Quick answer: BIS Working Paper No. 1046, “The case for convenience: how CBDC design choices impact monetary policy pass-through” (Garratt, Yu, and Zhu, 2022), models two ways to design a central bank digital currency: pay interest on it, or make it more convenient to use. Setting the CBDC interest rate equal to the interest on reserves would give full policy pass-through, but it widens the gap between large and small banks. Making the CBDC more convenient improves pass-through and levels the field, which the authors argue is the better design.
Updated 07/17/2026. By Jake Claver. Educational content, not investment advice.
A central bank digital currency is a policy instrument as much as a payment tool, and the design choices decide how it behaves. BIS Working Paper 1046 takes one specific question seriously: if a central bank issued a digital dollar, should it pay interest, or compete on convenience? The answer shapes both how well monetary policy transmits and who wins among banks. This explainer stays close to the paper.
What BIS Working Paper 1046 studies
The paper, by Rodney Garratt, Jiaheng Yu, and Haoxiang Zhu, was published by the BIS in 2022. It builds a model of the U.S. banking system with banks of different sizes and asks how two CBDC design levers, the interest rate on the CBDC and its payment convenience, affect deposit rates, bank competition, and the pass-through of policy rates. The full text is in the BIS Working Paper 1046 PDF.
“Pass-through” here means how fully a change in the central bank’s policy rate flows into the deposit rates households and firms actually receive. Weak pass-through blunts monetary policy; strong pass-through sharpens it. The paper’s contribution is showing that CBDC design, not just its existence, determines which one you get.
Interest rate versus convenience: the core trade-off
The paper is precise about the interest-rate lever. In its own words: “Setting the CBDC interest rate equal to the interest rate on reserves would result in full monetary policy pass-through. However, by forcing both banks to raise interest rates, a higher CBDC interest rate makes it more difficult for the small bank to compete with the large bank.”
Convenience works differently. Raising the CBDC’s payment convenience also increases deposit rates and improves pass-through, but instead of widening the gap between banks it causes market shares to converge. The authors’ conclusion is that “payment convenience is a crucial aspect of CBDC design that may be more desirable than paying interest on CBDC balances.” In short, both levers can improve transmission, but only one avoids concentrating the market.
Why small banks are the pressure point
The distributional result is what makes this practical. Large banks already have an advantage in attracting deposits. An interest-paying CBDC forces every bank to raise its deposit rate to compete, and a small bank with thinner margins struggles more with that pressure, so the interest design tends to amplify large-bank dominance. A convenience-focused CBDC levels the playing field because it improves the everyday usefulness of money without turning deposits into a pure rate war. For policymakers weighing a CBDC, the paper reframes the debate away from “should it pay interest” toward “what design keeps both transmission and competition healthy.”
The engineering side: Project Hamilton
Working Paper 1046 is about policy design, not plumbing. The technical feasibility question was tackled separately in Project Hamilton, a collaboration between the MIT Digital Currency Initiative and the Federal Reserve Bank of Boston. That project built OpenCBDC-tx, an open-source transaction processor, and demonstrated architectures reaching up to 1.7 million transactions per second (a two-phase commit design) alongside a 170,000-per-second atomizer design. It concluded in 2023 and shows that raw throughput is not the binding constraint; the design and policy choices are. Broader central-bank research on this sits on the BIS site.
Why this matters
Whether or not the United States ever issues a retail CBDC, the paper clarifies the stakes: the design dials decide whether such a currency strengthens monetary policy and preserves bank competition, or quietly tilts the field toward the largest institutions. That is a governance question, not a technology one. Keep it separate from any investment view. Modeling how a hypothetical CBDC would affect deposit markets says nothing about the price or prospects of any cryptocurrency or company. For U.S. regulatory framing on digital assets more broadly, see the CFTC digital assets page.
Common questions
What is BIS Working Paper 1046 about?
It models how two central bank digital currency design choices, paying interest on the CBDC versus improving its payment convenience, affect monetary policy pass-through and competition between large and small banks. It is titled “The case for convenience” and was written by Garratt, Yu, and Zhu (2022).
What is monetary policy pass-through?
It is how fully a change in the central bank’s policy rate flows through into the deposit rates that households and businesses actually receive. Stronger pass-through makes monetary policy more effective; weaker pass-through dampens it.
Why does the paper prefer convenience over paying interest?
Both improve pass-through, but an interest-paying CBDC forces banks into a rate war that a small bank struggles to win, concentrating the market toward large banks. A convenience-focused CBDC improves pass-through while causing market shares to converge, so it levels the field.
What was Project Hamilton?
Project Hamilton was a research collaboration between the MIT Digital Currency Initiative and the Federal Reserve Bank of Boston that tested the technical feasibility of a hypothetical U.S. CBDC. It built the open-source OpenCBDC-tx processor, reaching up to 1.7 million transactions per second, and concluded in 2023.
Does BIS Working Paper 1046 mean the U.S. will launch a CBDC?
No. It is a research model of design trade-offs, not a policy decision or a launch plan. It informs the debate about how a CBDC would need to be designed, not whether one will be issued.
This content is educational only. It is not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
