What is central bank digital currency (CBDC)?

1. What is central bank digital currency (CBDC)?

CBDC (Central Bank Digital Currency) is a central bank’s digital currency. It is an electronic obligation of a monetary regulator, denominated in a national unit of account and serving as a means of payment, measure and store of value.

2. Why do we need a CBDC?

Central banks already practice virtual currency issuance, and a significant portion of payments and transfers occur in non-cash form.

The differences between CBDC and the existing system are as follows:

  • CBDC is designed to increase stability and competition in the financial sector amidst the competition of banks with technology companies and cryptocurrencies.
  • CBDC improves financial inclusiveness by offering a payment infrastructure with lower transfer costs. It also makes it easier for central banks to operate in a digitized economy.
  • CBDC will expand the fiscal policy tools available to regulators – for example, avoiding the “zero-rate trap.” CBDC’s programmability and transparency will make it easier for regulators to control monetary policy. More transparent payment flow data will improve the quality of macroeconomic statistics.
  • CBDC encourages the use of local currency to pay for goods and services, which is especially relevant in countries prone to dollarization.
  • Commercial version of CBDC (for banks only) will reduce settlement risks, provide round-the-clock access to liquidity for banks and reduce costs of cross-border transfers.

The motivation for CBDC research and development varies by jurisdiction.

In developed economies, central banks view digital currency as a means to improve security and resiliency, as well as the efficiency of domestic payments and financial stability.

For central banks in emerging economies, achieving financial inclusion is important.

3. What kind of CBDCs are there?

There is no single universally accepted classification of CBDCs. The key parameters by which they can be classified into types are:

  • architecture;
  • infrastructure;
  • Technology and access conditions;
  • level of anonymity;
  • The possibility of application for domestic and/or cross-border payments.


Depending on the architecture, researchers distinguish two main categories of CBDCs:

  • Wholesale (wholesale, aka commercial or direct);
  • Retail (retail/general purpose).

The retail category includes three types of architectures:

  • Hybrid;
  • Intermediary;
  • Indirect (synthetic).

At the time of writing, four central banks are considering a direct model (the motive is to increase financial inclusion); seven are considering a hybrid or intermediary model (some along with the direct model). Most regulators, however, are still undecided about the architecture.

4. What are wholesale or commercial CBDCs (W-CBDCs)?

A wholesale version of a CBDC is a payment system operated by central banks. It is only available to a narrow range of users (financial institutions holding central bank accounts and professional market participants). The analogues of wholesale digital currencies are correspondent accounts and bank deposits at central banks.

In case of interest income accrual, wholesale CBDCs can be regarded as interest-bearing liabilities of a central bank.

Pros and benefits of wholesale digital currencies:

  • Ability to regulate the demand for money;
  • conducting flexible monetary policy;
  • ensuring financial stability;
  • provision of round-the-clock bank liquidity;
  • reducing the costs of cross-border transfers;
  • fixing transfers in a distributed register – this improves settlement efficiency and reduces credit and settlement risks, since the central bank is the source of funds and guarantor of liabilities;
  • reduction of counterparty risks.

Minuses of wholesale CBDCs:

  • The scope of distribution is limited to interbank transactions, transfer settlements, clearing operations, and international trade (where banks often act as guarantors of transactions).

Implementation Perspective

Wholesale CBDC is the most popular model among central banks, as it has the potential to accelerate financial systems, improve their security and reduce costs. Retail payment and settlement systems in developed countries are already quite efficient, operating in near real time and always available. Most citizens have access to banking services.

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Wholesale CBDC technology will increase the efficiency of interaction between different spheres. Directly linking equity or currency market platforms with cash platforms can increase the speed of transactions and eliminate settlement risk. The speed of transactions in OTC markets and in the areas of syndicated lending and the settlement of international trade transactions can increase significantly 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 improve its efficiency and security, reduce costs, and reduce liquidity and counterparty risks.

The introduction of distributed ledger technology will also allow for “smart” features of wholesale CBDCs, including earmarked funding, time and space restrictions on their use, and the use of conditional interest rates. Such features will allow central banks to leverage new monetary policy tools, such as personal lending rates.

Real-time monitoring and tracking options, as well as money supply controls, will help banks and regulators in anti-money laundering and surveillance.

5. What are retail CBDCs ?

Retail CBDCs are digital currencies available for widespread use by individuals and businesses. They serve as a substitute for (or supplement to) cash and an alternative to bank deposits. No interest income is usually accrued.

Key features of retail CBDCs

While different variations of the retail digital currency model are possible, most central bankers highlight the following key features:

  • Retail CBDC must be a new form of central bank money issued and controlled by the regulator. The supply of retail digital currency is driven by monetary policy and controlled by the central bank.
  • CBDC should be included in the central bank’s financial statements.
  • The digital currency must be accepted as a means of payment by all citizens, companies and government agencies.
  • CBDCs are distributed by the central bank at a one-to-one ratio with fiat currency and must be freely convertible into cash.
  • CBDCs must operate on an open infrastructure that will allow private companies to create new products and services.
  • Transaction costs should be lower than in existing systems.

Implementation Perspective

The concept of retail CBDCs is relatively popular among central banks in emerging economies, where financial institutions are seeking to play a leading role in the fast-growing fintech industry, introduce financial inclusion, accelerating the movement toward a cashless society, and reduce the cost of issuing money and the cost of processing banknotes.

Central banks in developed countries are not particularly enthusiastic about retail CBDCs. Regulators are unwilling to create competition between central bank and private sector funds, considering the potential benefits of retail digital currencies to be limited.

In their view, the introduction of retail CDBCs is too bold (or premature).

6. What are hybrid CBDCs?

Hybrid digital currencies are a cross between direct (wholesale) and indirect (synthetic) CBDCs. Payment processing is handled by intermediaries, but the digital currency itself is a direct payment claim on the central bank. The latter is responsible for the distributed registry with all transactions and manages the back-up 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 underlying currency rights, separating them from the balance sheets of the payment service provider (PSP). If the provider is unable to meet its obligations, the assets holdings in the CBDC are not considered part of the PSP’s assets available to creditors.

The legal framework gives the central bank the ability to transfer a retail customer’s contract with an inoperable PSP to a fully functional provider.

Another key element is the technical ability to provide asset portability. The bank must support the payment process in a situation where the intermediary is experiencing technical difficulties. Consequently, the financial institution needs the ability to rebalance the retail customer. Therefore, the bank keeps a copy of the retail customer’s CBDC assets, which allows it to move assets from one PSP to another in the event of a technical failure.

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Pros and cons of hybrid CBDCs

As an intermediate solution, this model may have better stress tolerance than indirect (synthetic) CBDCs, but is more difficult to manage infrastructure from a central bank perspective.

Hybrid CBDCs are somewhat easier to manage than direct (wholesale) CBDCs. Because 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 enhance the ability to store reserves in central banks, as well as improve the interoperability of different payment systems.

7. What are intermediary CBDCs?

The architecture of intermediary digital currencies resembles that of hybrid CBDCs. In this case, the monetary regulator controls the wholesale register rather than the central register of all retail transactions. Intermediary CBDCs represent a direct payment claim on the central bank, while payments are made by intermediaries.

The Bank for International Settlements (BIS) has noted a growing number of central banks that are leaning toward hybrid and intermediary CBDC models. Only a few jurisdictions are considering “direct” designs in which the regulator takes care of all user payments.

8. What are synthetic or indirect CBDCs (sCBDCs)?

In addition to the three general-purpose CBDC architectures described above, there is another approach. It is based on the model of indirect provisioning of retail digital currencies through financial intermediaries.

The sCBDC model is also known as the “two-tier” CBDC because it resembles the existing two-tier banking system.

Intermediaries, represented by issuing companies, secure all regulatory obligations 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, and wholesale payment instructions to the central bank.

Central banks protect the assets and customer rights of intermediaries (issuing companies), control the transaction registry, and manage the back-up technical infrastructure.

The sCBDCs issued by intermediary companies are backed by central bank reserves.

sCBDCs require expanded access to central bank reserves for financial institutions, fintech start-ups and large technology companies. Reserve collateral allows sCBDC providers to guarantee repayment of liabilities at face value.

Pros and cons of sCBDC

sCBDCs are cheaper and less risky than directly issued and more manageable counterparts. They also allow the private sector to innovate and interact more effectively with customers, and central banks to ensure user confidence.

The downside is that the public may view sCBDC as a central bank-branded product without fully understanding that the regulator has limited responsibility for it.

9. How do central bankers feel about CBDCs?

According to experts, the development of CBDCs is one of the most important trends in the monetary sphere that will radically change the world of money in the next decade.

According to the BIS, as of January 2020, more than 80 percent of central banks were engaged in CBDC research and development.

As of January 2020, more than 80% of central banks were engaged in CBDC research and development. Data: ConsenSys blog.

A report released by BIS in April 2020 indicates that the coronavirus pandemic has only accelerated development in this area. According to the document, China, Sweden and Canada are leading the way in CBDC development.

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Compared to 2019, the number of speeches in which central bankers addressed various aspects of CBDC has increased.

Increase in the number of speeches by central bankers on CBDC issues. Data: August 2020 BIS report.

While public statements by central bank governors and board members about digital currencies in 2017-2018 were predominantly negative, particularly with respect to retail CBDCs, the rhetoric began to change in late 2018. Central bankers now view CBDCs more positively.

Since late 2018, central bankers have viewed CBDCs more positively. Data: August 2020 BIS report.

The number of central bankers willing to issue CBDCs over the next six years doubled over 2019:

“Central banks representing one-fifth of the world’s population said they are likely to issue CBDCs in the near future,” according to the BIS report.

The study’s authors elaborate:

“As of mid-July 2020, 36 central banks had published papers looking at retail or wholesale CBDCs. At least three countries (Uruguay, Ecuador and Ukraine) have completed retail CBDC pilots. Six more retail CBDCs are being piloted: in Sweden, South Korea, the Eastern Caribbean Currency Union, the Bahamas, the PRC, and Cambodia.”

As of summer 2020, 18 central banks have published studies on retail CBDCs, and 13 banks have announced studies or development of wholesale CBDCs. Data: August 2020 BIS report.

10. What CBDCs are central banks studying and testing?


A growing number of banks consider digital currencies with hybrid or intermediary architectures promising. In this context, CBDC is a direct payment requirement on the central bank, but the private sector controls customer interactions.

Only a handful of jurisdictions consider models in which the central bank plays a significant operational role in customer payments.

Central banks are more likely to choose direct or hybrid/intermediary architecture in jurisdictions with relatively high standards of living, broad public access to banking services, and effective government.

In less developed countries, central banks tend not to specify their chosen architecture.

CBDC infrastructure (technical concept)

The infrastructure can be based on either a traditional centralized database or a distributed ledger (DLT).

Many banks are considering different technology options. However, current approvals of the CBDC concept are based primarily on DLT rather than traditional technology infrastructure.

The central banks experimenting with DLT tend to use permissioned systems, in which the operators have the right to decide who is admitted to the network.

Access technology and degree of anonymity of use

Account-based access technology

Account-based CBDCs are tied to identity information. The challenge of combining the qualities of cash as an inclusive and crisis-resistant means of payment with the characteristic of anonymity can be difficult.

This is the most popular concept – five central banks are considering it.


The digital token-based access mechanism allows implementing various value-based payment methods – for example, issuing prepaid CBDC banknotes. The latter can be exchanged both physically and digitally.

However, this comes with the risk of criminal activity and counterfeiting. In addition, access through such a scheme is difficult for people deprived of access to banking services and forced to use only cash.

Three central banks are considering this concept.

Ability to be used for domestic and/or cross-border payments

CBDCs can be used for domestic payments or for cross-border payments. Accordingly, the digital currency model may involve retail and wholesale interconnectivity and access options for residents or non-residents. CBDC for domestic token-based use would be open to all, including non-residents.

Most projects are leaning toward domestic use. In contrast, the ECB, the central banks of France, Spain, the Netherlands, and the Eastern Caribbean Central Bank are focusing on cross-border use of digital currencies.

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