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Retail CBDCs: why commercial banks will be key players

Central Bank Digital Currencies (CBDCs) - a digital form of central bank money - are firmly on the radar of Central Banks globally. According to the Atlantic Council over 100 countries are actively exploring a CBDC. Many are further along on their journey with some already launched. But why do we need them? And what role will commercial banks play?

Types of CBDC

First, let's clarify the different types of CBDC. Retail CBDCs are domestic networks aiming to facilitate financial inclusion and digital payments within a country. It’s where we see live CBDCs today such as in Nigeria and the East Caribbean.

Wholesale CBDCs are intended for the settlement of interbank transfers and related wholesale transactions. These tend to be lower volume and higher value compared to retail.

 And then mCBDC (multiple CBDC) is all about cross-border, linking up CBDC networks across jurisdictions for international settlements, using platforms with multiple sub-nets or that are interoperable. These promise to shake-up the inefficiencies of the correspondent banking model, albeit challenges remain on areas such as governance and standards.

In this article we'll be looking at retail CBDCs. So, why do we even need them?

Why do we need retail CBDCs?

The answer varies depending on where you are in the world. Financial inclusion is often quoted as a key driver, and this is particularly relevant for countries with large unbanked populations and those who don't yet have digital payment networks.

In such countries retail CBDC may help facilitate payments for those populations and boost digital economies. Preservation of monetary sovereignty is also a driver through protecting against the rise of alternatives that could fill the void - foreign currency stablecoins or crypto for example.

Central banks might like the idea of CBDCs progressively replacing cash with a view to cost savings from minting, distribution, and storage of physical money. Other arguments include the programmable nature of CBDC as a direct monetary policy tool, and a building block for mCBDC as these evolve.

Of course, some countries already have effective digital payment solutions. For example, here in Switzerland we have Twint. I can easily buy a coffee by simply scanning a QR code with an app on my phone, linked to my bank account. Merchants appreciate the lower cost compared to credit card networks. It’s easy and effective. Other countries have similar systems. So, in such places, do we really need another system such as a retail CBDC?

It perhaps comes down to the future role of public money. As cash usage declines should the state preserve access to central bank money through a digital equivalent? Does the average person understand (or care about) the difference between having a claim on deposits at a commercial bank versus a bearer instrument with direct claim on the central bank? Is it too dangerous to leave money in only the hands of the private sector?

These are questions the policy makers are thrashing out. In Europe, the attitude from the ECB seems to be gearing towards launching CBDC. Fabio Panetta from the ECB executive board recently said "issuing CBDCs is likely to become a necessity".

Of course, beyond simply launching a CBDC, success will be about convincing the population to actually use it. And to achieve this privacy concerns must be addressed and there needs to be real added-value compared to alternatives.

In summary there remain questions about retail CBDCs in digitised economies; but in many parts of the world momentum is building. So, as they are launched, how will they work?

How will retail CBDCs work?

The evolving standard is the 2-tier model, where the central bank mints and issues CBDC to approved intermediaries such as commercial banks, who maintain the relationship with the user and act as distributors. Mechanisms for issuance might involve directly exchanging CBDC for reserves held at the central bank. This would allow adding CBDC as new monetary option without impacting the base money supply.

The intermediary is then able to hold CBDC ready to distribute to the wider population. They would also perform the role of customer onboarding, wallet opening, and provision of exchange facilities to allow conversion between CBDC and regular money. Once the customer has CBDC in their wallet, they can send it to another person or use it for payments. And then the reverse process: conversion of CBDC back into money, redemption by the intermediary back at the central bank, who can then re-issue or remove it from circulation according to policy.

It's possible we will see multiple types of intermediary participate in CBDC networks and provide wallet facilities. Nevertheless commercial banks are expected to be key players.

Why commercial banks will be key players

Commercial banks are the natural candidates for distributing CBDC to the population of a given country.

First, commercial banks have the means to participate. They have the liquidity in the form of reserves meaning if a CBDC gets launched, they can quickly participate and hold CBDC ready for distribution.

Banks have the existing broad customer base that extends in many countries to most of the population. In this way they can support public accessibility to CBDC. Furthermore, they have the experience in account opening, KYC processes, and managing the customer, areas the central bank would not typically want to get involved in.

Banks hold customer deposits and so are ideally placed to provide the on/off ramps and slick conversion facilities between those deposit accounts and CBDC wallets. Linking bank accounts to wallets with direct conversion also solves the tricky problem of receiving payments that exceed wallet balance limits, something we are likely to see widely applied to avoid CBDC being used to store value in place of deposits and risk of bank runs.

Banks have the high regulatory and operational standards that would be a pre-requisite to participating in CBDC systems. For example, for connecting to the infrastructure that could involve hosting and operating a node on a DLT network.

So, banks are well placed to participate, but to offer such services would require investment. It raises the interesting question: what's in it for the banks? How might they justify the cost, and what kind of services might they offer? These are questions I'll explore in my next article.


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Jeremy Boot

Jeremy Boot

Product Strategist


Member since

22 Sep 2022



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