Evaluating the Implications of CBDC for Financial Stability (IMF)
The IMF published a Fintech Note that examines the potential financial stability implications of introducing retail central bank digital currencies (CBDCs). The paper identifies six transmission channels through which CBDCs could affect financial stability: liability and asset channels (affecting bank funding structures and balance sheets), fee income channel (reducing bank revenues), run-risk channel (potentially facilitating bank runs), information channel (affecting data flows on borrowers), and payment system resilience channel (impacting competition and operational resilience). While acknowledging theoretical ambiguities, the paper reviews quantitative studies suggesting that under moderate adoption scenarios (approximately 10% of deposits), CBDCs would likely have manageable effects on bank profitability and financial stability, particularly in systems characterized by low competition, diverse funding sources, and limited deposit reliance. The magnitude of impacts depends critically on CBDC adoption rates, country-specific characteristics, and design features such as remuneration rates and holding limits. And in any case, quantity restrictions, tiered remuneration, and access parameters, combined with traditional prudential policies, can effectively mitigate potential financial stability risks. [Source: IMF]
I found it surprising that the paper didn’t include in its assessment two papers that under certain conditions CBDC can actually expand bank lending and deposits when its interest rate falls within an intermediate range. A 2023 Journal of Political Economy article written by several Bank of Canada staffers found that banks with market power typically restrict deposit supply to keep rates low, but a CBDC provides an outside option that sets a floor on deposit rates, forcing banks to supply more deposits. In their calibration to the US economy, a CBDC increases bank lending when its rate is between 0.30% and 1.49% (with the average 3-month T-bill rate at 0.90% during the calibration period), with maximum increases of 1.57% in lending and 0.19% in output at a CBDC rate of 0.98%. However, if the CBDC rate exceeds this range (above 1.49%), disintermediation occurs as banks must raise lending rates to break even, reducing loan demand. The paper concludes there is no single “optimal” CBDC rate but rather a range that promotes intermediation, with the effectiveness depending on the degree of bank market power rather than CBDC usage per se.
And a 2025 National Bureau of Economic Research (NBER) paper written by several San Francisco Fed staffers found that the welfare impact of CBDC introduction follows an inverted U-shape with respect to the interest rate paid on CBDC: rates that are too low fail to curtail bank deposit market power significantly, while rates that are too high cause excessive bank disintermediation, reducing credit supply and output. For their baseline U.S. calibration with a 2% policy rate, the optimal CBDC rate is approximately 0.8% annually, yielding welfare gains of 27 basis points of consumption. More generally, across economies with different steady-state policy rates, they derive a simple rule of thumb for optimal CBDC remuneration: the maximum of 0% and the policy rate minus 1%. This rule captures the key insight that CBDC should pay interest to effectively compete with bank deposits (especially in high interest rate environments where bank deposit market power is greatest), but not so much as to cause harmful bank disintermediation. The welfare gains from CBDC are larger in high interest rate environments, reaching about 1% of consumption at a 6% policy rate, because CBDC more effectively curtails bank monopoly power when the deposit spread is otherwise large.
BMA Advances Embedded Supervision Initiative To Architect Real-Time Regulatory Oversight For DeFi (BMA)
The Bermuda Monetary Authority (BMA) launched an Embedded Supervision initiative, aiming to modernize regulatory oversight for decentralized finance (DeFi) by embedding supervisory requirements directly within financial infrastructure. Through its Innovation Hub, the BMA is collaborating with technology partners to create real-time, verifiable, and privacy-preserving regulatory frameworks that allow for continuous assurance, rather than relying on retrospective reporting. The initiative’s pilot project, involving Chainlink Labs and other industry players, explores expressing policy logic and compliance conditions directly in blockchain infrastructure, providing regulators with real-time data and reducing the compliance burden. [Source: BMA]
Upcoming Speaking Engagements:
The Cedi@60 Anniversary Currency Conference (Accra, Ghana, November 17-20) hosted by the Bank of Ghana, in partnership with Currency Research, will celebrate 60 years of the Ghanaian Cedi, bringing together leaders from across Africa and beyond to reflect on the currency’s legacy and chart its digital future. Learn about Ghana’s eCedi pilot and the future of sovereign digital currencies in Africa, and engage with innovators driving mobile money, QR code payments, and financial inclusion across the region. [Register here and get 15% off by using the Kiffmeister15 code!]
The Digital Euro Conference 2026 (Frankfurt, March 26) will explore the future of money with a focus on CBDCs, stablecoins, and commercial bank tokens. This hybrid event offers the perfect platform to understand the future of digital money! [Register here and get 20% off the regular ticket price by using the Kiffmeister20 code!]
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.
