## Implications of Central Bank Digital Currency for Monetary Operations

_Fintech Notes, October 4, 2024_

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**Canonical URL:** [Implications of Central Bank Digital Currency for Monetary Operations](https://www.imf.org/en/publications/fintech-notes/issues/2024/10/04/implications-of-central-bank-digital-currency-for-monetary-operations-555883)

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## Bibliographic details
- Authors: Tansaya Kunaratskul, Andre Reslow, Manmohan Singh
- Published: October 4, 2024
- Series: Fintech Notes
- DOI: https://doi.org/10.5089/9798400289019.063

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### Overview
- Purpose: Analyze how issuance of central bank digital currency (CBDC) could affect monetary operations, defined as central banks managing the demand and supply of reserves to achieve a desired stance of monetary policy.
- Authors: Tansaya Kunaratskul, Andre Reslow, Manmohan Singh
- Date of publication: October 4, 2024
- Series: Fintech Notes No 2024/007

### Scenarios of CBDC substitution and their implications
- Scenario: CBDCs substituting cash.
  - Implication: Changes to central bank and commercial bank balance sheets as cash holdings shift to CBDC holdings.
- Scenario: CBDCs substituting commercial bank deposits.
  - Implication: Potential deposit outflows from commercial banks, affecting banks’ funding and reserve dynamics.
- Scenario: CBDCs substituting reserves.
  - Implication: Direct effects on the reserve base held at the central bank, with immediate implications for liquidity and monetary control.
- Note: Implications vary based on design features and market developments.

### Effects on monetary operations and market rates
- CBDC-induced balance sheet and reserve changes can:
  - Draw short-term interest rates away from the policy target.
  - Complicate liquidity forecasting for central banks.
- Operational challenge: Maintaining a desired stance of monetary policy when short-term rates deviate and liquidity conditions become harder to predict.

### Monetary operations tools and calibration
- Central banks could calibrate operations to offset CBDC effects, including:
  - Engaging in fine-tuning operations to address temporal liquidity mismatches.
  - Providing additional reserves on demand to ensure maintenance of the monetary policy stance.

### Design features to mitigate adverse effects
- Careful CBDC design can limit adverse impacts on monetary operations by setting:
  - Criteria for access (who can hold or transact in the CBDC).
  - Holding quantity limits (caps or thresholds on CBDC balances).
  - Remuneration (interest or yield policies on CBDC holdings).
- Design choices interact with market developments to determine the scale and persistence of effects on reserves and short-term rates.

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_Source: https://www.imf.org/en/publications/fintech-notes/issues/2024/10/04/implications-of-central-bank-digital-currency-for-monetary-operations-555883_