Currently, over 60 jurisdictions have launched faster payment services.5 In addition, central banks are building expertise and investing in technology to examine the potential applicability of CBDCs.6 Monetary Policy Implementation in An Evolving Monetary System As we consider the potential impact of this array of innovations, it is useful to start with a view into the current monetary system. For decades, central bank reserve balances have been the safest and most liquid asset, at the core of a smoothly operating financial system. Most economies operate with two-tier monetary systems, in which households and businesses hold and make payments  Regulation, supervision, and deposit insurance help keep commercial bank money safe. In turn, deposits fund growth in the economy through loans to households and businesses. And central banks provide liquidity backstops to ensure that the banking system can meet its liquidity obligations to the public. Most policy implementation frameworks around the world are designed based on this two-tiered system. In these frameworks, central banks control the aggregate supply of their liabilities and the rates at which these liabilities are remunerated, which in turn influences the market interest rates that are transmitted to the economy.7 In considering the impact on implementation frameworks of an environment including private and public digital currencies, I would like to raise two key questions that central banks might consider. First, what are the implications for the tools of interest rate control? And second, how might the central bank balance sheet adapt?

In some environments, this requires central banks to forecast demand for liabilities and execute open market operations to supply needed reserves. In recent years, the demand for many central bank liabilities has become higher and less predictable. However, most central banks have been operating with abundant liquidity surpluses, which has limited the impact of this reduced predictability on implementation.12 As central banks embark on balance sheet reduction, however, understanding demand for liabilities may become more important. The demand for digital currencies is not well understood, as these are instruments for which there is no precedent or experience. For a CBDC, central banks would have to understand the behavior of the demand for this new liability. If stablecoins were to be issued by commercial banks, it would also be important to understand drivers of growth in these coins and how that growth might affect banks’ demand for reserves. Trend growth in these central bank liabilities could be quite different than it is for other liabilities, such as cash or reserve holdings of traditional banks. And, the variability in demand could potentially be high, driven by shifts in the market environment or in response to geopolitical developments or other exogenous events. This variability could be amplified if digital currencies were available internationally, potentially leading to larger flows. The variability could create new challenges for supplying the appropriate amount of reserves to the banking system to ensure that administered rates continue to control rates, and could lead to a need for larger liquidity surpluses to ensure interest rate control.