CBDC: Marketing Event or Digital Triumph

Central banks have been providing trusted money to the public for hundreds of years. Interest in digital currency has grown in response to changes in the financial world.

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The distributed ledger technology (DLT) is one of the last modern or most innovative approaches. DLT is an expanding chronologically ordered list of cryptographically signed binding and permanent transactional records shared by all participants. DLT also allows partakers or parties to trace financial assets back to their origin, which is beneficial for traditional investments. It also allows two or more participants who do not know each other to safely interact in a digital environment and exchange value without an explicit need for a centralised authority.

DLT may radically change the assets operations and maintenance, the charging of obligations, the production cost reduction/optimisation, the risk management, and others. The technology ability could transform financial services and markets by:

  • Reducing complexity.

  • Improving end-to-end processing speed and thus the availability of assets and funds.

  • Decreasing the need for reconciliation across multiple record-keeping infrastructures.

  • Increasing transparency and unchangeability in transaction record-keeping.

  • Improving network resilience through distributed data management.

  • Reducing operational and financial risks.

DLT may also enhance market transparency if the information contained on the ledger could be shared broadly with participants, authorities, and other stakeholders.

DLT generates intense interest for use in various industries and domains ranging from banking, finance, insurance, and accounting to healthcare, legal, retail and trade, etc. Its capability for transforming financial sectors also paves the way for other uses such as issuance of central bank digital currencies (CBDC), generation of new products for entering in new niches or for potential onboarding customers or implementation of a new way for banking services, e.g., for cross-border payments. Therefore, the focal point of the white paper is CBDC as one of the progressive approaches for banking applications, solutions, or platforms.

Central bank digital currency definitions

Central banks have been providing trusted money to the public for hundreds of years. In the era of digitalisation, central banks are actively researching the pros and cons of offering a digital currency to the public. IMF paper defines CBDC as a digital representation of a sovereign currency issued by and as a liability of a jurisdiction's central bank or other monetary authority [IMF WP 20/104].

The Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve and Bank for International Settlements have collaborated on a report setting out common foundational principles and core features of a CBDC. These principles emphasise that specific criteria would have to be satisfied for any jurisdiction to consider proceeding with a CBDC. Specifically, authorities would first need to be confident that issuance would not compromise monetary or financial stability. A CBDC could coexist with and complement existing forms of money, promoting innovation and efficiency.

Interest in CBDC has grown in response to changes in payments, finance, and technology. A 2021 BIS survey of central banks found that 86% are actively researching the potential for CBDCs, 60% were experimenting with the technology, and 14% were deploying pilot projects.

Token- and account-based CBDC forms

The classification distinguishes two forms of CBDCs. One of them is named token-based, and the other – account-based.

The token-based one depends on the potential use of the CBDC: a widely available use for payment or a restricted-access digital token for settlement transactions. The account-based version envisages the central bank providing general purpose accounts to all agents in the jurisdiction.

A critical distinction between token- and account-based money is the verification when CBDC is exchanged. In the digital world, the token-based CBDC are validated for their legitimacy or checked whether the token has already been spent.

At the same time, account-based CBDC is under verification for the identity of the account owner as a countermeasure for money transfer or withdrawal from accounts without permission. As such, AML/KYC/CTF procedures would be performed.

Account-based CBDC payment schema

Token-based CBDC payment schema

CBDC retail and wholesale models

In simple terms, a central bank digital currency would be a digital banknote. Individuals could use it to pay businesses, shops, or each other (a "retail CBDC") or between financial institutions to settle trades in financial markets (a "wholesale CBDC"). CBDC is issued by the central bank only but differs in terms of who is ultimately liable.

Retail CBDC model

Retail payments typically consist of payments between individuals and businesses. They tend to be low in value, but large in volume and are commonly used. Retail CBDCs could be circulated in two different ways:

  • Deposit accounts

  • Digitally issued tokens

In deposit accounts, individuals and businesses will be able to open accounts at their central bank and benefit from the same services provided by commercial banks. Through these accounts, they could typically initiate and receive payments as well as their account balance. In comparison, digitally issued CBDC tokens would represent an electronic alternative to banknotes and coins. The central bank would only issue these tokens for distribution by commercial banks.

Wholesale CBDC model

A wholesale CBDC model would enable the payment and settlement of transactions between financial institutions. This model could improve the efficiency and risk management of the settlement process by providing an option to financial market participants to open accounts at a central bank that is currently not allowed.

Something more, a wholesale CBDC does not only apply to pure money transfers. However, asset transfers could also be used in securities if two parties are trading assets, such as security for cash. A wholesale CBDC could allow the payment and delivery of the asset to occur instantaneously.

Wholesale transactions are characterised by considerable value, institutional counterparties, and quick or real-time settlement timeframes.

Central banks are currently assessing the following CBDC wholesale models:

  • Wholesale CBDC for domestic payments is generally routed through central banks, which operate so-called real-time gross settlement (RTGS) systems.

  • Wholesale CBDC for cross-border payments, whose processes are simplified and whose cost is significantly reduced due to eliminating some intermediaries.

Wholesale CBDC model schema going from local originator to local originating bank to intermediary and central banks to local bank to recipient

Schemas for CBDC payments are:

  • Local wholesale CBDC is only transferable within the local jurisdiction and not across borders. Each central bank provides an account denominated in its own CBDC to commercial banks that intend to operate in this jurisdiction and currency.

  • Local transferable wholesale CBDC is to be used across borders in other jurisdictions. Central banks can offer participating banks a CBDC account denominated in their respective currencies, i.e., commercial banks could open both local and foreign CBDC-enabled accounts.

  • Universal wholesale CBDC is a collective CBDC accepted by several Central banks and supported by currencies like stablecoin. It allows commercial banks to transact using a single CBDC across borders, jurisdictions, and central banks.

The schemas improve the payments and bring substantial benefits, e.g., real-time handling, settlement finality, and payment tracking.

CBDC four fundamental properties could be summarised:

  1. CBDC issuer - the central bank or other authority.

  2. CBDC form - token-of-stored-value-based or account-based.

  3. CBDC model - wholesale or retail.

  4. CBDC accessibility - widely or restricted.

From an IT perspective, the cost associated with developing and operating CBDC:

  • Professional services - consultancy, development, user experience, and others.

  • Infrastructure - cloud or on-premises servers.

  • Software - licenses, service fees, wallet maintenance costs, and others.

  • Cyber security - threat modelling; protection; identification; response management; penetration tests, and others.

  • Support - help desk/service desk; training; capacity planning, disaster recovery, and others.


Practical implementation of CBDC in 2021

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INDUSTRIA is a global technology consulting, development and ventures firm with extensive expertise in the field of enterprise blockchain, confidential computing, process automation and digital experience. Official partner of R3.

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