How CBDC Interest Rates Shape Adoption and Bank Funding

Digital money promises easier payments, broader access, and more efficient financial infrastructure. But moving money into a new wallet also changes where that money sits, who can use it, and how the wider economy is financed.

That is particularly important for central bank digital currencies, or CBDCs. Unlike an ordinary banking app, a retail CBDC would give households access to digital money issued directly by a central bank. If consumers fund those wallets by moving substantial balances out of commercial banks, the funding supporting mortgages and business loans can become more expensive.

A new study by Vidhu Shekhar and Sanjogita Ramesh, CBDC Design in General Equilibrium: Adoption Thresholds, Bank Intermediation, and the Feasibility Frontier¹, examines how to balance those effects. Its central contribution is a framework for determining whether a proposed digital currency design remains compatible with deposit-funded banking.

For investors, the implication extends beyond central banks. Digital money infrastructure becomes more valuable when it improves payments while working with the institutions that supply credit.

Why CBDC Adoption Changes Bank Funding

A bank deposit and a CBDC balance may look similar on a smartphone screen, but they represent claims on different institutions. Deposits are liabilities of commercial banks. CBDC would be a liability of the central bank.

When customers convert deposits into CBDC, their commercial bank loses that deposit funding. Banks do not simply lend out customer balances one dollar at a time, but deposits remain an important part of their funding structure. Replacing them can require higher deposit rates, wholesale borrowing, or adjustments to lending.

The study models households choosing among cash, deposits, and CBDC. Their choices depend on payment usefulness, preferences, and the interest they forgo by holding digital currency.

This reveals an important distinction: adoption is not equivalent to deposit displacement. Many people could use small CBDC balances without moving much of their savings. Alternatively, fewer users holding large balances could create substantial funding pressure. Counting wallets alone would miss that difference.

CBDC Interest Rates Shape Adoption and Efficiency

The researchers examine the gap between the policy interest rate and the return paid on CBDC. A smaller gap makes CBDC more attractive. A larger gap increases the opportunity cost of holding it.

In the baseline calibration, paying CBDC holders the policy rate produces the highest welfare. The estimated gain is approximately 0.43% of steady-state consumption relative to an economy without CBDC.

That figure is a model-based measure of economic benefit expressed in consumption terms. It is not a prediction that introducing CBDC would increase GDP or household spending by 0.43%.

The following results come entirely from the paper’s baseline calibration. Interest-rate spreads are quarterly, rather than annual figures.

These comparisons show the cost of making digital money less attractive: fewer households use it, and fewer payment-efficiency benefits are realized. However, maximizing those benefits is only appropriate when the banking system can accommodate the resulting deposit shifts.

Bank Funding Sets the CBDC Feasibility Frontier

When the researchers increase deposit displacement or banking frictions, the governing constraint changes. Some attractive CBDC designs become inconsistent with the model’s maintained deposit-funded equilibrium.

Put simply, banks would need to offer deposit rates that no longer fit the household saving conditions assumed in the model. The researchers call the boundary between admissible and inadmissible designs a feasibility frontier.

This does not establish that banks would collapse or that an economy would have no possible equilibrium. It means the modeled deposit-displacement path, bank pricing, and household choices cease to work together under the specified assumptions.

Within the stressed scenarios examined, the preferred interest-rate gap is the smallest one that restores feasibility. That suggests a useful policy principle: apply enough restraint to preserve bank funding, while retaining as much payment benefit as possible.

The practical challenge is measuring that boundary. A deposit-rich banking system with flexible funding options may accommodate a design that would put greater pressure on institutions with narrower funding sources.

Digital Euro Safeguards Show the Design Trade-Off

Actual CBDC proposals already reflect concerns about deposit displacement. The European Central Bank’s proposed digital euro safeguards include non-interest-bearing balances, holding limits, and links to commercial bank accounts that would support payments exceeding wallet balances.

These mechanisms distinguish how much money someone can store from how much they can pay. A wallet need not permanently hold a large balance to support a larger purchase if the payment can draw on a linked account.

That creates an opportunity to preserve usability without encouraging customers to relocate substantial savings. It also shows why wallet design deserves as much attention as the underlying settlement technology.

In an October 2026 speech on digital money, ECB Executive Board member Piero Cipollone described a system in which banks and regulated payment providers would distribute the digital euro and manage customer relationships.

The study does not demonstrate that this particular proposal is optimal. It supplies a framework for assessing such choices, including when interest rates and holding caps need to be coordinated.

Payment Success Should Be Measured Beyond Wallet Growth

The research suggests a broader way to assess digital payment systems. Adoption matters, but the economic objective should be useful activity achieved at acceptable funding and operating costs.

A wallet with frequent payments and modest average balances could serve consumers well while displacing relatively little bank funding. A wallet that attracts large idle balances might generate impressive adoption statistics without producing proportionate payment improvements.

For operators and investors, three questions become particularly useful:

• Are balances funding regular payments or accumulating as savings?
• Does adoption reduce transaction costs after integration and compliance expenses?
• How does the system affect bank funding and access to credit?

This perspective also helps explain why infrastructure matters beyond the blockchain transfer. Securities.io’s guide to stablecoin merchant payments examines the surrounding settlement and commercial obligations that determine whether a payment actually delivers its intended result.

Stablecoins and CBDCs have different issuers, backing arrangements, and risks. Nevertheless, both benefit from analysis that follows the entire money flow rather than stopping at transaction speed.

Mastercard’s Role in Digital Money Infrastructure

That emphasis on connections creates a natural investment angle through Mastercard. Its relevance lies in helping different forms of money work within familiar payment networks.

Mastercard completed its acquisition of BVNK in August 2026. The company said the combination would connect its global network with stablecoin infrastructure, supporting applications including cross-border business payments, payouts, settlement, and treasury flows.

Separately, Securities.io reported on SoFi’s stablecoin settlement launch on Mastercard’s network in September. This illustrates how digital money can enter established payment operations without requiring consumers to replace every familiar payment interface.

The investment thesis is that institutions will need conversion, compliance, acceptance, and settlement services as money takes new digital forms. Providers able to supply those functions could participate across several technologies.

However, CBDC adoption does not automatically benefit Mastercard. Public payment infrastructure could compete with existing networks, and cheaper settlement could pressure fees. Investors should look for monetized usage, integration progress, and durable customer demand rather than assuming every digital currency announcement creates earnings growth.

Latest Mastercard (MA) News and Developments

Better Digital Money Requires Better Economic Design

The paper’s limitations are important. It compares steady states rather than modeling the transition to CBDC, and it does not simulate bank runs. Its banking assumptions also omit several real-world features, including heterogeneous institutions and alternative funding responses.

Consequently, its numerical results should guide questions rather than dictate universal interest rates or wallet limits.

Its broader insight remains useful: payment efficiency and bank funding must be assessed together. Better digital money could make transactions easier while preserving the credit relationships households and businesses rely on. Achieving that outcome requires design choices informed by actual funding conditions, supported by infrastructure that connects new money with the financial system already in place.

References:

¹ Shekhar, V., & Ramesh, S. (2026). CBDC design in general equilibrium: Adoption thresholds, bank intermediation, and the feasibility frontier. International Review of Economics and Finance. Advance online publication. https://doi.org/10.1016/j.iref.2026.105954