Some have suggested tiered remuneration for different holding amounts in order to influence incentives and ensure appropriate integration into the monetary system.10 In the case of stablecoins, central banks don’t directly control interest that might be paid on these instruments. However, incentives created by remuneration policies could have important influences on the structure and relative demand for private and public digital currencies. Depending on how the regulatory and policy environment for financial innovation evolves, stablecoins could be issued by banks or other regulated entities that could have access to interest-bearing accounts at central banks. In this case, the rate of remuneration stablecoin issuers earn on their accounts might influence the rate paid to stablecoin holders, and the role of the instruments in the broader monetary ecosystem.11 Of course, implementation issues are not the only important consideration for remuneration of digital currencies, but it should be one consideration. Choices about the remuneration of new central bank liabilities, like CBDC, and of the accounts of private stablecoin issuers, could have an important influence on the incentives created by monetary policy implementation frameworks. Given this, central banks should take a holistic approach to considering the impact of their remuneration policies on the ecosystem of both private and public currencies. Pillar 2: Liquidity supply This brings me to the second pillar of interest rate control: liquidity supply. In order for central banks’ remuneration rates to effectively achieve interest rate control, central banks supply reserves in appropriate quantities to achieve the interest rate target.

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.