Central Bank Digital Currencies and the Monetary Policy Transmission Problem
Central bank digital currencies were once pitched as a simple upgrade to cash, but as pilots multiply and the technology runs into real-world friction, a harder question has emerged: whether programmable sovereign money can actually sharpen the transmission of monetary policy or whether it introduces new channels of disintermediation that central banks cannot fully control. The Bank for International Settlements, the International Monetary Fund, and national central banks from Canada to Nigeria have spent the last two years publishing working papers that grapple with exactly this tension. Their conclusions are more cautious than the original hype suggested, and the gap between theory and adoption is widening.
The Transmission Promise
In principle, a retail CBDC could give central banks a direct line to households, bypassing the commercial banks and money market funds that currently intermediate the effects of rate changes. A Bank of Canada staff working paper published in July 2024 by economists Saroj Bhattarai, Mohammad Davoodalhosseini, and Zhenning Zhao examined whether paying interest on central bank digital liabilities would be contractionary or expansionary and how that mechanism would interact with existing tools. The paper found that introducing a CBDC with interest-bearing features does alter the transmission of monetary policy, but the direction and magnitude depend heavily on design choices, including whether the CBDC pays interest, whether it is remunerated at the policy rate or a spread below it, and whether holding limits are imposed. The Bank of Canada concluded that a CBDC could enhance transmission if designed with holding caps and tiered remuneration, but warned that an unconstrained interest-bearing CBDC could pull deposits out of commercial banks and weaken the credit channel that currently does much of the work.
The BIS reached a similar conclusion in its own working paper on CBDC and bank disintermediation, modeling two scenarios it labelled fast and slow. In the fast scenario, households rapidly shift deposits into CBDC accounts at the central bank, forcing commercial banks to replace lost funding with more expensive wholesale borrowing and tighten lending standards. In the slow scenario, the shift is gradual and banks have time to adjust their balance sheets. The BIS concluded that “the difference between the two paths is not merely quantitative but structural,” warning that a fast shift could trigger a credit contraction that monetary policy alone cannot offset, because the central bank would simultaneously be expanding its own balance sheet and contracting the banking system’s capacity to lend.
The Adoption Reality Check
Whatever the theoretical benefits, actual CBDC adoption has been dismal wherever retail versions have launched. Nigeria’s eNaira, rolled out in October 2021 as Africa’s first retail CBDC, offers the most studied case. By 2023, fewer than 0.5 percent of Nigerians had actively used it, according to Central Bank of Nigeria and IMF data. By 2025, eNaira wallets reached roughly 13 million, but the IMF found that 98.5 percent of those wallets had never been used in a transaction. Total eNaira in circulation amounted to approximately 0.37 percent of all Nigerian currency in circulation, meaning physical cash still comprised 99.63 percent. The Central Bank of Nigeria’s controversial 2022-2023 demonetization program, which restricted cash withdrawals to force digital adoption, produced shortages, protests, and public backlash without meaningfully moving the needle on CBDC usage.
Ghana’s eCedi, piloted through 2023 and 2024, remains in limbo with no full retail rollout date announced as of early 2026. South Africa’s Project Khokha continues as a wholesale experiment confined to interbank settlement rather than a consumer-facing currency. Morocco and Egypt launched a joint cross-border CBDC experiment in July 2025, but that project targets institutional settlement, not retail payments. The pattern is consistent: wholesale CBDCs that operate between central banks and commercial institutions show promise, while retail CBDCs aimed at consumers struggle to gain traction against existing payment apps, mobile money, and private stablecoins that already work and that users already trust.
Disintermediation as the Central Risk
The IMF’s November 2025 policy paper on central bank digital currency risks flagged disintermediation as the most consequential threat to monetary policy transmission. If households can hold CBDC directly at the central bank, especially during periods of stress, commercial bank deposits could drain rapidly. Banks would then need to replace that funding with wholesale borrowing or central bank lending facilities, raising their cost of funds and compressing net interest margins. That compression would pass through to lending rates, potentially making the bank credit channel less responsive to policy rate changes. In effect, a CBDC designed to improve transmission could weaken the very channel it was meant to enhance.
The IMF recommended tiered remuneration and holding limits as the primary safeguards, concluding that “without binding holding limits, a retail CBDC could become a vehicle for digital bank runs during periods of stress.” This echoed the Bank of Canada’s findings. Under a tiered system, small CBDC holdings would earn the policy rate, making the currency attractive for payments, while larger holdings would earn progressively lower rates or none at all, discouraging use as an investment substitute for bank deposits. The IMF also warned that cross-border CBDC interoperability could transmit shocks between economies more quickly than existing correspondent banking arrangements, because settlement would be instantaneous and atomic rather than delayed and reconciled. That speed is a feature in normal times and a vulnerability in crises.
The European Central Bank’s digital euro project remains the most closely watched test of whether these safeguards can work at scale. ECB officials have proposed holding limits of 3,000 to 4,000 euros per person and tiered remuneration that would make large CBDC holdings unattractive relative to commercial bank deposits. The European Parliament is still debating the legislative framework, and the ECB has said it will not launch before 2027 at the earliest. Meanwhile, the United States Senate has banned the Federal Reserve from issuing a digital dollar, removing the world’s largest economy from the retail CBDC race entirely. The result is a bifurcated landscape in which the euro area is moving cautiously forward, the United States is sitting out, and emerging markets that have already launched are confronting the hard truth that building a CBDC is far easier than persuading people to use it.
