## wpiea2023060-print-pdf

## Source details

**Canonical URL:** [wpiea2023060-print-pdf](https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023060-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2023/english/wpiea2023060-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2023/english/wpiea2023060-print-pdf.pdf.json)

---

### Major themes and chapter structure
- Focus: "Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems".
- Main thematic areas:
  - CBDC design options, intrinsic risks to monetary policy, and country choices.
  - Monetary policy frameworks, implementation, and transmission effects of CBDCs.
  - Retail CBDCs, wholesale CBDCs (w‑CBDCs), and cross‑border CBDC use.
  - Strength, speed, and uncertainty of impacts (deposit disintermediation, money velocity, tokenization, market segmentation, currency substitution, capital flow volatility).
  - Special analysis for jurisdictions with Islamic banks (Sharia’h constraints, market structure, liquidity management).
- Structure includes figures, tables, and two boxed conceptual summaries (Taxonomy of Retail CBDC Designs; Quantity Theory of Money and Money Demand).

### Key conclusions and overall findings
- CBDCs do not change monetary policy objectives or the operational framework but can induce changes in retail, wholesale, and cross‑border payments with spillovers that affect implementation and transmission.
- Retail CBDCs can:
  - impact money velocity;
  - disintermediate bank deposits;
  - increase volatility in commercial bank reserves.
- If substantial, these outcomes can:
  - weaken the credit and interest rate channels for monetary policy transmission;
  - impair central bank forecasting of reserves and effective Open Market Operations (OMO);
  - weaken the effectiveness of money and inflation targeting (IT) regimes.
- Tokenization of w‑CBDCs can segment financial markets and pose liquidity management and interest rate transmission risks.
- Cross‑border CBDC use can increase currency substitution risk in recipient countries and speed capital flow reversals, weakening domestic monetary and exchange rate policy control.
- These findings contrast with other studies that suggest marginal or positive impacts on monetary policy.

### Channels through which CBDCs impact monetary policy
- Trigger: Change in public preferences for holding CBDCs relative to cash and bank deposits.
- Shock propagation:
  - Exchanging cash for CBDCs.
  - Funding CBDCs using bank deposits (deposit → CBDC).
- Vulnerabilities identified:
  - Structural change or instability in money velocity.
  - Bank deposit disintermediation and reserve volatility.
  - Low digitalization of payments; concentration in small retail deposits; large share of demand deposits.
  - Low commercial bank reserves at central bank; expansion of central bank balance sheet.
- Impact pathways:
  - Weaker monetary policy transmission.
  - Financial institutions (FIs) maintain larger liquid asset buffers, weakening interest‑rate impulses.
  - Lower credit expansion for a given policy rate.
  - Erosion of money targeting or IT regime effectiveness and more challenging liquidity management.

### Exchanging cash for CBDCs — balance sheet and velocity effects
- Stylized balance sheet entries (illustrative):
  - Household: +100 Digital Cash / -100 Fiat Money.
  - Central bank: CBDC +100 Digital Cash / Cash -100 Fiat Money.
  - Commercial bank: no net change (operational role only).
- Velocity effects:
  - CBDCs enable remote, immediate wallet crediting versus physical cash delays.
  - Possible outcomes:
    - Structural increases in money velocity.
    - Instability in money velocity, undermining money targeting frameworks.
  - Quantity theory link: if M, V, or both grow faster than real GDP, prices rise proportional to MV relative to output.

### Exchanging deposits for CBDCs — disintermediation and reserve volatility
- Stylized balance sheet mechanics:
  - Household: -100 Local Currency Deposit / +100 Digital Cash.
  - Commercial bank: Deposits -100 Local Currency / Commercial Bank Reserve Accounts -100 Local currency.
  - Central bank: Commercial bank reserves -100 Local currency / CBDC +100 Digital Cash.
- Key transmission effects:
  - CBDCs on central bank ledger are unavailable to commercial banks for lending.
  - Decline in deposits and reserves reduces available bank credit, potentially increasing bank credit costs.
  - Weakening of credit and interest rate channels.
- Liquidity and stability consequences:
  - Deposit outflows can create liquidity stress and potential insolvency if loans cannot be recalled.
  - Reserve volatility complicates central bank forecasting and OMO sizing/frequency.
  - Commercial banks may hoard liquidity, raising interbank and lending rates and reducing credit supply.
- Central bank response mechanics:
  - Central bank may expand balance sheet (e.g., increase claims on commercial banks by 100 LC) to restore bank liquidity, altering central bank asset composition.

### Wholesale CBDCs (w‑CBDCs): functional features, benefits, and risks
- Balance sheet effects:
  - w‑CBDCs are analogous to central bank reserves; issuance changes liability composition but need not alter size if intraday and redeemed nightly.
- Functional benefits:
  - Facilitate atomic or near‑real‑time DvP, PvP; enable tokenized asset settlement, programmability, extended operating hours, continuous ledger reconciliation.
  - Potential to reduce requirements for settlement liquidity and risk capital in tokenized markets.
- Interaction with legacy systems:
  - Jurisdictions with efficient RTGS may see limited additional utility from w‑CBDCs for domestic interbank clearing.
- Risks and market structure implications:
  - A w‑CBDC design substantially different from legacy reserves may cause market fragmentation if traded as a separate product.
  - Fragmentation can reduce policy pass‑through, increase liquidity requirements (prefunding for T+0), and necessitate new liquidity‑saving mechanisms.
  - DLT‑based w‑CBDC arrangements handling of counterparty credit risk materially affects participants’ liquidity needs and transmission.

### Cross‑border CBDC use: utilities and policy risks
- Potential utilities:
  - Broaden central bank money to non‑residents.
  - Enable real‑time PvP and DvP across jurisdictions; shorten settlement chains.
- Policy risks for issuers:
  - High foreign demand could increase currency outside the issuing country and complicate control of monetary aggregates; corresponding capital inflows may cause appreciation pressures.
- Policy risks for recipients:
  - Increased currency substitution and faster capital flow reversals reduce control over domestic liquidity and seigniorage.
- Systemic implications:
  - Faster cross‑border settlement could amplify capital flow volatility and intraday demand for central bank money.
  - Access by non‑resident banks to intraday w‑CBDC may increase demand for overnight reserves by resident correspondent banks.
- Adoption and enforcement constraints:
  - Cross‑border CBDC adoption depends on simultaneous issuance, platform interoperability, political/geopolitical, legal, AML/CFT, privacy, technical, and scalability challenges.
  - Uncertainty whether programmability of CBDCs complicates enforcement of Capital Flow Measures (CFMs).

### Retail CBDC uptake patterns and empirical uptake (end‑December 2022 reporting)
- By end‑December 2022, over a hundred countries were experimenting with CBDCs.
- Retail CBDC issuance/pilots in production or advanced pilots:
  - Issued: The Bahamas, Nigeria, Jamaica, and the 8 ECCU member countries.
  - Advanced pilots or pilots: China, Ghana, India, Kazakhstan, Korea, Russia, Sweden, Thailand.
- Reported uptake metrics (end‑December 2022 or comparable reporting):
  - The Bahamas: CBDCs account for less than 0.1 percent of currency in circulation two years after launch.
  - Nigeria: public adoption of e‑Naira reportedly 0.15 percent, one year after rollout.
  - ECCU (DCash): 0.16 per cent of currency in circulation at end March 2022.
  - People’s Bank of China pilots: e‑CNY represented 0.13 percent of total currency in circulation (M0) at end December 2022.
- Factors underpinning low uptake:
  - Inadequate awareness, inadequate infrastructure integration with merchants, user comfort with existing mobile payments, offline functionality technical issues, slow habit change.
- Design trend: Virtually all countries considering retail CBDCs are contemplating unremunerated and 2‑tier distribution models with transaction limits or caps for holdings.

### Jurisdictions with Islamic banks: special vulnerabilities and constraints
- Sharia’h constraints: prohibition of Riba and Gharar affects remuneration choices and permissible monetary instruments.
- Scale and structure:
  - Islamic finance accounts for less than 2 percent of global finance.
  - Islamic banking is systemically important in 15 jurisdictions (defined as 15 percent or more of total banking system).
  - Two countries (Iran and Sudan) have fully fledged Islamic banking systems; the rest operate dual systems.
- Market development constraints:
  - Limited availability of Shariah‑compliant money‑market instruments; Sukuk markets concentrated in Malaysia and the GCC.
  - Underdeveloped Islamic liquidity management instruments (ILMI) and limited Islamic repo facilities constrain liquidity management.
- Disintermediation risk:
  - Unremunerated deposits account for between 30 and 70 percent of liabilities in some Islamic jurisdictions.
  - CBDCs are close substitutes for unremunerated demand deposits, elevating disintermediation risk.
- Policy implication: Islamic jurisdictions may face elevated vulnerability to deposit outflows, with fewer Shariah‑compliant tools to mitigate liquidity shocks.

### Strength, speed, and uncertainty of impacts; crisis and inception risks
- CBDC impacts are conceptual and contingent on scale and speed of uptake.
- Risks are higher:
  - At inception (potential “en‑masse” wallet openings causing sizeable deposit outflows).
  - In crisis periods (precautionary demand for risk‑free central bank money increases run risk).
- Tail risks: retail CBDCs increase ease of runs on financial firms; deposit insurance may be insufficient to prevent large shifts into CBDC accounts.
- Central bank operational implications:
  - Need to enhance liquidity management capabilities, consider longer‑term or targeted lending operations, expand acceptability of collateral, and prepare for potential central bank balance sheet expansion.

### Design considerations that moderate or shape risks
- Caps and transaction limits:
  - May moderate adoption but can be operationally difficult to enforce; many small retail deposits may not be constrained by caps and can be circumvented via multiple wallets.
- Remuneration:
  - Unremunerated CBDCs reduce but do not eliminate disintermediation risk because of substitution with non‑interest demand deposits.
- Programmability:
  - Can improve cross‑border efficiency but may make rapid reversals of capital flows harder to contain.

### Policy recommendations and operational strategies
- Adopt a multifaceted strategy to identify macrofinancial risks and strengthen liquidity management before issuance choices are finalized.
- Preparatory actions for central banks:
  - Ensure macroeconomic risks posed by CBDCs are understood, identified, managed, and mitigated.
  - Assess potential domestic demand for CBDCs.
  - Understand bank deposit structures and vulnerability to deposit disintermediation.
  - Evaluate effectiveness and enforceability of proposed caps or limits.
  - Assess potential changes in money velocity and implications for monetary policy regimes.
- Cross‑border considerations:
  - Understand practical architectures for cross‑border CBDC infrastructure and likely impacts on flows, stability, and currency substitution.
- Strengthen liquidity management capabilities of commercial banks and central banks; ensure LoLR capacity and prudential liquidity requirements are robust.

### Research gaps and open questions
- Need further research on:
  - Macro‑financial implications of financial market tokenization (market fragmentation, liquidity and interest rate implications, interoperability with central bank reserves).
  - How asset programmability and smart contracts could affect capital flow volatility and the effectiveness of CFMs.
  - Whether central banks should serve as LoLR to foreign banks short of domestic CBDCs and implications of higher intraday demand for central bank money by non‑residents.
  - Empirical analysis of CBDC impacts is constrained by limited data (few issuers, short production history).

### Selected numeric indicators and empirical observations (preserved as reported)
- By end‑December 2022: over a hundred countries experimenting with CBDCs.
- Retail CBDC issuance/pilot uptake reported values:
  - The Bahamas: less than 0.1 percent of currency in circulation (two years after launch).
  - Nigeria: 0.15 percent public adoption one year after rollout.
  - ECCU (DCash): 0.16 per cent of currency in circulation at end March 2022.
  - People’s Bank of China pilots: e‑CNY represented 0.13 percent of M0 at end December 2022.
- Islamic banking metrics:
  - Islamic finance accounts for less than 2 percent of global finance.
  - Unremunerated deposits range between 30 and 70 percent of bank liabilities in some Islamic jurisdictions.

*IMF WORKING PAPERS Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems — INTERNATIONAL MONETARY FUND*

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

### Introduction

### Major themes and chapter structure
- The document addresses "Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems".
- Main sections listed:
  - "Introduction" (page 4)
  - "CBDC Design Options, Intrinsic Risks to Monetary Policy, and Country Choices" (page 6)
    - "Design Options and their Implications for Monetary Policy" (page 6)
    - "Cross Country Trends and Choices" (page 8)
  - "Monetary Policy Implications of Issuing CBDCs" (page 10)
    - "Monetary Policy Frameworks and Transmission Channels" (page 10)
    - "How CBDCs Impact Monetary Policy Implementation and Transmission" (page 12)
  - "Retail CBDCs" (page 13)
  - "Wholesale CBDCs" (page 17)
  - "Cross Border Use of CBDCs" (page 19)
  - "Strength and Speed of the Impact on Monetary Policy" (page 20)
    - "Retail CBDCs, Deposit Disintermediation and Changes to Money Velocity" (page 20)
    - "W-CBDCs, Tokenization and Financial Market Segmentation" (page 28)
    - "Cross-Border Use of CBDCs, Currency Substitution and Capital Flow Volatility" (page 28)
  - "Implications for Jurisdictions with Islamic Banks" (page 30)
    - "Overview of Islamic Financial Systems and Monetary Policy Frameworks" (page 30)
    - "Sharia’h Principles and CBDC Designs" (page 33)
    - "Potential Impact on Monetary Policy Implementation and Transmission" (page 34)
  - "Conclusions and Policy Strategies" (page 35)
  - "References" (page 39)

### Key analytical topics highlighted
- CBDC design space and inherent risks to monetary policy (Figures 1 and 2).
- Cross-country status and trends of CBDC projects (Figures 3 and 4).
- Interaction between CBDCs and monetary policy frameworks, implementation, and transmission (Figures 5 and 6).
- Distinct analysis for retail CBDCs, wholesale CBDCs, and cross-border CBDC use (sections and figures/tables across pages 13–19).
- Specific focus on deposit disintermediation, changes to money velocity, tokenization, financial market segmentation, currency substitution, and capital flow volatility (sections spanning pages 20–28).
- Special consideration of jurisdictions with large Islamic banking sectors, Sharia’h principles, and impacts on monetary policy transmission (sections and figures on pages 30–34).

### Figures and tables inventory (selected)
- Figures referenced (by number and title):
  - Figure 1. CBDC Design Options
  - Figure 2. Risks to Monetary Policy Inherent in CBDC Designs
  - Figure 3. Status of CBDC Projects Around the World
  - Figure 4. Trends by Type of CBDCs
  - Figure 5. Distribution of Countries by Nominal Anchor
  - Figure 6. Operational Frameworks for Monetary Policy
  - Figure 7. Channels through which CBDCs Impact Monetary Policy
  - Figure 8. Main Systems Used for Large Value Payments
  - Figure 9. Changes in Currency in Circulation to GDP
  - Figure 10. Cash as a Ratio of Money Supply
  - Figure 11. Penetration of Debit, Credit Cards and ATMs
  - Figure 12. Technological Developments and Money Velocity
  - Figure 13. Jurisdictions with Large Islamic Banking Sector and Share of Unremunerated Accounts
  - Figure 14. Monetary Policy Regimes in Countries with Islamic Banks
  - Figure 15. Monetary Policy Transmission in Jurisdictions with Islamic Banking Systems
  - Figure 16. Balance Sheet Structure of Islamic Banks
- Tables referenced (by number and title):
  - Table 1. Balance Sheet Effects of Exchanging Cash for CBDCs
  - Table 2. Balance Sheet Effects of Substituting Bank Deposits for CBDCs
  - Table 3. Balance Sheet Impact of Central Bank Operations to Compensate for the Decline in Deposits
  - Table 4. Stylized Balance Sheet Involving W-CBDC
- Boxes referenced:
  - BOX 1. Taxonomy of Retail CBDC Designs (page 37)
  - BOX 2. The Quantity Theory of Money and Money Demand (page 38)

### Glossary (selected entries as provided)
- Atomic Settlement: A conditional settlement that occurs if delivery and payment are both received at the same time.
- Application programming interface (API): Rules and specifications followed by software programs to communicate with each other, and an interface between different software programs that facilitates their interaction.
- Distributed Ledger: A record of transactions held across a network of computers (nodes), rather than stored in a central location.
- Distributed Ledger Technology (DLT): Protocols and supporting infrastructure that allow computers in different locations to validate transactions and update records in a synchronized way across a network.
- Digital Token: A piece of software with a unique asset reference, properties and/or legal rights attached.
- Instant Settlement: Instant settlement eliminates any time gap between trading and settlement, so that settlement happens immediately once a trade has been agreed upon.
- Interoperability: The technical or legal compatibility that enables a system or mechanism to be used in conjunction with other systems or mechanisms.
- Real Time Gross Settlement (RTGS): RTGS is the continuous process of settling payments in real time on an individual order basis without netting debits with credits.
- Smart Contracts: Smart contracts are coded programs that are used to automate pre-specified transactional events based on agreed upon contractual terms.
- Society for Worldwide Interbank Financial Telecommunications (SWIFT): SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services.
- SWIFT GPI: SWIFT GPI is a new facility that makes for quicker payments with full transparency on accompanying costs, while providing on-the-spot information on the status of transactions.
- Sukuk: Sukuk refers to Islamic/Sharia-compliant bonds or Islamic investment certificates. Sukuk is structured according to international sharia standards and is asset-based securitization, not merely receivables.
- Tokenization of CBDCs: Tokenization of financial assets is the conversion of financial instruments into digital objects and enables the transfer, storage, and trading of the assets in real time without intermediaries via digital channels.

*IMF WORKING PAPERS Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems — INTERNATIONAL MONETARY FUND*

### Introduction

### Introduction

### Overview
- Central banks worldwide are actively exploring the implications of, and options for, issuing Central Bank Digital Currencies (CBDCs).
- In an increasingly digital economy where demand for central bank notes and coins is rapidly declining, issuing CBDCs is likely to become a necessity to preserve access to public money.
- Although only a few countries have launched their CBDCs, there has been a rapid progression from conceptual discussions to targeted research and pilots; even some countries that do not see an immediate need to issue a CBDC are developing the capability to issue CBDCs.
- These trends suggest CBDCs could soon become mainstream.

### Literature, gaps, and framing
- The body of literature on CBDCs has grown at a phenomenal pace, but the monetary policy implications of CBDCs have been studied in much less depth.
- Many central banks have published discussion papers or opinion pieces, but comprehensive analytical assessments are only beginning to emerge.
- Misalignment between the literature and country choices: a two-tiered unremunerated retail CBDC is the design of choice among countries, but many existing studies focused on interest-bearing and single-tier retail CBDCs.
- Recent studies on unremunerated two-tier retail CBDCs are limited in scope and often focus on balance sheet effects; risk transmission channels and their relative importance remain largely unexplored.
- There is a dearth of studies on:
  - the monetary policy implications of w-CBDCs in general and tokenization in particular;
  - issuing CBDCs in jurisdictions with Islamic banks.

### Scope, approach, and limitations of this paper
- The paper provides a conceptual analysis of the monetary policy implications of issuing unremunerated two-tiered retail CBDCs and w-CBDCs, in jurisdictions with conventional and Sharia’h-governed banking systems.
- The paper discusses:
  - mechanisms through which CBDCs would affect monetary policy implementation and transmission;
  - the nature and relative strength of the impact;
  - policy and structural factors that could amplify or mitigate the impact;
  - strategies to minimize unintended consequences; and
  - areas for further research.
- Quantitative analysis could not be undertaken because empirical data on CBDCs are very limited in terms of the number of countries that have issued CBDCs and the length of time CBDCs have been in production.

### Key conclusions and findings
- CBDCs do not change the objectives of monetary policy, nor do they change the operational framework for monetary policy, but they can engender changes to retail, wholesale, and cross-border payments that have negative spillover effects on monetary policy implementation and transmission.
- Retail CBDCs can induce portfolio changes in the public’s relative holdings of cash and deposits that:
  - impact money velocity;
  - disintermediate bank deposits; and
  - increase volatility in commercial bank reserves at the central bank.
- If substantial, these outcomes can:
  - weaken the credit and interest rate channels for monetary policy transmission;
  - impair the central bank’s capacity to forecast reserves and conduct effective Open Market Operations (OMO);
  - weaken the effectiveness of money and inflation targeting (IT) regimes.
- Tokenization of w-CBDCs has potential to segment financial markets with adverse consequences for liquidity management and interest rate transmission.
- Use of CBDCs in cross-border payments can:
  - increase the risk of currency substitution in recipient countries; and
  - in crisis periods, increase the speed of capital flow reversals, thereby weakening domestic monetary authorities’ ability to control monetary and exchange rate policies.
- These findings deviate from other studies (Andolfatto (2021); Meaning, and others (2021)) that suggest impacts on monetary policy are marginal or even positive.

### Immediate risks and vulnerability factors
- The biggest and immediate risks to monetary policy are deposit disintermediation and related volatility in commercial bank reserves.
- Countries most vulnerable to deposit disintermediation are those with banking systems dominated by small retail deposits and a high share of non-interest-bearing demand deposits.
- Islamic banking systems, with predominance of non-remunerated demand deposits and small retail deposits, elevate deposit disintermediation risks.
- CBDC design choices that can minimize adverse impacts include caps or non-remuneration, but significant residual risks remain.
- Increases in money velocity constitute an important channel through which CBDCs could impact monetary policy in countries where cash still accounts for a large share of transactions.
- Potential impacts of tokenized markets on monetary policy are not yet comprehensively understood and need further review.
- Currency substitution and capital flow reversals present material risks, though cross-border CBDC use may be a more medium-term issue.

### CBDC design options and intrinsic risks to monetary policy
- Definitions:
  - Retail CBDCs (also called “general purpose CBDCs”) are designed for use by the wider economy in day-to-day payments and transfer transactions.
  - Wholesale CBDCs (w-CBDCs) are designed for use among financial intermediaries and are analogous to commercial bank reserves at central banks.
- CBDC design dimensions highlighted include:
  - Distribution model (Single or 2-Tier)
  - Remuneration (Interest vs non-interest)
  - Domestic, non-resident, cross-border eligibility
  - Validation (Account based or Token based or both)
  - Privacy (anonymous, pseudonymous, full transparency)
  - Ledger (Centralized vs Decentralised)
  - Other properties: Scalability, Security, Resilience, Performance, Programmability, Extensibility
  - Allowing non-bank PSPs to provide wallets; allowing non-bank PSPs to hold accounts at central bank
- Design features with greater inherent risks to monetary policy:
  - Retail CBDCs pose greater risks than w-CBDCs because retail CBDCs can cause deposit disintermediation irrespective of remuneration.
  - Remunerating a CBDC elevates disintermediation risks because it makes the CBDC a near-perfect substitute for all types of deposits and other low-risk assets.
  - An unremunerated CBDC is a good substitute for non-interest-bearing demand deposits; a retail CBDC that does not attract fees can be more attractive than demand deposits that may charge fees.
  - Single-tier CBDCs pose greater risks than two-tier because they can disrupt the payment system structure.
  - Design options that facilitate high adoption (full anonymity, token-based, no fees, interoperability) can amplify risks; options that constrain adoption (caps or transaction limits, full disclosure) can moderate risks.
- w-CBDC considerations:
  - Disintermediation is not a risk if w-CBDC usage is restricted to regulated financial institutions; decisions to allow non-banks are policy choices separate from w-CBDC characteristics.
  - Programmability enabled by DLT can facilitate tokenization, smart contracts, asset token settlement—these can change liquidity requirements and market structure.

### Cross-country trends and uptake (as of end-December 2022)
- By end-December 2022, over a hundred countries were experimenting with CBDCs.
- Retail CBDCs:
  - Central banks from three countries (The Bahamas, Nigeria, and Jamaica) and the 8 member countries of the Eastern Caribbean Currency Union (ECCU) had already issued retail CBDCs.
  - Several other countries (China, Ghana, India, Kazakhstan, Korea, Russia, Sweden, Thailand) had advanced to pilot stages and more than 90 countries were doing active research.
  - Virtually all countries are considering unremunerated and 2-tier distribution model retail CBDCs where financial institutions manage distribution and customer-facing activities.
  - Many countries plan transaction limits or caps on CBDC holdings for individuals, businesses, and non-supervised financial institutions.
  - For cross-border payments, out of 47 public retail CBDC projects, only 11 featured a cross-border dimension.
- Reported uptake where CBDCs are in production or advanced pilots (end-December 2022 or comparable reporting):
  - In The Bahamas, two years after the launch, CBDCs are reported to account for less than 0.1 percent of currency in circulation.
  - In Nigeria, public adoption of the e-Naira reportedly remains at a meagre 0.15 percent, one year after the roll out.
  - In Jamaica (JAM-DEX), live in July 2022, uptake reported to have been slow albeit increasing.
  - In the ECCU, DCash in circulation accounted for 0.16 per cent at end March 2022.
  - In the People’s Bank of China pilots, e-CNY in circulation represented 0.13 percent of total currency in circulation (M0) at end December 2022.
- Factors underpinning low uptake:
  - Inadequate awareness;
  - Inadequate infrastructure integration with merchants;
  - User comfort with existing mobile payments;
  - Offline payment functionality not yet materialized because of technical issues;
  - Payment innovations historically take a long time to become mainstream as human habits change gradually.
- Possible uptake driver: merchants may value not paying card fees when accepting CBDCs.

### Wholesale CBDCs (w-CBDCs) status and experiments
- No country had reached production stage for w-CBDCs at the time of reporting.
- w-CBDC pilot experiments have tested:
  - Domestic Delivery versus Payments (DVP) in securities settlement;
  - Payment versus Payments (PvP) in cross-border payments;
  - Liquidity optimization;
  - Multi-currency PvP (m-CBDC Bridge; Dunbar);
  - Settling tokenized assets with w-CBDC (Ubin, Helvetia Phase II).
- Programmability and tokenization in w-CBDCs remain important areas of exploration with potential monetary policy implications.

### Monetary policy frameworks, transmission channels, and how CBDCs interact with them
- Monetary policy objectives and frameworks do not change when countries issue a CBDC, but CBDCs as new payment instruments can induce changes to retail, wholesale, and cross-border payments with important spillovers.
- Institutional framework for monetary policy anchored by three pillars:
  - (i) Independence and accountability;
  - (ii) Policy and operational strategy;
  - (iii) Communications.
- Nominal anchors for monetary policy fall into four categories: (i) exchange rate targeting; (ii) inflation targeting (IT); (iii) money targeting; and (iv) “other”.
- Operational framework consists of instruments, operational targets, intermediate targets, and ultimate goals.
  - Central banks can target quantity (monetary aggregates) or price (interest rate) as intermediate targets depending on stable relationships with goals.
  - Central banks forecast liquidity or commercial banks’ free reserves and estimate excess reserves to determine scope of OMO.
- Monetary policy transmits via multiple channels: financial market prices (interest rates, exchange rates, asset prices), quantities (money supply and credit aggregates), and other channels (balance sheets and expectations).
- Financial institutions and interbank markets are conduits for transmission—efficient allocation of liquidity, interest rate and credit channel functioning, and price discovery are essential.
- How CBDCs affect implementation and transmission:
  - CBDCs can act as an anchor for the wider monetary system, preserving a public means of payment and trust.
  - CBDCs can change central bank cost functions for issuing money and impact seigniorage income, which has implications for central bank independence.
  - Central bank issuance of CBDC does not translate to full control over public uptake; neither central banks nor commercial banks fully control public preferences between deposits and CBDCs.
  - Retail CBDCs can trigger mutually reinforcing interactions with cumulative negative effects on monetary policy implementation and transmission (e.g., deposit disintermediation, reserve volatility, money velocity changes).

*IMF Working Paper — Introduction (excerpt) from Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems*

### introduction of a CBDC can result in some households and businesses exchanging some of their cash holdings

### wpiea2023060-print-pdf - introduction of a CBDC can result in some households and businesses exchanging some of their cash holdings

### Channels through which CBDCs impact monetary policy
- Trigger: Change in public preferences in holding of CBDCs relative to cash, bank deposits.
- Shock propagation:
  - Exchanging cash for CBDCs.
  - Funding CBDCs using bank deposits.
- Vulnerabilities:
  - Structural change in money velocity or instability that makes velocity unpredictable.
  - Bank deposit disintermediation.
  - Increase in volatility in reserve money.
  - Low digitalization of payments.
  - Concentration in small retail.
  - Large share of demand deposits.
  - Low commercial bank reserves at central bank.
  - Commercial bank increase demand for central bank facilities.
  - Banking system instability.
  - Expansion of central bank balance sheet.
- Impact:
  - Weaker monetary policy transmission.
  - FIs maintain large liquid assets to minimise liquidity risk which weakens interest rate impulses.
  - Credit expansion decline for any given policy rate.
  - Erosion in effectiveness of money targeting regimes.
  - Challenges in liquidity management.
  - Relationship between money and inflation becomes unpredictable.
  - Additional measures to achieve the inflation target for IT regimes.

### Exchanging cash for CBDCs — balance sheet and velocity effects
- Balance sheet composition:
  - Physical cash and CBDCs are two kinds of central bank money; substituting one for the other alters asset composition of households and liability composition of the central bank without changing the size of the balance sheets.
  - The balance sheet of commercial banks registers no changes in composition or size since commercial banks may only have an operational role in transferring funds from cash to CBDC.
- Stylized household/central bank/commercial bank entries illustrated with:
  - Household: +100 Digital Cash / -100 Fiat Money.
  - Central bank: CBDC +100 Digital Cash / Cash -100 Fiat Money.
  - Commercial bank: no net change (operational role only).
- Velocity effects:
  - Cash payments require physical proximity and involve delays before deposits reach banks; CBDCs enable remote transactions with immediate wallet crediting.
  - Rapid turnover of digital transactions can engender:
    - Structural increases in money velocity, or
    - Instability in money velocity.
  - Instability in money velocity:
    - Erodes the effectiveness of money targeting regimes based on a stable relationship between monetary aggregates and inflation.
    - Implies achieving an intermediate target (broad money) may not produce the desired outcome on inflation.
  - Structural increase in velocity:
    - When M, V, or combination increases faster than real GDP, prices increase in proportion to how much MV exceeds output growth.
    - An increase in velocity may denote higher inflation; countries with IT regimes would have to undertake additional monetary operations to achieve desired inflation rates.
- Seigniorage effects:
  - CBDCs can reduce operational costs related to printing, storage, and transportation of banknotes but can introduce new costs and alter demand for cash.
  - Changes in seigniorage income may increase or reduce reliance on the government for operational funding and have implications for central bank independence.
- Note on commercial banks’ role:
  - Commercial banks’ new role from intermediary to custodian may affect its profit and loss account (P&L) if there are fees levied for managing wallets; secondary effects via the P&L are outside the scope of this report.

### Exchanging bank deposits for CBDCs — disintermediation and reserve volatility
- Balance sheet mechanics (stylized entries):
  - Household: -100 Local Currency Deposit / +100 Digital Cash.
  - Commercial bank: Deposits -100 Local Currency / Commercial Bank Reserve Accounts -100 Local currency.
  - Central bank: Commercial bank reserves -100 Local currency / CBDC +100 Digital Cash.
- Key transmission effects:
  - CBDCs in digital wallets reside on central bank ledger and are not available to commercial banks to lend.
  - Decline in bank deposits and corresponding decline in commercial bank reserves reduces available bank credit to the economy.
  - Potential consequences:
    - Increase in cost of bank credit, which could curtail demand for credit.
    - Weakening of credit and interest rate channels central to conventional monetary policy transmission.
- Financial stability and liquidity management:
  - Deposit disintermediation can create liquidity risks that morph into bank insolvency if large withdrawals occur and loans cannot be recalled.
  - Banking system stress can lead to market segmentation as healthy banks avoid providing liquidity to weak banks, weakening the interest rate channel.
  - Volatility in commercial bank reserves complicates liquidity management for both commercial banks and the central bank.
- Mutual reinforcing channels from reserve volatility:
  - Central banks need to predict inflows/outflows to achieve short-term interest rate targets; significant volatility makes forecasting components of the balance sheet difficult and complicates sizing/frequency of OMO.
  - Commercial banks may hold much larger reserves to meet daily payment flows and potential outflows to fund CBDCs, reducing funding available for long-term lending and weakening the credit channel.
  - Hoarding of liquidity can affect transmission of policy rate changes to interbank markets; banks might offer higher deposit rates or raise funding from more costly/volatile sources, translating into higher lending rates and reduced credit to private sector.
- Central bank operations to compensate:
  - If commercial banks do not reduce assets in step with declining deposits and interbank market does not redistribute liquidity, cash-strapped banks will seek central bank financing.
  - Central bank balance sheet increases by same amount (100 LC) to restore commercial bank balance sheet to previous level; composition changes with increased claims on commercial banks and increased currency issued.

### Wholesale CBDCs (w-CBDCs) and payment system implications
- Balance sheet effects:
  - W-CBDCs are similar to reserves and do not affect monetary policy implementation or transmission through balance sheet effects.
  - Issuance of w-CBDCs changes liability composition of central bank balance sheet, offset by decline in commercial banks’ reserves; financial intermediaries’ assets change accordingly.
  - Intraday w-CBDC (issued during the business day and redeemed each night) would not impact the size of the central bank balance sheet.
- Functional differences and benefits:
  - Because w-CBDC is aimed at interbank settlement and other financial transactions between institutions, it does not lead to deposit disintermediation or digital runs.
  - W-CBDC can leverage DLT and smart contracts (programmability) enabling:
    - Extended operating hours.
    - More autonomous operations with minimum human intervention.
    - Continuous reconciliation of the ledger.
    - Potential to enable settlement in central bank money, reducing requirements for risk capital, clearing funds, and settlement liquidity.
    - Facilitation of atomic or near real-time DvP and straight-through-processing in securities settlement.
- Interaction with existing systems:
  - Many countries have RTGS enabling real-time settlement of interbank payments in central bank money with immediate finality, implying limited additional utility of w-CBDC for interbank clearing in those jurisdictions.
  - Early-stage pilots in countries with efficient domestic interbank payment systems did not point to strong value from w-CBDC for domestic interbank payments.
- Risks:
  - The availability of CBDC on DLT can change market structure and, as an unintended consequence of financial market tokenization, there is potential for market segmentation.

*IMF WORKING PAPERS: Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems — INTERNATIONAL MONETARY FUND*

### introduction of a w-CBDC design model that differs substantively from legacy fiat central bank reserves may

### wpiea2023060-print-pdf - introduction of a w-CBDC design model that differs substantively from legacy fiat central bank reserves may

### Market fragmentation, settlement cycles, and liquidity implications
- A w‑CBDC design that differs substantively from legacy fiat central bank reserves may cause market participants and markets to trade a w‑CBDC as a separate product, thereby fragmenting the interbank market.
- Market segmentation would:
  - reduce the efficiency gains and limit the pass through of central bank monetary policies;
  - potentially increase liquidity requirements if settlement cycles are shortened.
- Suboptimal market efficiencies may arise if w‑CBDCs trade over separate market infrastructure without interoperability or with limited interoperability with the broader financial market ecosystem.
- Shortening the settlement cycle to T+0 may require participants to prefund their accounts which would increase liquidity requirements.
- How a DLT arrangement handles counterparty credit risk could have a significant impact on participants’ liquidity needs and the transmission of monetary policy.

### Cross‑border use of CBDCs: potential benefits and policy risks
- Current limitation: central bank money in electronic format is accessible only to resident local banks and cannot be used in cross‑border and off‑shore transactions.
- Existing correspondent banking model for cross‑border FX involves several intermediaries, resulting in high costs, long transaction chains and long settlement periods; in some corridors settlement can take as long as 3 - 7 days due to frictions (fragmented data standards, lack of interoperability, AML/CFT and data protection complexities, different operating hours, outdated legacy platforms).
- Potential utilities of CBDCs for cross‑border use:
  - Broaden application of central bank money to non‑residents.
  - Enable PvP in real time by exchanging CBDCs for CBDCs and collapsing trading and settlement into a single operation.
  - Allow DvP settlement of securities where CBDCs serve as the cash leg for conventional or token‑based securities.
- Monetary policy implications:
  - For issuing countries:
    - High foreign demand for their CBDCs could increase currency outside the country and negatively affect the issuing country’s ability to control monetary aggregates.
    - Corresponding capital inflows could exert appreciation pressures on exchange rates and could have implications for inflation and monetary policy implementation.
  - For recipient countries:
    - Increased currency substitution reduces monetary authorities' control over domestic liquidity by limiting the component over which authorities have direct influence.
    - Faster and easier accessibility of reserve asset CBDCs facilitates substitution at a faster pace and larger scale, negatively affecting seigniorage for the recipient country.
  - For both issuing and recipient countries:
    - Faster access to cross‑border settlement could cause liquidity to flow rapidly between currency asset markets, amplifying capital flow volatility and affecting exchange rate and monetary policy management.
    - Upsurge in use of w‑CBDC for cross‑border settlement could result in higher and possibly more volatile intraday demand for central bank money.
    - Access to intraday w‑CBDC by non‑resident banks could increase demand for the overnight reserves held by resident banks acting as correspondents, affecting liquidity management, the price for liquidity, and transmission of monetary policy.

### Strength, speed, and uncertainty of monetary policy impact
- CBDC risks to monetary policy are conceptual and contingent on many unknowns related to scale and speed of uptake.
- Historical precedents (sudden capital flow reversals, deposit runs, liquidity gridlocks, dollarization, volatility in commercial bank reserves) show material challenges to financial stability, exchange rate, and monetary policy that required policy responses (changes in collateral policies, emergency liquidity facilities).
- Conclusion: introduction of CBDCs may not upend monetary policy but poses material risks to implementation and transmission that require policy consideration.

### Retail CBDCs, deposit disintermediation, and effects on money velocity
- Retail CBDCs, if quickly and widely adopted, could pose material risks to monetary policy implementation and transmission via:
  - deposit disintermediation;
  - volatility in commercial bank reserves;
  - changes in money velocity.
- Probability of risks materializing depends on scale and pace of adoption and may vary across inception, steady state, and crisis environments.

Key findings on deposit disintermediation:
- Deposit disintermediation is a high probability, high impact risk if CBDCs become more prevalent; it weakens the credit channel and can make commercial bank reserves volatile.
- Interbank markets may not transmit policy rates effectively during volatile liquidity flows.
- If disintermediation is persistent, central banks may need to provide longer‑term and targeted lending operations with adverse consequences for the central bank’s Lender of Last Resort (LoLR) function.
- Sudden large reductions in commercial bank reserve balances can:
  - drive up money‑market interest rates;
  - destabilize financial markets;
  - complicate forecasting of reserves and Open Market Operations (OMO) intervention amounts.
- Factors that increase the likelihood or severity of disintermediation:
  - Large share of small retail transactional deposits and demand deposits, which are perfect candidates for transfer to digital wallets.
  - Caps on CBDC wallet holdings may not bind on many small retail deposits and can be circumvented via many wallets.
  - Disintermediation could occur even if CBDCs are not remunerated, since CBDCs are close substitutes of non‑interest‑bearing demand deposits.
  - Financial inclusion via CBDC does not compensate for disintermediation because CBDCs reside on the central bank ledger and are not available for commercial bank lending; tokenization aimed at inclusion may encourage some population segments to avoid the banking system.
  - Limits or caps on CBDC wallet holdings pose operational enforcement challenges; monitoring or technological solutions would be needed.
- Liquidity system conditions and banks’ responses can mitigate or amplify risks:
  - Universal excess reserves: decline in deposits would translate into lower excess reserves with muted monetary policy impact.
  - Uneven liquidity distribution: liquidity‑strapped banks may borrow in interbank markets or raise deposit rates; interbank rates and lending rates could rise depending on volumes.
  - Tight liquidity scenario: shift from deposits to CBDCs could lead to fluctuations in commercial bank reserves, minimum reserve constraints becoming binding, structural liquidity deficits, asset fire sales, rising short‑term interest rates, and falling asset prices.
  - System‑wide shortages may compel central banks to provide liquidity, increase balance sheets, change collateral policy, and risk raising inflationary pressures if balance sheet expansion is not matched by output growth.
- Crisis and inception risks:
  - Risks are highest in crisis times when precautionary motive surpasses transaction motive, and at CBDC inception when there may be “en‑masse” wallet openings.
  - In the inception phase, “en‑masse” opening of digital wallets would result in sizeable deposit outflows even if individual amounts are low.
  - Rapid shift to CBDCs can cause significant dislocation; gradual adoption allows standard central bank liquidity provision to keep money market rates near the key rate.
  - In tail‑risk events, retail CBDCs, being credit and liquidity risk free and fully guaranteed by the central bank, increase the ease of runs on financial firms; deposit insurance may be insufficient to prevent large shifts to CBDC accounts.
  - In transition and crisis scenarios, banks may scramble for alternative funding or central bank financing; if collateral is exhausted central banks may need to expand acceptable collateral or lend uncollateralized, increasing central bank balance sheet risk.

Policy and operational implications for central banks:
- Central banks will need to enhance liquidity management before behavioral responses become clearer and the financial sector adjusts.
- Prudential liquidity requirements and access to central bank liquidity facilities provide a cushion against risks.
- Capacity and flexibility of the central bank to manage liquidity and effectiveness of the LoLR are critical to mitigating monetary policy risks.
- Deposit disintermediation introduces uncertainty about whether banks need short‑term or longer‑term funding and raises the risk of central banks becoming a persistent source of funding rather than an LoLR.

### Changes to money velocity: empirical patterns and potential scope
- Impact of money velocity on monetary policy is likely pronounced where cash still accounts for a large share of transactions, scope for digitalization is high, and countries pursue money targeting regimes.
- Probability of changes in velocity is difficult to predict ex‑ante because demand for cash depends on macro‑financial conditions (interest rates, GDP growth), privacy concerns, payment infrastructure deficiencies, and sociological preferences.
- Historical observations:
  - Digitalization of payments coincided with significant declines in currency in circulation relative to GDP (CIC/GDP) in several economies between 1960-2000 (Canada, China, New Zealand, Sweden, Switzerland, United Kingdom, United States).
  - Periods of economic uncertainty or low interest rates can increase the precautionary motive and offset effects of payment innovations; moderation or reversal in CIC/GDP occurred after 2000, notably after the Global Financial Crisis (GFC) and COVID‑19 pandemic.
- Empirical scope for change:
  - Several countries still have high shares of cash in money supply, implying large potential for digital payment adoption.
  - Low penetration of private digital payment instruments (credit/debit cards, ATMs) in many EMDEs suggests substantial scope for CBDC adoption; in many EMDEs less than 50 percent of the population have access to electronic payments.
- Empirical evidence on money velocity:
  - In advanced economies that registered significant digitalization (United States, Canada, China, Kenya, Singapore, Sweden), money velocity for M1 showed significant instability while M2 velocity registered more moderate structural changes and volatility.
  - Examples: United States’ income velocity of M1 rose between 1960 and 2008 with payment innovations but dropped sharply after GFC and COVID‑19; Canada’s M1 velocity rose with Visa card introduction and became unstable after 1982 when money targeting was abandoned; China’s volatility in velocity increased with mobile money expansion around 2002.

*IMF Working Paper excerpt: Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems*

### Introductionof Visa

### Introductionof Visa

### Changes in money velocity and monetary targeting
- Empirical studies find that adoption of e-money was associated with:
  - changes in cash management accounts for businesses,
  - instability in the relationship between M1 nominal income and interest rates,
  - an impaired money targeting framework (Isard and Rojas-Suarez (1986); Nizam M 2021; Zhou, G.Y 2018).
- Historical policy responses:
  - Canada abandoned the practice of monetary targeting in 1982.
  - The United States adjusted their aggregates and de-emphasized M1 in the early 1980s.
  - In the United Kingdom, financial innovation prompted authorities to change intermediate targets.
- Conceptual link to inflation:
  - An increase in velocity (V), money (M), or their combination growing faster than real GDP can raise prices as MV exceeds output growth.
- Evidence and gaps:
  - KOÇ Ümit and ŞAHIN Hasan (2021) find variables related to electronic payment systems have statistically significant effects on inflation.
  - There is a dearth of studies establishing a causal relationship between payment innovations, money velocity and inflation.
  - Forecasting CBDC impacts on money velocity will require well-specified quantitative analysis and data that may not be immediately available.
- Contextual note:
  - Trends in digital payments impacting cash in circulation and money velocity are indicative only because CBDCs have a different risk profile from private digital monies and CBDCs will be additional to other digital payments; the impact of incremental innovations is not linear.

### w-CBDCs, tokenization, and financial market segmentation
- State of technology and uncertainty:
  - DLT proof-of-concept experiments are still in early stages; real-world applications could be years from full implementation.
- Potential benefits and risks of tokenization:
  - Benefits: enhanced efficiencies in security settlement (shortened time between trade and settlement; reduced replacement cost risk).
  - Risks: increased market segmentation, liquidity challenges, and potential negative effects on money market efficiency and liquidity.
- Empirical pilot evidence:
  - Some pilots (e.g., Project Helvetia) indicate w-CBDC introduction could lead to segmentation of the money market.
- Mechanisms of fragmentation:
  - If w-CBDC operates on a separate payment rail and is not interoperable with current systems, financial institutions may need balances in two systems, reducing liquidity and fragmenting supply.
  - Shorter settlement times (DvP or instant settlement) can increase liquidity requirements due to prefunding needs.
- Operational and market implications:
  - May necessitate novel liquidity-saving mechanisms and development of new money markets for immediate and intraday liquidity.
  - Raises questions for interest rate setting if settlement moves to 24/7.

### Cross-border use of CBDCs, currency substitution, and capital flow volatility
- General assessment:
  - Cross-border use of CBDCs could affect monetary policy for issuing and recipient countries; risks are higher for recipient countries and more elevated in crisis periods.
  - Status of CBDC experiments suggests risks are more medium-term than immediate.
- For issuing countries:
  - Cross-border availability does not guarantee demand for the CBDC; demand depends on trade/financial needs, store of value, speculation, central bank credibility, and macro performance.
  - Over $950 billion in U.S. dollar banknotes were held by foreigners at the end of the first quarter of 2021, accounting for roughly half of total U.S. dollar banknotes outstanding (Bertaut and others 2021); this did not upend the United States Federal Reserve’s ability to conduct monetary policy.
  - Appreciation pressures from surges of capital inflows have had a negligible impact on inflation in the United States (Matschke J and Sattiraju A 2022).
  - Issuers could design CBDCs to restrict access to non-residents, though effectiveness is prospective and uncertain.
- For recipient countries:
  - Risks include currency substitution, sudden capital flow reversals, and reduced seigniorage, especially in countries with weak macro-fundamentals.
  - Faster cross-border transactions (e.g., pilots like m-CBDC Bridge, Project Dunbar) could enable capital flow volatility challenging exchange rate and monetary policy.
  - Greater use of foreign CBDCs could lower seigniorage for the domestic central bank.
- Historical parallels and policy tools:
  - Past technological changes in cross-border payments have not upended monetary policy capacity, but faster transactions could stress shallow financial systems.
  - Regulatory tools such as Capital Flow Measures (CFMs) can slow outflows if foreign CBDCs do not bypass traditional intermediaries; uncertainty remains whether CBDC programmability would complicate enforcement of CFMs.
- Barriers to cross-border CBDC adoption:
  - Need for countries to issue CBDCs and ensure platform interoperability or a common platform.
  - Political, geopolitical, technical, legal, and scalability challenges.
  - Specific concerns:
    - geopolitical implications of foreign CBDCs circulating domestically and data/privacy/national security risks;
    - technical/legal challenges including interoperability across diverse DLTs or non-DLT designs, access criteria for non-local banks, and simplifying cross-border payment flows while respecting regulatory differences;
    - uncertainties on macroeconomic implications, investment and maintenance costs, legal and regulatory frameworks, AML/CFT compliance, privacy protection, technology standardization, risk management, operational and information-sharing concerns, network governance, data warehousing, and custody models (BIS 2022a).

### Implications for jurisdictions with Islamic banks
- Shariah constraints:
  - Shariah principles prohibit Riba (interest payments) and Gharar (speculation), affecting CBDC design, use cases, monetary policy implementation and transmission.
- Scale and structure of Islamic finance:
  - Islamic finance accounts for less than 2 percent of global finance.
  - Islamic banking is systemically important in 15 jurisdictions (systemically important banking systems is defined as 15 percent or more of the total banking system).
  - Two countries (Iran and Sudan) have fully fledged Islamic banking systems; the remainder operate dual-financial systems where Islamic banks coexist with conventional banks.
  - Of the 34 countries with Islamic banking, 10 countries are experimenting with retail and w-CBDCs; among these, one country (Iran) is a fully-fledged Islamic banking system and the remainder have dual banking systems.
- Monetary policy frameworks:
  - Conduct of monetary policy in jurisdictions with Islamic banks does not differ materially from conventional systems; objectives include price stability, economic growth, and a partial modification to add equitable distribution.
  - Currently, jurisdictions with large Islamic finance sectors mostly adopt exchange rate targeting as the nominal anchor; none operate an IT regime; one country (Bangladesh) operates a money targeting regime; Pakistan, Malaysia, and Sudan have no explicit nominal anchor.
  - The exchange rate peg anchors inflationary expectations at low levels but restricts monetary policy independence under open capital accounts.
- Market development constraints:
  - Conventional liquidity management tools based on interest are not permissible for Islamic banks; central banks must modify instruments or develop Shariah-compliant alternatives.
  - Availability of Sharī`ah-compliant money market instruments varies; the market is mostly underdeveloped.
  - A few countries (Malaysia, Bahrain, Indonesia) have made advances; many lack Islamic repo facilities with central banks or have very limited offerings.
  - Basic infrastructure for market-based Islamic monetary policy (Islamic money and Sukuk markets) is lacking in many jurisdictions.
  - Islamic banks tend to hold more cash than necessary due to these constraints.
- Balance sheet and disintermediation risk:
  - Unremunerated deposits account for a very large share of bank liabilities in some countries, ranging between 30 and 70 percent.
  - CBDCs are perfect substitutes for unremunerated demand deposits, elevating bank disintermediation risk in Islamic jurisdictions.
  - Predominance of retail deposits supports funding stability but caps on CBDC wallet holdings intended to minimize disintermediation might not be binding for many small retail depositors.
- Liquidity management limitations:
  - Underdeveloped Islamic finance markets increase the risk that deposit use to fund CBDCs could constrain central bank ability to mitigate liquidity risk.
  - Islamic banks cannot access interest-bearing liquidity facilities available to conventional banks due to sharia restrictions.
  - Islamic liquidity management instruments (ILMI) develop slowly due to unsupportive regulations, sharia-compliance complexities, limited standardization, small number of Islamic banks, and underdeveloped financial sectors.
  - Sukuk have emerged as principal collateral for OMO in Islamic countries but Sukuk markets are concentrated in Malaysia and the GCC and tend to be held to maturity, reducing tradeable volumes.
  - Market segmentation and lack of adequate Shariah-compliant money market instruments limit Islamic banks' liquidity management capacity and constrain the effectiveness of a Lender of Last Resort (LoLR).

*IMF WORKING PAPERS Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems — INTERNATIONAL MONETARY FUND*

### Conclusions and Policy Strategies

### Conclusions and Policy Strategies

### Key findings on monetary policy implications
- Assessments of the monetary policy implication of CBDCs are still largely conceptual and tentative.
- Data are not yet sufficient to undertake empirical analysis as only a few countries have issued CBDCs and the period that the CBDCs have been in production is short.
- The impact of a retail CBDC on monetary policy depends on the degree and speed of adoption; the impact of w-CBDCs will depend on the degree to which DLT is widely adopted.
- Thus far, countries that have issued CBDCs have witnessed very little uptake, but it is still too early to deduce long term trends.
- Inference from the monetary policy impact of past innovations in digital payments has to be interpreted with caution because CBDCs have a different risk profile from private monies.
- For w-CBDCs, although there is much optimism regarding the promise of DLT, the risk implications are not yet fully understood.
- Conceptual analysis suggests CBDCs do not change the objectives of monetary policy or the operational framework for monetary policy but can induce changes in retail, wholesale and cross-border payments with spillover effects on monetary policy implementation and transmission.

### Risks to monetary policy and transmission channels
- Retail CBDCs can:
  - alter the public’s portfolio holdings of CBDCs relative to cash and deposits;
  - increase the volatility of money velocity;
  - cause deposit disintermediation; and
  - increase the volatility of bank reserves.
- These outcomes can:
  - weaken the interest rate and lending channel in the monetary policy transmission mechanism;
  - reduce the capacity to forecast reserves and conduct OMO; and
  - erode the effectiveness of money and IT regimes.
- W-CBDC effects:
  - could enable tokenization of assets and enhance efficiencies in securities settlement systems;
  - have potential for market segmentation that could undermine efficiency gains and needs to be better understood.
- Cross-border CBDC use could:
  - increase currency substitution risks in recipient countries;
  - speed up capital flows;
  - impact domestic monetary and exchange rate policies.

### Country- and system-specific vulnerabilities
- Countries most vulnerable to deposit disintermediation:
  - banking systems with large shares of small transactional retail deposits and demand deposits;
  - systems where banking system liquidity is unevenly distributed or there is a structural liquidity deficit.
- Jurisdictions with Islamic banking systems could be more vulnerable because of:
  - the predominance of unremunerated deposits and retail deposits in banks;
  - the underdeveloped nature of Islamic financial markets and Sharia’h compliant liquidity management tools limiting central banks’ scope to respond to liquidity shocks.
- Payment systems with low levels of digital payments could see significant changes in money velocity.
- Phases of particular challenge:
  - the inception phase could be most challenging because of “en masse” opening of the digital wallets and commercial banks may not yet be ready for the sudden shock to their deposit base;
  - the crisis period could be equally challenging as the precautionary motive could lead to a surge in CBDC adoption.

### Design considerations that moderate or shape risks
- Caps on CBDC holdings or transaction limits:
  - may not be binding for banks with small retail transaction deposits;
  - enforcing caps on the amount of CBDCs that can be held in a digital wallet may entail operational challenges.
- Issuing unremunerated CBDCs will not stop disintermediation given the similarities with non-remunerated demand deposits.
- Programmability can:
  - help address pain points in cross border payments and enhance efficiencies;
  - make it difficult to contain rapid reversals of capital flows, impacting monetary policy directly and indirectly through the exchange rate.

### Policy recommendations and strategies
- Adopt a multifaceted strategy to comprehensively identify macrofinancial risks and strengthen liquidity management.
- As part of preparations for issuing CBDCs, central banks should:
  - ensure macroeconomic risks posed by CBDCs are understood, identified, managed, and mitigated;
  - assess potential demand for CBDCs in their countries;
  - understand the deposit structure of banks and vulnerabilities to deposit disintermediation;
  - evaluate the effectiveness of proposed measures (caps) to minimize deposit disintermediation;
  - assess potential changes in money velocity and how that might affect the effectiveness of the monetary policy regimes.
- For cross-border use of CBDCs, authorities should:
  - understand practically how a cross-border payment infrastructure with CBDCs could be set up;
  - understand the likely impact on cross-border flows, possible financial stability risks and currency substitution.
- Strengthen liquidity management capabilities of both commercial banks and central banks to mitigate liquidity risks that could arise if CBDCs are funded by bank deposits.

### Research gaps and open questions
- Further research is needed to better understand:
  - (i) the macro-financial implications of financial market tokenization, including the potential for market fragmentation, the liquidity and interest rate implications, and the potential to interoperate with the market for central bank reserves;
  - (ii) how the programmability of assets and smart contracts could impact capital flow volatility in cross border payments and capital flow measures;
  - (iii) whether the central bank should be the lender of last resort to foreign banks if they are short of domestic CBDCs or if increased use of w-CBDC for cross‑border settlement could result in higher and possibly more volatile intraday demand for central bank money.
- Related operational and liquidity questions include:
  - whether access to intraday w-CBDC for non‑resident banks increases demand for the overnight reserves held by resident banks acting as correspondents;
  - how such changes may affect liquidity management for market participants, the price for liquidity and the efficacy of monetary policy implementation.

### Box summaries extracted from the chapter
- Box 1. Taxonomy of Retail CBDC Designs:
  - Distribution model: single-tier (central bank issues and distributes to end customers, keeps records, undertakes onboarding and KYC) versus indirect/two-tier/intermediated (central bank issues, banks distribute and assume customer onboarding and AML compliance).
  - Remuneration: Interest bearing (attract interest payments akin to deposits) vs non-interest bearing (does not pay interest and are more akin to cash).
  - Validation models: Account based (tied to an identification scheme) vs Token based (digital currency authenticated, not the user).
  - Privacy: a range of design choices around the type of information to keep private and who to keep it private from; privacy is the degree to which holdings and transactions data are hidden from participating entities.
  - Ledger technology: centralized ledger, decentralized DLT, or hybrid; central bank can run infrastructure or delegate record-keeping, messaging, and related tasks to a private sector provider.
  - Caps, limits, and overflow accounts: caps restrict the amount of CBDC held to minimize disintermediation and digital runs; overflow approach transfers funds in excess of a cap automatically to a linked commercial bank deposit account.
- Box 2. The Quantity Theory of Money and Money Demand:
  - Equation and definitions: M*V = P*Y where M = Money stock, V = Velocity of money stock circulation, P = Price level, Y = Volume of transactions of goods and services (real GDP).
  - Growth-rate transformation yields ∂(M) + ∂(V) = ∂(P) + ∂(Y). Assuming ∂(V) = 0 and ∂(P) = π, this gives ∂(M) = π + ∂(Y), which equals ∂(NGDP), so ∂(M) = ∂(NGDP).
  - Implication: if velocity is constant, a percentage rise in the money supply leads to a corresponding percentage rise in nominal GDP; if velocity changes unpredictably, the effect of changes in the money supply on nominal GDP becomes unpredictable.
  - Historical note: this basic equation shaped how central banks conducted monetary policy for many years because payment mechanisms historically changed very slowly.

*IMF WORKING PAPERS Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems, Conclusions and Policy Strategies*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023060-print-pdf.pdf_