The importance of remuneration in the design of a central bank digital currency (CBDC) was emphasized in a paper released by the United States Federal Reserve Board on Nov. 17. The paper, part of the Fed’s Finance and Economics Discussion Series, reviews the theoretical literature on CBDCs in large, developed economies, with a particular view to the United States. It looks at the risks and benefits to the banking system of introducing a CBDC, with a particular focus on the role of CBDC design in the implementation of monetary policy and remuneration — that is, payment of interest — as a critical design feature.
A CBDC could help control bank disintermediation resulting from its introduction, the authors find, and it can help in the management of the Fed’s balance sheet by making the holding of CBDCs more or less attractive relative to bonds. The authors conclude that “Remuneration is arguably the key design feature that any central bank would want to contemplate.” They go on to say:
“A CBDC that pays no interest is consigned to the role of a medium of exchange; its value would be determined almost entirely by the convenience it would render. […] A remunerated CBDC, on the other hand, would be more attractive as a store of value, and its rate of remuneration could serve as an additional policy tool.”
Interest can be proportional, expressed as a percentage or tiered, with the rate rising or falling nonlinearly as a policy tool, such as relative to the size of the holding.
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The paper also considered convenience as a quality of a CBDC that can be manipulated for policy purposes:
“If a CBDC pays no interest, its use as a store of value is circumscribed. […] In such circumstances, CBDC is much like cash, and its usage would be determined by how much convenience it provides, relative to its money-like rivals.”