Central bank digital currencies (CBDCs) would help advance the digitalisation of payments and the economy as a whole. Retail, wholesale and international payments using CBDC would expand choices, enabling more diversified payment systems and greater autonomy for the central bank.

CBDC for retail payments

CBDC can serve as a settlement medium for digital transactions online and at the point of sale. It would enable the non-bank public to use central bank money when making payments in a digital environment. The decline in the use of cash has prompted some central banks to consider issuance of a retail CBDC to give the public continued access to central bank money in the event cash disappears entirely or is no longer readily accessible.

The importance of cash differs significantly by country and is affected by prevailing circumstances. In developed countries its decline has been accelerated by COVID-19 and the rise of contactless payments, for example, while in low-income countries it has grown in importance, mainly as a store of value. Although it remains to be seen which trends will endure beyond the pandemic, the role of cash seems set to diminish over the medium term.. This has prompted many central banks to consider CBDC as an alternative.

Currently, the non-bank public can conduct electronic payments in a variety of ways. The bulk of transactions by value are conducted by banks in the form of transfers, standing orders, debit and credit card payments, PayPal and other money transmitter services and cash. CBDC would offer the public the choice of making a retail payment outside of the banking system, just as a payment in cash requires no bank.

Retail CBDC would be distributed by the banking system and held in electronic wallets by the non-bank public and other end-users. This would represent an alternative payment means for consumer-to-consumer, consumer-to-business and business-to-business payments. CBDC would offer instant settlement and would reduce the risk that is inherent in the batch clearing of retail payments.

The use of retail CBDC would rely to a large extent on the existing payments infrastructure. It would need to be integrated with core banking and payment functions to allow payment at the point of sale without the need to install a new infrastructure. The functionality would rest with the electronic wallet and extend to other endpoints including mobile phone applications, cards and wearables.

The programmability of CBDC would allow retailers and banks to impose restrictions on transactions or trigger additional validation requests. Transaction limits by type of transaction can be designed to meet given prudential and other safeguards, including anti-money-laundering and anti-terrorism financing. Since all transactions are traceable, the data generated by CBDC would also offer new levels of transparency. A dashboard would serve as a crisis prevention tool by making it possible to monitor retail transactions and detect unusual payment patterns.

Financial inclusion is a special case for CBDC. Mobile technologies may allow the relatively large share of the population without a bank account—particularly in low-income countries—to access banking through mobile phone apps. The central bank may consider issuing CBDC directly to the public using mobile services where the private sector is unable or unwilling to offer readily available payment means. To do this, the central bank would need to rely on partnerships with mobile phone operators to install the needed infrastructure. Examples from Kenya, where mobile phone operator Safaricom offers the M-Pesa app, suggest that private operators can successfully deliver near-universal payment services.

Financial inclusion will also depend to a large extent on banking services, including lending, that central banks are unlikely to want to offer. The role of CBDC to advance financial inclusion remains ambiguous and will be case-dependent.

CBDC for wholesale payments

Wholesale CBDC would offer a level playing field. Payments would be conducted in central bank money across different platforms, conveying confidence that token-based platforms can offer settlement conditions similar to existing platforms. For a long time, central bank money has been the preferred medium for financial market infrastructures to mitigate settlement risk.

CBDC tokens provide important native properties to overcome network barriers and control access, helping to facilitate the merging of payments and trading processes. The performance of existing large-value payments systems, in particular real-time gross settlement systems (RTGS), implies limited additional utility of CBDC for interbank clearing. But if a central bank were to grant more general access to central bank money, it would allow peer-to-peer payments in central bank money and lead to more diversified payment options.

CBDC can facilitate the merging of financial instrument transfers and payments. If financial instruments were to be available in a tokenised format, CBDC would allow an end-to-end settlement in tokens. This would take the form of token-for-token swaps on token-based financial market infrastructures, to conduct instant and atomic delivery versus payment transactions.

Wholesale CBDC would support financial innovation by establishing alternative platforms, offering a wider spectrum of payment capabilities and increased competition across platforms. All of this would contribute to a diversification of national payments and enhance resilience and security in large-value payments.

CBDC in international transactions

The use of CBDC in international transactions aims to broaden the use of central bank money, creating a greater symmetry between access to and transactions in national securities and other financial instruments and national currencies. The native capabilities of CBDC allow it to expand access while preserving the required prudential controls and jurisdictional boundaries. It would reduce risks in international transactions and could be highly conducive to facilitating deeper financial integration, including of smaller currencies, leading to a greater diversification of the international monetary system.

The utility of CBDC rests in its possible use by non-residents and its exchange properties—it would need to be held by non-residents in order to enable international transactions to settle in central bank money. A recent report by the European Central Bank (ECB) affirmed that a future digital euro would have to be held by non-residents too, as this would help mitigate risk and establish more equitable settlement conditions between residents and non-residents in a given national currency.

Central bank money is, by design, local. It is issued only to resident banks, although bank notes can be held universally. Central bank money in electronic format is normally only accessible to resident local banks and cannot be used in cross-border and off-shore transactions. For example, a U.S. treasury security denominated in dollars can only be settled in central bank money by the U.S. Federal Reserve. The same U.S. treasury security traded off-shore can only settle in bank monies. This asymmetry between national and international settlement conditions may hinder financial market integration and convey an undue advantage to resident exchanges and institutions.

In foreign exchange, trading parties cannot exchange claims directly using central bank money. Existing arrangements imply that the foreign currency can only be held by a correspondent bank, as non-resident banks cannot hold an account at the host central bank. CBDC offers a secure approach to allow select non-resident institutions to hold and transact in CBDC while preserving prudential boundaries.

CBDC would be exchanged in CBDC versus CBDC or payment versus payment transactions. This would happen in real time and would collapse trading and settlement into a single operation. Two approaches seem to predominate: a settlement corridor approach representing a third jurisdiction to allow corridor participants to exchange CBDC freely within the corridor; and a cross-network approach to facilitate exchanges across national CBDC networks.

In securities and other financial instrument trading, CBDC would allow for settlement of securities in central bank money in cross-border and off-shore transactions. CBDC would be the cash leg to settle conventional or token-based securities in a delivery versus payment operation whereby CBDC holders can be non-resident entities.

CBDC is without doubt an interesting and innovative solution to the digital transformation happening around the world. By approaching it with an innovative mindset while keeping focused on function and security, central banks can ensure central bank money will remain relevant.

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