In my keynotes at various conferences, I’ve called for a more serious and nuanced consideration of remunerated retail central bank digital currency (RCBDC) a design concept that is often treated very dismissively by central banks. In this post I attempt to synthesize recent theoretical research that assesses how a remunerated RCBDC could impact economies where bank market power suppresses deposit rates and creates structural inefficiencies in the intermediation of credit. Contrary to traditional disintermediation fears, research indicates that a remunerated RCBDC can act as a competitive “outside option,” forcing banks to raise deposit rates. If calibrated to an “intermediate range,” this paradoxically expands the deposit base and increases bank lending by relaxing liquidity and reserve constraints.[1]

Applying Bank Deposit Rate Discipline

Particularly in emerging markets with concentrated banking sectors, a remunerated RCBDC can serve as a benchmark that disciplines bank deposit rate setting. Chiu et al. (2023) and Andolfatto (2021) demonstrate that banks with significant market power often keep deposit rates artificially low to maximize profits. A remunerated RCBDC places a floor on these “sticky” rates, forcing banks to increase them to remain competitive. Andolfatto (2021) highlights that the higher deposit rates can induce the unbanked to enter the formal financial system and current depositors to increase their balances.

Expanding Bank Lending (“Crowding In”)

Chiu et al. (2023) argue that if the RCBDC rate is set correctly, the increase in total deposit volume can outweigh the higher interest cost by expanding loanable funds (“crowding in”). Furthermore, Garratt et al. (2022) note that banks benefit from a “return flow” effect, because a significant portion of the funds they lend out naturally returns to them as deposits due to their market share, which lowers their effective opportunity cost of capital.

Additionally, for banks operating under traditional reserve requirements, a RCBDC that induces deposit growth provides the regulatory headroom needed to back new loans (Andolfatto, 2021). This process also improves the bank’s liquidity coverage ratio (LCR) to the extent that it replaces volatile wholesale funding with stable retail deposits. By reducing the bank’s reliance on liabilities that can exit the bank quickly, the marginal cost of credit is lowered and expanded lending volumes supported.

Garratt et al. (2022) warn that higher RCBDC interest rates that force up deposit rates may increase market concentration. In this scenario, small banks may struggle to match the RCBDC rate while lacking the digital infrastructure of larger rivals, and they may lose deposits to those rivals. However, remunerated RCBDC may provide a “convenience offset” (e.g., speed, interface, universal acceptance) that narrows the competitive gap. This may allow smaller banks to retain deposits without needing to pay higher interest, leveling the playing field.

Funding, Lending and Arbitrage Bottlenecks

The remunerated RCBDC “crowding-in” effect assumes that banks are holding back credit due to a lack of affordable funding (“funding bottleneck”). However, if the primary bottleneck is a scarcity of creditworthy borrowers (“lending bottleneck”), banks already possess sufficient liquidity to satisfy all viable loan applications at current rates. Forcing these banks to raise deposit rates to compete with a RCBDC simply compresses banks’ net interest margins, which may lead to tighter lending standards or higher lending rates and/or fees to maintain profitability, potentially resulting in credit contraction (Chiu et al., 2023).

A third distinct scenario occurs in highly dollarized or open economies where banks engage in offshore arbitrage. In this environment, banks capture local deposits at near-zero rates but, due to structural domestic constraints, choose to invest the majority of these funds in high-yield overseas assets rather than domestic loans. A remunerated CBDC serves as a competitive benchmark that disciplines this “money machine” by providing a high-yield “outside option” for savers. Because these banks are typically over-liquid relative to their domestic loan books, a shift of deposits to the RCBDC does not “crowd out” lending; instead, it redistributes risk-free rents from private bank margins back to the public through CBDC remuneration.

Binding Constraints by Scenario
	Funding Bottleneck	Lending Bottleneck	Offshore Arbitrage
Primary Constraint	Banks keep deposit rates low, resulting in a smaller pool of loanable funds.	Lack of creditworthy borrowers or shortage of bank capital.	Deposits captured at low rates and invested in high-yield offshore assets.
CBDC Impact	Breaks the bottleneck, drawing “idle” cash into the system and expands credit.	Squeezes margins without increasing lending, as credit demand is already met.	Reclaims risk-free rents for the public without impacting the domestic credit supply.
Key Indicator	High net interest margins plus high physical cash usage or large unbanked population.	Low credit growth despite high bank liquidity and low interest rates on reserves (IOR).	High offshore placements; wide spreads versus foreign yields; low loan-to-deposit ratios.

Calibrating the RCBDC Rate (“Sweet Spot”)

The macrofinancial outcome depends heavily on the calibration of the RCBDC rate. There should be no impact if the CBDC rate is below bank deposit rates. However, if the CBDC rate exceeds the interest rate on reserves (IOR), banks make a loss on deposits, potentially increasing lending rates and/or disintermediation. To hit the “crowding in” sweet spot, the CBDC rate must below the IOR, so that banks have a strict incentive to retain deposits and continue lending (Andolfatto, 2021).

Guardrails Against Runaway Disintermediation

While theoretical “crowding-in” effects may offer a compelling case for a remunerated RCBDC, the risk of an unconstrained flight from bank deposits can be mitigated with holding limits and/or tiered remuneration. Bindseil (2020) advocates for the latter option, calling for a competitive RCBDC rate on holdings up to some threshold, while holdings exceeding the threshold would earn a significantly lower rate. This obviates the need to impose limits.

Summary and Conclusion

The success of a remunerated RCBDC depends on a deep understanding of the local financial sector. In jurisdictions where funding bottlenecks persist, characterized by high bank market power and significant “idle” physical cash, a remunerated CBDC can serve as a vital structural reform. By disciplining “sticky” retail deposit rates, it draws wealth into the formal system, relaxes regulatory constraints, and expands the volume of credit available to the real economy. In cases of offshore arbitrage, it redistributes risk-free rents back to the public without impacting the domestic credit supply.

Conversely, in jurisdictions facing lending bottlenecks, aggressive remuneration risks destabilizing the financial sector. If banks are already meeting all creditworthy demand, the increased cost of funding will simply compress margins. Consequently, the optimal path is one of controlled calibration: maintaining the RCBDC rate within the “sweet spot” that does not exceed the IOR while utilizing tiered remuneration or holding limits to mitigate disintermediation risks.

References

Andolfatto, D. (2021). “Assessing the Impact of Central Bank Digital Currency on Private Banks,” The Economic Journal, 131(525), 525-540.

Bindseil, U. (2020). “Tiered CBDC and the Financial System,” European Central Bank Working Paper No 2351, January.

Chiu, J., S.M. Davoodalhosseini, J. Jiang, and Y. Zhu. (2023). “Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment,” Journal of Political Economy, 131(5), 1212-1248.

Garratt, R., J. Yu, and H. Zhu (2022). “The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through,” BIS Working Papers, No 1046.

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[1] In highly competitive banking systems, where deposit rates closely track policy rates, the scope for a RCBDC to “crowd in” lending is significantly diminished. In such environments, a remunerated RCBDC is more likely to lead to disintermediation, as banks lack the monopoly rents necessary to compete for deposits without raising the cost of credit.

FYI I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.

Part 1 of this series used the CBDCTracker.org database to show that retail central bank digital currency (CBDC) projects are fizzling out, and Part 2 discussed potential reasons why. In some cases, the projects have been mismanaged, but more pervasively, retail CBDCs seem to be redundant digital payment instruments, particularly versus fast payment systems (FPSs).

And although, Bindseil (2026) makes a case for retail CBDCs versus FPSs from a Euro Area policy goal perspective, many of the goals may not resonate strongly with potential users, especially in other jurisdictions (Table 1). For example, does the average user really care about strategic autonomy, monetary sovereignty, and the “anchor” role of central bank money. Plus, deference to financial integrity considerations results in the offering of only “adequate” privacy, while physical cash and crypto-assets provide complete privacy.

Table 1: Bindseil (2026) Retail CBDC Policy Goals[1]
Bindseil (2026) CBDC Policy Goals	Retail CBDC v FPS Score (Bindseil, 2026)
Reduce merchant fees and limit payment service provider (PSP) market power	100% v 100%
Preserve strategic autonomy and monetary sovereignty	100% v 66%
Add technical resilience through settlement/front-end redundancy	100% v 33%
Public good and social objectives (financial inclusion and adequate privacy)	100% v 33%
Preserve the “anchor” role of central bank money in retail payments	100% v 0%

However, I remain keen on what Chris Ostrowski and I call “test and deploy” digital currency, and the Monetary Authority of Singapore calls “purpose-bound money”. Both aim at narrow use cases and allow for abbreviated project management cycles because the risks of large-scale (“death star”) retail CBDCs are absent. The National Bank of Kazakhstan has successfully launched purpose-bound RCBDCs using them for public finance targeted payments, conditional transfers and automated compliance scenarios. And recent examples of such pilots by other central banks include:

• Hungary’s Magyar Nemzeti Bank issuing RCBDC to unbanked young people.
• The Reserve Bank of Australia testing 16 use cases, many of which leverage programmable payments to facilitate multi-party, conditional or escrowed payments, or to enable atomic settlement of transactions in tokenized assets.
• The Hong Kong Monetary Authority conducting 14 pilots that tested programmability, tokenization, and atomic settlement.
• The Reserve Bank of India piloting programmable retail CBDC use cases, including targeted government subsidies, agricultural credit, and corporate allowances.

None of this is to say that a “death star” retail CBDC will not be a success somewhere. I can think of several niche cases. One could be overcoming “cross-border” banking sector frictions in the Euro Area. Another could be in jurisdictions where a remunerated retail CBDC could “crowd in” oligopolistic banks that are abusing their market power to suppress deposit rates. I’ll expand on this idea in a future post in this series.

Another special use case is the provision of digital payments when/where connectivity is absent. Several retail CBDC projects have tested stored-value card and device-to-device payment methods that allow for transactions in such cases (IMF, 2025). Private payment service providers seem reluctant to offer such services, so maybe that’s a market failure that calls for retail CBDC intervention?

Lastly, central banks could consider more aggressively pushing the privacy boundaries set by the Financial Action Task Force (FATF) and other privacy-intrusive regulations. However, this is unlikely for advanced economy central banks and their governments that architected and impose these privacy-invading and financial control tools. And it is just as unlikely for emerging and developing market economy jurisdictions that have to stay compliant to be participants in international commerce and finance. And that finishes my three-part tour of the retail CBDC landscape as it stands today.

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[1] Bindseil’s scores are based on a benchmark “fully-effective and well-designed” CBDC that hits all of his five policy goals, and on a low-cost FPS run by the central bank and imposed on all banks and merchants.

FYI I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.

In Part 1 of this series I used the CBDCTracker.org database to show that retail central bank digital currency (CBDC) projects seem to be fizzling out. Many central banks are putting their projects on the backburner or outright canceling them, some have been pivoting out of retail CBDC into wholesale CBDC-backed tokenized deposits, and some have just quietly quiet, never getting out of the research or proof-of-concept phases. Now I’ll review some of reasons why retail CBDC launches and pilots have been so underwhelming and suggest ways to achieve viability.

In many cases retail CBDCs are made redundant by payment ecosystems that are already well served by digital payment instruments, such as fast payment systems (FPSs). And as central banks navigate “knife edge” design challenges, they create retail CBDCs that offer nothing new and compelling to end users. Interest-bearing CBDCs are rejected on bank disintermediation concerns, and cash-like privacy is rejected in deference to financial integrity considerations.

In some cases of underwhelming pilots or launches, central banks skip too quickly through the development process and/or don’t involve all stakeholders. IMF (2023) recommends a five phase (“5P”) CBDC project management approach that starts with (1) preparation before moving on to (2) proof-of-concept work and (3) prototyping, followed by (4) piloting and (5) production (launch).  In other cases, the infrastructure is incomplete and key partners (e.g., banks and merchants) lack incentives to support the retail CBDC.

Countries	Launch	Adoption so far	Adoption challenges/ lessons learned/
Bahamas Sand Dollar	Oct 2020	120,000 wallets (vs. population of 400,000) at end-March 2024. End-2025 Sand Dollars in circulation less than 1% of banknotes and coins in circulation.	Banks, credit unions, and merchants are slow to participate in the Sand Dollar network. The Sand Dollar was not integrated with the traditional banking system regarding merchant accounts. Customer education was inadequate, failing to show users how and why to use Sand Dollars.
Nigeria eNaira	Oct 2021	eNaira wallets had grown to 13 million in 2023, representing 9% of active bank accounts, but few are actually being used. End-October 2024 e-Naira in circulation was less than 0.5% of banknotes and coins in circulation. It seems that it now has been quietly put out of its misery.	The central bank was able to see all eNaira transactions, making potential users concerned. Nigeria has a large informal economy that thrives on cash. There were too few merchants and too little infrastructure. A change of the technology provider after the launch suggested that robust tech infrastructure was not in place.
Jamaica Jam-Dex	Jul 2022	305,000 wallets (vs. population of 2.8 million at end-2025). End-2025 JAM-DEX in circulation was less than 0.1% of banknotes and coins in circulation.	Slow merchant onboarding has been a big issue as retailers are required to upgrade their POS equipment to use Jam-Dex. The central bank did not incentivize or mandate banks to modify their ATMs to accept and convert Jam-Dex.
Source: IMF (2024) “Central Bank Digital Currency Adoption: Inclusive Strategies for Intermediaries and Users”.

Many central banks have prioritized building out fast payment systems, which are up and running in over 120 jurisdictions, versus just four launched retail CBDCs and five being piloted (Figures 1 and 2).[1] Although (IMF, 2025) makes a case for retail CBDC and FPS co-existence, one must wonder what incremental value retail CBDC offers users? Both provide instantaneous, efficient and potentially lower cost payments, and although FPSs transfer private liabilities that carry credit risk, deposit insurance eliminates that for most users.

Bindseil (2026) identifies several other reasons why retail CBDCs might trump FPSs, but while many of them resonate with central bankers and policymakers, I wonder how many of them do with potential users. I’ll discuss this more fully in the next post in this series.

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[1] Figure 1 is based on the World Bank’s Project FASTT database that I updated with some AI assistance. Figure 2 is based on the CBDCTracker.org database.

FYI I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.