Remunerating means of payment

Non-remuneration of digital money acts as a distortionary tax, making EU bans on interest for e-money and stablecoins hard to defend.

Though banknotes cannot technically earn interest, electronic means of payment can in principle be remunerated at negligible cost. Many countries however permit remuneration only of bank sight deposits and reserves with the central bank, while the European Union does not allow e-money, central bank digital currencies or stablecoins to be remunerated.

We review the literature and conclude that no economic theory of the interest-rate spread between money and adjacent financial assets implies that money must be unremunerated. Non-remuneration acts like a distortionary tax on money holders proportional to nominal interest rates and makes the inflation tax regressive, redistributing income from less-wealthy individuals to issuers. Moreover, such constraints are circumvented ‘internally’ through disguised remuneration or ‘externally’ through flight into neighbouring financial assets.

The decline of transaction costs implied by universal electronification, open banking, agentic artificial intelligence and smart contracts, makes external circumvention all too easy, creating unintended flows of funds across the interest-rate cycle and thereby undermining financial stability. The main arguments for constraining remuneration – protecting the bank deposit franchise and financial stability – are insufficiently founded. They can be defended at most as temporary second-best measures when first-best instruments are unavailable. EU policymakers should therefore not defend non-remuneration as a matter of principle: the digital euro could rely on tiered remuneration, rather than on non-remuneration and holding limits, the EU ban on stablecoin remuneration should at minimum be restated as transitional, and the prohibition of e-money remuneration should be abolished in line with a pro-competition logic.

Source : Bruegel