A subset of those digital assets, known as stablecoins, could over time be used by consumers and businesses as money, if they serve as a safe means of payment, a store of value, and a unit of account.2 Some jurisdictions are considering bringing these kinds of instruments into the regulatory framework by requiring their issuers to become banks or other licensed entities.3 This could enhance the ability to safely integrate them into the payments system. It could also expand access to central bank accounts and services to new entrants, allowing the stablecoins to be backed by the most liquid and stable of assets: central bank reserves. Traditional commercial banks are also forming consortiums and partnering with digital innovation firms to increase their offerings of liabilities associated with digital activities, which might entail offering deposits to stablecoin issuers or even direct issuance of stablecoins. Many are also investing in distributed ledger activities that could transform their businesses. Preliminary analysis of the May 2022 Senior Financial Officer Survey suggests that most U.S. Global Systemically Important Banks (GSIBs) expect growth and development in these areas to be a medium or high priority over the next couple of years, and banks continue to explore these areas to see how they fit into their business strategies.4 Central banks are also innovating. Many are implementing new forms of payments or experimenting with central bank digital currencies (CBDCs) to prepare for the future.
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?