What are Retail and Wholesale Central Bank Digital Currencies (CBDCs)
Central Bank Digital Currencies (CBDC) are divided into two different categories:
- Wholesale
- Retail
What is Wholesale CBDC?
A wholesale CBDC is for financial institutions that hold reserve deposits with a central bank. It could be used to improve payments and securities settlement efficiency, as well as to reduce counterparty credit and liquidity risks.
A value-based wholesale CBDC would replace or complement reserves at the central bank with a restricted-access digital token. A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries.
This would be something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values.
The wholesale CBDC is seen as the most popular proposal among central banks because of the potential to make existing wholesale financial systems faster, inexpensive, and safer. The Bank of International Settlements (BIS) also shares the view that wholesale CBDC could potentially benefit the payments and settlements systems.
What is Retail CBDC?
A retail CBDC is one that will be issued for the general public. Retail CBDC based on DLT has the features of anonymity, traceability, availability 24 hours a day and 365 days a year, and the feasibility of an interest rate application.
The retail proposal is relatively popular among central banks in emerging economies, mainly because of the motivation to take the lead in the rapidly emerging fintech industry, to promote financial inclusion by accelerating the shift to a cashless society, and to reduce cash printing and handling costs.
The Key Principles of Retail CBDC
- A retail CBDC when launched is going to be a new form of central bank money. The CBDC is going to be issued, managed, and controlled by the central bank. Also, the supply of retail CBDC will depend on the monetary policy of the country.
- Retail CDBCs are going to fall under the liability side on the central bank’s balance sheet.
- A retail CBDC needs to be accepted as a mode of payment, legal tender, as well as a safe store of value not only by citizens but also by enterprises and government agencies.
- A CBDC is distributed at one-to-one parity with relevant fiat by the central bank, and should be seamlessly and freely convertible against commercial bank money and cash.
- CBDC stands at 1:1 ration with the pegged FIAT currency and needs to be easily convertible.
- There should not be a need to have a bank account to obtain and access a CBDC
- Banks/businesses need to build CBDCs on an open infrastructure so that other businesses can create services and products on top of it.
- The transaction cost needs to be less than the current charges.
Co-ordinated Retail and CBDC approach
The wholesale CBDC development approach seems to the first step in the universal adoption ladder of CBDCs. Wholesale CBDCs are less disruptive and would enable the global payments to be quicker, cheaper, and more secure.
The issue is only central banks have the legal right to issue a currency or a token and label it as legal tender. However, the challenge here is that they lack experience as well as resources to conduct research, build, and maintain an innovative infrastructure. On top of it, they would need to build a set of compliances for transactions.
The research, development, and adoption of blockchain and digital currencies has been on a higher scale in the private banking sector. What’s driving them more towards adopting digital currency is the fact that the regulations related KYC and AMC are getting stringent and there are various kinds of costs involved in international payments.
Retail and Wholesale CBDCs in International Payments
CBDCs are also going to reduce the time of processing payments and reduce/nullify the time-period where the money is trapped in a pre-funded nostro-accounts. An instant international payment and settlement would become a reality with the launch CBDC and it is a very attractive thought not only for businesses but also for the private banks.
In all, in order to develop a successful wholesale CBDC one needs the resources available to private banks and the expertise of central banks in terms of regulations. The CBDC needs to be open, transparent, and accessible as no one wants to work in silos anymore. Hyperledger and Ethereum blockchain are working on making blockchains interoperable.
