¼ percent per year.
  - Example central bank e-wallet data (end-2018):
    - Volume using e-wallets for payment of goods and services: 4.3 billion pesos.
    - Average holdings or balance in e-wallets: 265 million pesos.
    - Resulting “transactions velocity”: 16.
  - Comparative metric: GDP/ M0 is roughly 3.0 as per monetary data files of this country.
  - A reduction of the monetary base may constrain a central bank's ability to mop up excess liquidity and conduct monetary policy and will reduce seigniorage revenues from money creation; the reverse could occur in a CBDC world if CiC increases base money.

### Box 3 — Demand for Money and Seigniorage (selected points)
- Seigniorage fundamentals:
  - Developed economies: currency demand between 2 and 4 percent of GDP.
  - Most other countries: currency demand between 2 and 11 percent of GDP.
  - Many central banks remunerate 70-80 percent of central bank profits must be transferred to the Treasury.
  - Traditional seigniorage depends on both inflation and the level of demand for reserve money; in the short run it also depends on changes in reserve money.
- Illustrative seigniorage calculation:
  - Inflation = 6 percent.
  - Reserve Money as percentage of GDP = 16 percent.
  - Resulting seigniorage revenue = 0.9 percent of GDP.
- Currency in circulation (CiC), monetary base (M0), and digital substitution:
  - New payment systems can represent a leakage in monetary policy transmission channels.
  - Demand for cash depends on available alternatives (banking services, nonbank e-money, mobile accounts).
  - If nonbank alternatives to cash increase:
    - Ratio of cash outstanding to GDP is expected to decrease.
    - Effect on broader monetary aggregates depends on reserve requirements for the new money substitutes.
      - Example: where regulations require holding reserves one-for-one against e-money, movement from cash to e-money will have no effect on broader aggregates (e.g., M2 in Kenya).
      - Movement from bank deposits to e-money will reduce broader aggregates (e.g., Kyrgyz Republic) if there are no reserve requirements for e-money.
  - Empirical observations show heterogeneous CiC/GDP trends across countries.
- Sterilization and central bank balance sheet constraints:
  - Notation and identities (steady-state):
    - NFA/PY = γ
    - NDA/PY = χ
    - MB/PY = λ
    - N/PY = η
    - Return on NFA = r*
    - In steady state, (1 + r*)γ − (1 + i)χ − λ = η and using γ − χ − λ = η leads to central bank sterilization cost in steady state: i χ = (λ + η) r*
  - Numerical example for emerging market averages:
    - λ (money base to nominal GDP) = 10 percent.
    - Return on NFA = 3 percent.
    - Steady-state sterilization cost = 0.30 percent of GDP.
  - Policy implication: if fintech/digital money reduces demand for money (λ), constraints to sterilization are possible.
- Payment Service Providers (PSPs), mobile payments, and implications for money demand:
  - E-money may be regulated and part of the central bank balance sheet; some e-money may be unregulated.
  - If new payment systems face lower reserve requirements than banks, demand for central bank monetary base (especially CiC) may deteriorate further.
  - Key risk depends on asset side of non-bank issuers:
    - If they keep 100 percent as banking deposits, little change to transmission or credit supply is expected.
    - If they invest in treasury bonds or other financial assets outside banking, this may weaken banking credit supply and affect transmission.
  - Regulatory examples: some African countries require phone companies to hold liquid reserves against customer funds; others have no such requirement.
- Illustrative mobile payments liquidity example (figures preserved):
  - Initial unbanked: 1,000 CiC and 100 in mobile phone accounts.
  - Initial banked: 3,000 in bank deposits, 1,000 CiC, and 100 in mobile phone accounts.
  - Mobile operator initial customer accounts = 200 (100 from unbanked + 100 from banked) split as: Liabilities 200 Customer Accounts; Assets 100 Infrastructure, 100 Demand Deposits at Commercial Bank.
  - Reserve requirement = 50 percent.
  - Commercial bank initial assets: 1,550 Commercial Loans; 1,550 Reserves at Central Bank. Liabilities: 3,000 Individuals’ Demand Deposits; 100 Phone Company Demand Deposits.
  - Central bank initial monetary base: Reserves = 1,550; Currency in circulation = 2,000; Total monetary base = 3,550.
  - After mobile balances for unbanked increase from 100 to 200:
    - Mobile operator: Assets: 100 Infrastructure; 200 Deposits with Commercial Bank. Liabilities: 300 Customer Accounts.
    - Commercial bank gains 100 in deposits from the mobile company.
    - Aggregate monetary base reduces to 3,500 total: Reserves in commercial banks = 1,600; Currency in circulation = 1,900.
  - Note: if the mobile company instead holds 100 percent treasury bonds, demand deposits would be reduced and demand for collateral and/or central bank reserves would rise.
- Cross-border flows and remittances:
  - International remittances are 20-35 percent of GDP for many countries (examples: El Salvador, Tajikistan, Serbia, Armenia, Philippines).
  - Phone account-based remittances and other nonbank cross-border flows can bypass banking channels, making M2 metrics incomplete and contributing to base money decline.

### Operational and analytical priorities signaled
- Need to redefine monetary aggregates to account for new payment assets (highlighted in Section II overview).
- Need to understand separability and limited substitutability across payment sectors to judge whether new central bank instruments are warranted (highlighted in Section III overview).
- Central bank operational issues to examine include currency-in-circulation trends, seigniorage, transactional velocity of digital money, and sterilization, including parallels between CiC and CBDC (highlighted in Section IV overview).
- Empirical relevance: many issues from non-bank providers appear already in countries with large e-money penetration; Section V focuses on e-money and PSPs (MNOs), liquidity outside the monetary base, decline in money demand, and other metrics such as M2.
- Conclusion preview: need better understanding of elasticities of demand for new digital technologies relative to elasticities for existing payment methods.

### Policy messages and recommendations (from Box 3)
- Monitor trends in currency-in-circulation, central bank seigniorage, monetary base, liquidity outside the monetary base, and transactional velocity.
- Understand substitutability across payment sectors to assess the effectiveness of interest rate channel and need for new policy instruments.
- Implement effective regulation and oversight to bring e-money and mobile payment activities within a regulatory perimeter to address seigniorage leakage, financial stability, and AML/CFT concerns.
- Collect and begin data gathering now before payment practice changes become overwhelming.
- Reconsider unnecessary regulatory burdens on banks while encouraging innovation and ensuring a level playing field.
- Open questions highlighted:
  - How retail CBDC will compete with digital money at the household level.
  - The role of MNOs extending into microlending and foreign remittances, and implications for unidentified e-wallets and AML protections (payment limits, foreign transaction limits, cash withdrawal limits).

*IMF WORKING PAPERS — Digital Money and Central Bank Operations (Introduction, sections I and Box 1–3 excerpts).*

### Introduction ...........................................................................................................

### Introduction

### Overview and purpose
- The rise of central bank digital currency (CBDC), stablecoins, payment service providers (e.g., mobile network operators), and other monetary vehicles implies an "unprecedented change in the retail and wholesale payments system."
- Central banks and infrastructure providers are examining new ways to facilitate transfer of value across wholesale payments platforms.
- The paper examines whether these innovations upend the role of and implementation of monetary policy, noting two contrasting perspectives:
  - Historical-parallel view: past changes (card-based retail payments, netting systems, new cross-border systems) were absorbed by central banks.
  - Disruption-opportunity view: speed of change, rapid transmission across payment arrangements, and attractiveness of non-bank/non-regulated structures could stress systems and risk central bank irrelevance; alternatively, new monetary instruments could enable more targeted policy responses via adjustment of multiple interest rates or monetary aggregates.

### Core questions addressed
- The paper focuses on three central questions:
  - (i) Can digital money affect the interest rate channel?
  - (ii) Would it require a new instrument for the central bank?
  - (iii) What are the implications for currency-in-circulation, monetary base and seigniorage?

### Macroeconomic framing
- Distinction of policy contexts:
  - Traditional policy aimed at affecting overall real interest rates.
  - Quantitative easing or tightening focused on altering differentials between returns on asset categories (maturity premia, risk premia, liquidity premia).
- Distinction in operative frameworks:
  - Implementing policy by targeting nominal interest rates.
  - Implementing policy by targeting monetary aggregates when interest rates are hard to observe or control timely.
- Working perspective of the paper: controlling relevant interest rates is the macroeconomic goal of the monetary authority; monetary aggregates are used as a target by authorities that find interest rates difficult to observe or directly control on a timely basis.

### Additional central bank goals beyond macro targets
- New payment systems can introduce financial stability risks requiring policy responses.
- Forms of new money yield different seigniorage revenues; if seigniorage is an important part of a central bank’s mandate, policies may need to influence the mix of payment arrangements.
- The paper focuses on implications for central bank operations rather than exhaustive coverage of all design motivations.

### Paper structure (section list with exact numbering)
- Introduction ......................................................................................................................................................... 2
- I. Payments Assets, Old and New ...................................................................................................................... 3
- II. Interest Rate Channel ..................................................................................................................................... 6
- III. New Instruments for Other Goals ................................................................................................................. 7
- IV. Central Bank Operational Issues ................................................................................................................. 8
- V. Payment Service Providers and Demand for Money ................................................................................. 13
- VI. Conclusion ................................................................................................................................................... 16
- References ......................................................................................................................................................... 18

### Key descriptive findings (from the Introduction and Section I excerpt)
- Existing money largely in two varieties:
  - Central bank debt used as physical currency.
  - Bank money: debt of commercial banks acceptable for payments.
- Central bank money is fiat currency, issued essentially without cost.
- Commercial bank money promises redemption in central bank debt and is backed by reserves, regulatory structures, deposit insurance, and lender-of-last-resort arrangements.
- Money commands a liquidity premium because it is useful for payments; issuers can reap profits by supplying it for payments purposes.
- Seigniorage: the central bank trades its monetary asset for non-monetary assets (for example Treasury bonds) and profits from the difference between the interest payable on the bonds and the interest cost it pays (typically zero) on the monetary asset.
- Commercial banks profit from the spread between interest received on loans and lower interest paid on transactions deposits, net of reserve carrying costs.
- Public preference for cash versus demand deposits depends on convenience and relative cost.

### Typology of innovations considered
- Two basic types of monetary innovations considered:
  - (i) central bank digital currency (CBDC);
  - (ii) bank electronic money and fintech-issued electronic money.
- The paper considers only moneys whose rate of exchange with existing money is intended to be "fixed."1/
- Primary difference: nature of guarantee of fixed redemption:
  - CBDC redemption guaranteed by central bank's ability to issue currency to redeem CBDC.
  - Electronic money redemption depends on backing: whole or fractional; backing assets may be central bank reserves or short-term government assets; liabilities may be liabilities of the payment institution or ring-fenced backing assets held in custody for holders of the electronic money (see Box 1 and Box 2).

### Box 1 excerpt — Types of Central Bank Digital Currency (selected points preserved)
- Motivations for CBDC include financial inclusion, spurring retail payments innovation, simplifying wholesale and international payments, breaking the zero-nominal interest rate lower bound, and protecting central banks from irrelevancy.
- Design variations include retail vs. wholesale CBDC; account-based central bank implementation vs. wallet-based via intermediaries; non-interest bearing vs. interest bearing (or possibly negative) CBDC; restrictions on amounts or additional smart-contract functionality.1/
- Focus of this paper: a non-interest bearing asset issued by the central bank, useful for payments, acting as a substitute for CiC, and freely redeemable in CiC (with authorized firms likely handling customer service for wallets).2/
- Notes on interest-bearing CBDC:
  - Interest-bearing retail CBDC would behave similarly to savings vehicles substituting for time deposits.
  - Wholesale interest-bearing CBDC would quickly replace other forms of central bank reserves; remunerating the stock of CBDC at the policy rate could convert central banks from net recipients of interest to net payers—"a dramatic shift" central banks would not willingly contemplate.
- Footnote numeric markers present in the source: 1/, 2/, 3/ (preserved as in source).

### Operational and analytical priorities signaled
- Need to redefine monetary aggregates to account for new payment assets (highlighted in Section II overview).
- Need to understand separability and limited substitutability across payment sectors to judge whether new central bank instruments are warranted (highlighted in Section III overview).
- Central bank operational issues to examine include currency-in-circulation trends, seigniorage, transactional velocity of digital money, and sterilization, including parallels between CiC and CBDC (highlighted in Section IV overview).
- Empirical relevance: many issues from non-bank providers appear already in countries with large e-money penetration; Section V focuses on e-money and PSPs (MNOs), liquidity outside the monetary base, decline in money demand, and other metrics such as M2.
- Conclusion preview: need better understanding of elasticities of demand for new digital technologies relative to elasticities for existing payment methods.

*IMF WORKING PAPERS — Digital Money and Central Bank Operations (Introduction, sections I and Box 1 excerpt).*

### Box 2. Stablecoins are Money if Backed by Central Bank Reserves

### Box 2. Stablecoins are Money if Backed by Central Bank Reserves

### Nature and scale of stablecoins
- Stablecoins are designed as a medium of exchange and are anchored at a par value (example: par value of $1), unlike volatile crypto assets.
- The market for stablecoins backed by high quality liquid assets is around $180 billion.
- Sizable growth is expected for US dollar backed coins.
- To maintain a stable value, issuers need to back the coins with a riskless asset, such as short-term US Treasury obligations.
- Stablecoins introduce a privately established dollar-denominated currency that is not backed by reserves at the US central bank.

### Implications for traditional monetary policy and OMOs
- Traditional monetary policy relies on central bank open market operations (OMOs) to influence the money supply by altering reserves available to banks.
- With stablecoins backed by safe assets like Treasuries, the money supply no longer needs to be backed exclusively by central bank reserves—Treasuries can serve similarly.
- As stablecoins grow, the central bank's ability to influence the money supply through OMOs will be reduced.
- Reserves remain in demand for instantaneous transmission over large value payment systems; Treasuries are safe but less liquid for those purposes.
- The banking system will continue to need reserve balances to provide payment services for demand deposits (Singh, Kahn, Long, 2021).

### Demand for safe collateral and central bank options
- Growth of stablecoin usage increases demand for Treasuries, Bunds, or JGBs; central banks lack standard monetary policy instruments to directly meet this demand.
- An alternative is to allow or encourage stablecoin issuers to use central bank reserves as backing rather than Treasuries (Singh et al, 2021).
- Nonbank stablecoin issuers would likely favor direct access to reserves through a Fed master account and access to central bank payment rails, rather than siloing Treasuries or obtaining reserves through correspondent banks.
- Reserves may be more plentiful in the post QE and post COVID era than good collateral (example: Eurozone).

### Spectrum of backing and regulatory distinctions
- At one extreme are stablecoins backed by central bank reserves or ring-fenced deposits of a banking system.
- At the other extreme are “e-moneys” issued by companies and backed primarily by the reputation of the company itself (as with some PSPs or MNOs in some jurisdictions—see Section V).

### Interaction with interest rate channel and CBDC
- The interest rate channel: altering interest rates on government bonds changes investment and hence economic activity and inflation.
- New means of payment are unlikely to change target interest rates for real investment as a first-order effect.
- New payment assets can change spreads between bank funding costs and lending rates by either increasing competition or enhancing efficiency.
- If monetary aggregates are targeted, money multipliers for new payment media will differ from existing multipliers and vary with external shocks.
- Introducing a CBDC does not alter the fundamental conduct of monetary policy because CBDC is another central bank-issued asset and the outside money supply becomes the total of CBDC and cash in circulation.
- A CBDC can increase the central bank's control over monetary policy and ability to reap seigniorage if it draws demand away from private monetary assets.
- Use of CBDC might increase the velocity of money, reducing the aggregate amount of money needed for the same transaction volume.
- When private electronic money is backed by central bank reserves, it restores some central bank power to affect the liquidity premium (see Section V).
- Perceived safety affects substitution between CBDC and privately issued electronic money; increases in perceived risk of private money can cause significant swings in the mix of payment assets held by the public.

### Financial stability and regulatory policy implications
- Different new forms of money yield different seigniorage revenues; central banks may need new instruments if objectives expand (e.g., liquidity management via CBDC, nonbank access to wholesale CBDC).
- Historically, macroeconomic control and financial stability were handled by separate instruments (OMOs vs discount window lending, deposit insurance, and safety-and-soundness regulation).
- If institutions providing new payment instruments remain regulated and insured, the existing division of labor can continue.
- Payments institutions may require different risk premia for deposit insurance depending on backing (central bank reserves vs liquid assets).
- Electronic payments might increase the speed of bank runs, possibly necessitating more generous deposit insurance.
- Main financial stability concerns arise from unregulated or underregulated payments institutions that can create regulatory arbitrage and systemic risks.
- Ensuring the benefits of joining the regulated sector (for example, access to the payments backbone) outweigh regulatory costs is a key protection.
- Central bank regulation could be used to encourage a particular mix among payment arrangements; however, fine-tuning is limited by customer substitutability and swings in perceived risk.

### Seigniorage, monetary base, and mobile/e-wallet effects (illustrative evidence)
- Widespread use of mobile operator payments systems can reduce the monetary base by swapping cash in circulation to demand deposits and by operators reducing demand deposit holdings—this increases the velocity of money.
- An illustrative scenario shows base money shrinking from 16 to 10 percent of GDP under three paths:
  - Severe scenario: reduction takes place in the next six years where MB/GDP falls by 1 percent per year.
  - Baseline scenario: reduction in the next 12 years where MB/GDP falls by ½ percent per year.
  - Mild scenario: reduction in the next 24 years where MB/GDP falls by ¼ percent per year.
- Example central bank e-wallet data (end-2018):
  - Volume using e-wallets for payment of goods and services: 4.3 billion pesos.
  - Average holdings or balance in e-wallets: 265 million pesos.
  - Resulting “transactions velocity”: 16.
- Comparative metric: GDP/ M0 is roughly 3.0 as per monetary data files of this country.
- A reduction of the monetary base may constrain a central bank's ability to mop up excess liquidity and conduct monetary policy and will reduce seigniorage revenues from money creation; the reverse could occur in a CBDC world if CiC increases base money (see Section II).

*IMF Working Papers — Box 2. Stablecoins are Money if Backed by Central Bank Reserves*

### Box 3. Demand for Money and Seigniorage

### Box 3. Demand for Money and Seigniorage

### Seigniorage fundamentals and illustrative calculation
- Developed economies: currency demand between 2 and 4 percent of GDP.
- Most other countries: currency demand between 2 and 11 percent of GDP.
- Many central banks remunerate 70-80 percent of central bank profits must be transferred to the Treasury.
- Traditional seigniorage depends on both inflation and the level of demand for reserve money; in the short run it also depends on changes in reserve money.
- Illustrative scenario:
  - Inflation = 6 percent.
  - Reserve Money as percentage of GDP = 16 percent.
  - Resulting seigniorage revenue = 0.9 percent of GDP.
  - Note: the illustration excludes short-term effect where base money/GDP is constant between periods (i.e., zero in the equation). If base money declines, seigniorage will be lower; if base money increases, seigniorage will increase.

### Currency in circulation (CiC), monetary base (M0), and digital substitution
- New payment systems can represent a leakage in monetary policy transmission channels.
- Demand for cash depends on available alternatives (banking services, nonbank e-money, mobile accounts).
- If nonbank alternatives to cash increase:
  - Ratio of cash outstanding to GDP is expected to decrease.
  - Effect on broader monetary aggregates depends on reserve requirements for the new money substitutes.
    - Example: where regulations require holding reserves one-for-one against e-money, movement from cash to e-money will have no effect on broader aggregates (e.g., M2 in Kenya).
    - Movement from bank deposits to e-money will reduce broader aggregates (e.g., Kyrgyz Republic) if there are no reserve requirements for e-money.
- Empirical observations:
  - Figure 2 (2007-2020) shows reduction trend in CiC/GDP for a group of countries.
  - Country heterogeneity noted (examples include Finland, Sweden, Norway, China, India, Russia, Mongolia, Kenya, Armenia, Kyrgyz Republic, Kazakhstan, Tanzania, Rwanda).
  - CiC decline usually pulls M0 with it; however M0/GDP may not have declined in cases of financial deepening (Russia, Mongolia, Armenia, Rawanda) due to larger banking sectors and higher required reserves contributing to M0 and seigniorage.
- Recent research using a “cash usage” metric (cash/(cash+cards+e-money)) suggests declining demand for cash (Khiaonarong and Humphrey, 2022). The metric is a harbinger of CiC trends but not suitable for seigniorage calculation.

### Sterilization and central bank balance sheet constraints (Box 4)
- If demand for money as percent of GDP is high and return on net foreign assets (NFA) is high, sterilization can be absorbed more easily within the central bank balance sheet.
- Notation and identities used in steady-state derivation (as presented):
  - NFA/PY = γ
  - NDA/PY = χ
  - MB/PY = λ
  - N/PY = η
  - Return on NFA = r*
  - In steady state, (1 + r*)γ − (1 + i)χ − λ = η and using γ − χ − λ = η leads to central bank sterilization cost in steady state: i χ = (λ + η) r*
- Numerical example for emerging market averages:
  - λ (money base to nominal GDP) = 10 percent.
  - Return on NFA = 3 percent.
  - Steady-state sterilization cost = 0.30 percent of GDP.
  - Note: η is zero in the equation under the assumption central bank net worth does not change.
- Policy implication: restricting sterilization below this threshold (0.30 in the example) to meet budgetary needs will adversely impact monetary policy. If fintech/digital money reduces demand for money (λ), constraints to sterilization are possible.

### Payment Service Providers (PSPs), mobile payments, and implications for money demand
- E-money may be regulated and part of the central bank balance sheet; some e-money may be unregulated.
- Changes in consumer preferences between cash and bank accounts alter demand for central bank reserves because banks hold reserves as a fraction of demand deposits while cash holdings are one-for-one central bank money.
- If new payment systems face lower reserve requirements than banks, demand for central bank monetary base (especially CiC) may deteriorate further.
- Theoretical effects of non-bank PSPs (e.g., mobile network operators):
  - May reduce seigniorage and weaken monetary policy transmission.
  - Empirical evidence remains tentative due to recency of innovations.
- Key risk depends on asset side of non-bank issuers:
  - If they keep 100 percent as banking deposits, little change to transmission or credit supply is expected.
  - If they invest in treasury bonds or other financial assets outside banking, this may weaken banking credit supply and affect transmission, particularly under maturity transformation structures.
- Regulation examples:
  - Some African countries require phone companies to hold liquid reserves against customer funds; others have no such requirement.
- Prudential/regulatory urgency:
  - E-money and mobile accounts are effectively equivalent to demand deposits and raise similar concerns; central banks should bring them under a regulatory umbrella.
  - Mobile operators’ large customer bases and low regulatory burdens exert competitive pressure on banks; banks retain advantages for already-banked customers (deposit insurance, links to savings accounts).

### Illustrative mobile payments liquidity example
- Initial conditions and balances:
  - Unbanked individuals: 1,000 currency in circulation (CiC) and 100 in mobile phone accounts.
  - Banked individuals: 3,000 in bank deposits, 1,000 CiC, and 100 in mobile phone accounts.
  - Mobile operator initial customer accounts = 200 (100 from unbanked + 100 from banked) split as: Liabilities 200 Customer Accounts; Assets 100 Infrastructure, 100 Demand Deposits at Commercial Bank.
  - Reserve requirement = 50 percent.
- Commercial bank initial balance sheet:
  - Assets: 1,550 Commercial Loans; 1,550 Reserves at Central Bank.
  - Liabilities: 3,000 Individuals’ Demand Deposits; 100 Phone Company Demand Deposits.
- Central bank initial monetary base:
  - Reserves = 1,550.
  - Currency in circulation = 2,000.
  - Total monetary base and source of seigniorage = 3,550 (Interest Bearing Financial Assets on asset side = 3,550; Liabilities 2,000 CiC and 1,550 reserves).
- After phone company account usage increases (mobile balances for unbanked increase from 100 to 200):
  - Mobile operator: Assets: 100 Infrastructure; 200 Deposits with Commercial Bank. Liabilities: 300 Customer Accounts.
  - Commercial bank gains 100 in deposits from the mobile company.
  - Aggregate demand shifts from CiC to reserve-backed transactions; outstanding monetary base reduces to 3,500 total:
    - Reserves in commercial banks = 1,600.
    - Currency in circulation = 1,900.
  - Note: if the mobile company instead holds 100 percent treasury bonds, demand deposits would be reduced and demand for collateral and/or central bank reserves would go up.
- Reserve requirement illustration: 50 percent used in the example.

### Cross-border flows, remittances, and data implications
- International remittances are 20-35 percent of GDP for many countries (examples: El Salvador, Tajikistan, Serbia, Armenia, Philippines).
- Phone account-based remittances and other nonbank cross-border flows can bypass banking channels, making M2 metrics incomplete and contributing to base money decline.
- For LICs targeting monetary aggregates or moving toward inflation-targeting, monitoring monetary aggregates remains important.

### Policy messages and recommendations
- New payment arrangements provide large benefits, especially for previously disconnected individuals, but pose challenges for monetary policy and central bank operations.
- Key areas for policy focus:
  - Monitor trends in currency-in-circulation, central bank seigniorage, monetary base, liquidity outside the monetary base, and transactional velocity.
  - Understand substitutability across payment sectors to assess the effectiveness of interest rate channel and need for new policy instruments.
  - Implement effective regulation and oversight to bring e-money and mobile payment activities within a regulatory perimeter to address seigniorage leakage, financial stability, and AML/CFT concerns.
  - Collect and begin data gathering now before payment practice changes become overwhelming.
  - Reconsider unnecessary regulatory burdens on banks while encouraging innovation and ensuring a level playing field.
- Open questions highlighted:
  - How retail CBDC will compete with digital money at the household level.
  - The role of MNOs extending into microlending and foreign remittances, and implications for unidentified e-wallets and AML protections (payment limits, foreign transaction limits, cash withdrawal limits).

*IMF Working Papers — Box 3. Demand for Money and Seigniorage*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022085-print-pdf.pdf_