Digital Money and Central Bank Balance Sheets

Digital money is a logical step in the process of continuous technological advancement in payment systems. In response, central banks are reviewing the conduct of their monetary operations in light of the new landscape of financial markets and systems. The impact of digital money will depend on the type of monetary substitution that occurs. This document examines several scenarios in which the substitution of currency in circulation and bank deposits could take place through digital currencies such as Central Bank Digital Currency (CBDC) or other forms of electronic money, and how these would affect the central bank’s balance sheet. The option of paying interest on the CBDC—and whether it is aligned with a new objective—could amplify the effect of monetary policy through the interest rate channel.