The wholesale version of the CBDC is a payment system managed by central banks. It is only available to a narrow range of users (financial institutions that hold funds in central bank accounts and professional market participants). Wholesale digital currency equivalents are correspondent accounts and bank deposits with central banks.
Wholesale CBDCs can be considered as interest-bearing liabilities of the central bank in case of interest income accrual.
The wholesale CBDC model is the most popular model among central banks as it has the potential to accelerate the operation of financial systems, improve their security and reduce costs. In developed countries, retail payment and settlement systems are already quite efficient, operating in near real time and always available. Most citizens have access to banking services.
Wholesale CBDC technology will improve the efficiency of interaction between different areas. A direct link between stock or currency market platforms and cash platforms can increase the speed of transactions and eliminate settlement risk. The speed of transactions in over-the-counter markets and syndicated lending and international trade settlements can be significantly increased when linked to the instant settlement system based on wholesale CBDCs.
Wholesale CBDCs can also simplify cross-border payment infrastructure by significantly reducing the number of intermediaries. This will increase its efficiency and security, reduce costs and reduce liquidity and counterparty risks.
The introduction of distributed registry technology will also make it possible to give wholesale CBDCs „smart“ characteristics, including targeted financing, limiting their use in time and space, and the use of air-conditioned interest rates. Such features will enable central banks to use new monetary policy instruments, such as personal lending rates.
Real-time monitoring and tracking options, as well as money supply control, will help banks and regulators to fight against money laundering and supervise.
Retail CBDCs are digital currencies available for wide use by individuals and legal entities. They serve as a substitute for cash (or supplement) and an alternative to bank deposits. Accrual of interest income is generally not provided.
Although various variations in the retail digital currency model are possible, most central banks highlight the following key characteristics:
- The retail CBDC should be a new form of central bank money issued and controlled by the regulator. The offer of retail digital currency is subject to monetary policy and is controlled by the central bank.
- The CBDC must be included in the central bank’s financial statements.
- Digital currency must be accepted as a means of payment by all citizens, companies and government agencies.
- The CBDC is distributed by the central bank in a one-to-one ratio with fiat currency and must be freely convertible into cash.
- The CBDC must operate on an open infrastructure that allows private companies to create new products and services.
The cost of the transaction must be lower than in existing systems.
Prospects for implementation
The concept of retail CBDC is relatively popular among central banks in emerging economies, where financial institutions seek to play a leading role in the fast-growing financial industry, introduce financial inclusion by accelerating the movement towards a cashless society, and reduce the cost of issuing money and banknote processing.
Central banks in developed countries are not particularly enthusiastic about retail CBDCs. Regulators are reluctant to create competition between central banks and the private sector, considering the potential benefits of using retail digital currencies to be limited.
In their view, introducing retail CDDCs is too bold (or premature) a step.
What are hybrid CBDCs?
Hybrid digital currencies are something in between direct (wholesale) and indirect (synthetic) CBDCs. Intermediaries handle payment processing, but the digital currency itself is a direct payment requirement for the central bank. The latter is responsible for a distributed register with all transactions and manages the redundant technical infrastructure to restart the payment system in case of failure.
One of the key elements of the hybrid CBDC architecture is the regulatory framework that underpins the rights to currency, separating them from the balance sheets of the payment service provider (PSP). If the supplier is unable to meet its obligations, the assets in the CBDC are not considered part of the PSP assets available to creditors.
The legal framework allows the central bank to transfer a retail customer contract with an inoperable PSP to a fully functional supplier.
Another key element is the technical ability to ensure the transfer of assets. The Bank is obliged to support the payment process in a situation where the intermediary experiences technical difficulties. Therefore, the financial institution needs the ability to restore the balance of the retail customer. The bank therefore retains a copy of the retail client’s CBDC assets, which enables the assets to be moved from one PSP to another in the event of a technical failure.
Pros and cons of hybrid CBDCs
As an interim solution, this model may have better stress resistance than indirect (synthetic) CBDCs, but is more complex to manage from a central bank perspective.
Hybrid CBDCs are somewhat easier to manage than direct (wholesale) CBDCs. Since the central bank does not interact directly with retail users, it can focus on a limited set of key processes such as payment settlement. At the same time, intermediaries can manage other services, including instant payment confirmation.
Hybrid CBDCs extend the ability to store reserves in central banks and also improve the interaction between different payment systems.
What are CBDC intermediaries?
The architecture of intermediary digital currencies is similar to that of hybrid CBDCs. In this case, the monetary regulator controls the wholesale register rather than a central register of all retail transactions. The CBDC Intermediary is a direct payment requirement for the central bank, while payments are made by intermediaries.
The Bank for International Settlements (BIS) has seen an increase in the number of central banks, which tend to favour hybrid and intermediary CBDC models. Only a few jurisdictions consider „direct“ projects in which the regulator assumes all user payments.
What are synthetic or indirect CBDCs (sCBDC)?
Along with the three general purpose CBDC architectures described above, there is another approach. It is based on the indirect provision of retail digital currencies through financial intermediaries.
The sCBDC model is also known as the „two-tier“ CBDC as it resembles the existing two-tier banking system.
Intermediaries, represented by issuing companies, provide all obligations of the regulator to retail customers (in the form of indirect CBDCs) through assets in actual CBDCs (or other funds) deposited with the central bank. Intermediaries control communications with retail customers, network payments and messages to other intermediaries as well as wholesale payment instructions to the central bank.
Central banks protect the assets and customer rights of intermediaries (issuing companies), control the transaction register and manage the back-up technical infrastructure.
The central banks‘ reserves are provided by sCBDC intermediary companies.
sCBDCs require increased access to central bank reserves for financial institutions, fintech-startups and large technology companies. The provisioning allows sCBDC’s providers to guarantee repayment of liabilities at face value.
Pros and cons of sCBDC
sCBDCs are cheaper and less risky than directly produced and more manageable analogues. They also allow the private sector to innovate more actively and interact more effectively with customers, while central banks can ensure the trust of users.
The downside is that society may view sCBDC as a product released under the central bank’s brand, not fully aware that the regulator has limited responsibility for it.
How do central banks feel about CBDC?
According to experts, the development of CBDC is one of the most important trends in the monetary sphere, which will radically change the world of money in the next decade.
According to BIS, as of January 2020, over 80% of central banks were engaged in CBDC research and development.
As of January 2020, over 80% of central banks were engaged in CBDC research and development. Data: ConsenSys blog.
A report released by BIS in April 2020 shows that the coronavirus pandemic has only accelerated development in this area. According to the document, China, Sweden and Canada are leading the way in developing the CBDC.
Compared to 2019, there was an increase in the number of speeches in which central bank representatives touched on various aspects of the CBDC.
An increase in the number of presentations by central bank representatives on CBDC issues. Data: BIS report dated August 2020.
Whereas in 2017-2018 the public statements of central bank governors and board members about digital currencies were predominantly negative, especially in relation to retail CBDCs, rhetoric began to change at the end of 2018. At present, central bank representatives are rather positive about the CBDC.
Since the end of 2018, central bank managers have rather positively assessed CBDC. Data: BIS report from August 2020.
The number of central banks ready to issue CBDC in the next six years has doubled in 2019:
„Central banks, representing one fifth of the world’s population, have indicated that they are likely to release CBDC in the near future,“ says the BIS report.
The authors of the survey specify:
„As of mid-July 2020, 36 central banks have published works that address retail or wholesale CBDCs. At least three countries (Uruguay, Ecuador and Ukraine) have completed pilot CBDC retail projects. A further six retail CBDCs are currently being piloted: in Sweden, South Korea, the Eastern Caribbean Monetary Union, the Bahamas, China and Cambodia“.
As of summer 2020, 18 central banks have published research on retail CBDCs and 13 banks have announced research or development of wholesale CBDCs. Data: BIS report from August 2020.
Which CBDCs study and test central banks?
An increasing number of banks are considering digital currencies with hybrid or intermediary architecture as promising. In this context, CBDC is a direct payment requirement for the central bank, but the private sector controls the interaction with customers.
Only a few jurisdictions consider models in which the central bank plays a significant operational role in payments to customers.
Central banks are more likely to choose direct or hybrid/mediate architecture in jurisdictions with relatively high living standards, wide public access to banking services and efficient public administration.
In less developed countries, central banks generally do not specify the architecture they choose.
Infrastructure (technical concept) CBDC
The infrastructure can be based either on a traditional centralised database or on a distributed registry (DLT).
Many banks are considering different technological options. However, current approvals of the CBDC concept are mainly based on DLT rather than on traditional technology infrastructure.
Central banks experimenting with DLT typically use systems in which operators have the right to decide who they want to admit to the network.
Access technology and degree of anonymity of use
Access technology (account-based)
CBDCs based on accounts are linked to identification information. The challenge of combining the quality of cash as an inclusive and crisis resistant means of payment with the characteristic of anonymity may not be easy.
This is the most popular concept – it is considered by five central banks.
The access mechanism based on digital tokens makes it possible to implement various value-oriented payment methods – for example, to issue prepaid CBDC banknotes. The latter can be exchanged both physically and digitally.
However, this involves the risk of criminal activity and counterfeiting. In addition, access under this scheme is difficult for people who do not have access to banking services and have to use only cash.
Three central banks are considering this concept.
Possibility of being used for domestic and/or cross-border payments
CBDCs can be used for domestic settlements or for cross-border payments. Accordingly, the digital currency model can provide retail and wholesale interconnections and access options for residents or non-residents. The CBDC for domestic use based on tokens will be open to all, including non-residents.
Most projects are prone to internal use. By contrast, the ECB, central banks in France, Spain, the Netherlands and the Eastern Caribbean Central Bank are focusing on the cross-border use of digital currencies.
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