Could a CBDC Be Used to Enforce Negative Interest Rates?
Yes, a CBDC could be a highly effective tool for enforcing negative interest rates on digital balances. Since the central bank directly controls the digital ledger, it could programmatically apply a negative rate to all or certain balances, which is difficult to implement with physical cash.
This mechanism could be used as a monetary policy tool to stimulate spending during economic downturns.
Glossar
Interest Rates
Rate ⎊ Within cryptocurrency derivatives, rate dynamics significantly influence option pricing and hedging strategies, particularly concerning perpetual futures and synthetic instruments.
Negative Interest Rates
Rate ⎊ Negative interest rates represent a monetary policy where commercial banks are charged for holding reserves at the central bank, effectively pushing deposit rates below zero.
Monetary Policy Tool
Instrument ⎊ In decentralized finance (DeFi), the dynamic interest rate model serves as a primary monetary policy instrument, algorithmically controlling the cost of capital within the lending protocol.
CBDC
Currency ⎊ Central Bank Digital Currency (CBDC) represents a digital form of a nation's fiat currency, issued and regulated by the central bank, distinct from decentralized cryptocurrencies.