Digital Money and Central Banks Balance Sheet

IMF Working Papers, October 28, 2022

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Digital money represents a logical step in continuous technological advancement in payment systems.
Central banks are reviewing their conduct of monetary operations in light of the new shape of financial markets and systems.
The impact of digital money depends on the type of money substitution by digital money.
The paper examines several substitution cases where currency in circulation (CiC) and bank deposits may be replaced by digital money such as CBDC or other e-money, and the implications for the central bank balance sheet.
Remuneration of CBDC, if aligned to a new objective, could potentially amplify the effect on the interest rate channel of monetary policy.

Substitution scenarios analyzed include:
- Substitution of CiC (currency in circulation) by digital money.
- Substitution of bank deposits by digital money.
- Mixed cases where both CiC and bank deposits are affected by adoption of CBDC or other forms of e-money.
Balance sheet implications emphasized:
- Changes in central bank liabilities composition when digital money replaces CiC or bank deposits.
- Potential shifts in monetary base (M0) composition and seigniorage implications.
- Interaction with central bank holdings of Treasury bills and bonds, and central bank FX positions, as part of balance sheet adjustment dynamics.
Monetary policy channel effects:
- Remuneration on CBDC could alter the interest rate transmission mechanism.
- If remuneration is aligned to a new objective, the interest rate channel of monetary policy could be amplified.

Central banks need to reassess conduct of monetary operations given changes in the payments landscape driven by digital money.
Design choices for CBDC and other e-money (including whether to remunerate) are central to determining macroeconomic and balance-sheet outcomes.
Considerations include:
- The extent and type of substitution (CiC vs. bank deposits).
- Impacts on seigniorage and central bank liabilities.
- Interaction with financial institutions and the broader financial system.
The paper positions these design and operational questions as critical for shaping monetary policy effectiveness in a digital-money environment.

Subjects: Bank deposits, Central Bank digital currencies, Currencies, Digital currencies, Financial institutions, Financial services, Money, Technology, Treasury bills and bonds
Keywords: bank deposits, Caribbean, CBDC, central bank balance sheet, Central Bank digital currencies, central bank FX, central bank liability, central bank of Brazil, Currencies, currency-in-circulation, Digital currencies, digital money, dollarization level, Fiat currency, Global, impact of digital money, money base (M0), seigniorage, Treasury bills and bonds, unit of account

IMF Working Paper No. 2022/206, October 28, 2022.