CDBCs: What Are the Distinctions Between Wholesale and Retail?

With over 100 central banks, in jurisdictions representing 95% of global GDP, having launched pilot programmes or actively researching central bank digital currencies (CBDCs), the momentum is undeniable. Yet only a handful of these institutions have rolled out new currency units for retail use, and many of the most recent pilot projects are focused on a more limited application of CBDCs for wholesale usage. (See Figure 1.)

Singapore, for example, in November 2023 announced the launch of a live CBDC for wholesale settlement to facilitate the “safe and innovative use of digital money”.

This shifting focus in part reflects the challenges around the implications of retail-targeted CBDCs and technical issues such as scalability, interoperability, and cybersecurity. But it also points to a growing interest in the potential benefits of CBDCs as a key component of the digital infrastructure that will facilitate seamless financial transactions in the future. 

“The common central bank mandate for stability,” said Olivier Fines, Head of Advocacy and Capital Markets Policy Research for EMEA at CFA Institute, “means that any CBDC would be developed to deliver significant advances against current forms of currency. Otherwise, they’re a solution looking for a problem.”

A CBDC developed for wholesale transactions would exclusively serve financial institutions to facilitate large-value and interbank settlement and liquidity management. 

Theoretically, wholesale CBDCs could add speed and efficiency by allowing instant settlement of financial transactions. Atomic settlement, as it is often named, would be purely digital, allowing the seamless transfer of digital assets and facilitating the broader trend of asset tokenization.

With a restricted number of authorized users, wholesale CBDCs may also be well suited to managing cross-border capital flows involving CBDCs. 

In May 2023, the Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) reported that they had successfully tested the interoperability of two distinct CBDC networks through a shared clearing mechanism. The simulations resulted in near real-time settlement with end-to-end settlement in under 30 seconds.

“Our research collaboration with the MAS reveals key opportunities for central bank innovation to play an important role in easing wholesale payment flows globally and improving settlement outcomes,” said Michelle Neal, Head of the Markets Group at the New York Fed.

The implications of the introduction of CBDCs will depend to a large extent on their design features, as we discussed here. The choice of retail or wholesale use cases is therefore an important one for central banks. 

Wholesale CBDCs could introduce additional cost savings or boost productivity by removing frictions in the financial system. One of the objectives of a retail CBDC is to increase financial inclusion, especially in less-developed economies. 

According to the World Bank, some 1.4 billion adults remain unbanked. These populations tend to be poorer and less educated and more often reside in rural areas that lack access to traditional banking infrastructure. By bringing these unbanked people into the formal financial system, digital money may reduce frictions in the system and encourage savings by supporting economic activity. 

In its 2021 Global Findex report, the World Bank detailed how the use of digital payments acts as a “gateway” to an increase in financial participation. In developing economies, almost two thirds of adults who received a digital payment also used their account for cash management. About 40% used their account to save money, and 40% of payment recipients also borrowed formally.

Retail CBDCs could help to lower barriers to opening and maintaining a bank account and therefore boost financial inclusion and reduce poverty. 

“CBDCs can replace cash which is costly to distribute in island economies,” said Kristalina Georgieva, Managing Director of the International Monetary Fund in November 2023. “They can offer resilience in more advanced economies. And they can improve financial inclusion where few hold bank accounts.”

At the same time, retail CBDCs may pose significant economic risks, in terms of cybersecurity and data privacy challenges. They could also have unforeseen implications related to monetary policy, cross-border trade and even financial stability.

Wholesale CBDCs can be expected to mitigate these risks by limiting their usage to only qualified institutions. But the ‘atomic’ speed of transfers and settlement poses different risks at a systemic level. 

As the IMF speculated in its Central Bank Digital Currency Virtual Handbook, the scale of wholesale CBDCs could lead to catastrophic transmission of global financial shocks as capital flows between countries carry over at rapid rates and high volumes. 

Moving digital assets is often instantaneous and that speed of fund transfer could, for example, accelerate bank runs or allow them to expand across borders before regulators have had the chance to react. Even if authorities were able to use the same real-time capabilities to introduce emergency measures, they would be acting at human or bureaucratic speed — far slower than internet connections. 

The dramatic collapse of Silicon Valley Bank in the spring of 2023 was at least partly attributed to digital banking and the speed at which large volumes of money left the bank’s balance sheet.

From a technical perspective, wholesale and retail CBDCs will require similar scalability and interoperability as well as common safeguards around data privacy and AML compliance. Methods of payment verification, meanwhile, could still be very different. 

Token-based CBDCs would likely be based on some version of blockchain or distributed ledger technology while account-based CBDCs could use alternative software platforms, which would likely require an intermediary to verify an account holder's identity before processing transactions (similar to consumer credit cards or digital wallets today).

As central banks consider the benefits and risks of digital currencies, many have begun to study different frameworks to serve individual and institutional users. Much in the way that different software applications have developed for different tasks, countries may find they need separate CBDC iterations for wholesale and retail applications. Yet in many discussions around CBDCs, the interaction between retail and wholesale use cases is not always clear-cut. 

A survey of CFA charterholders highlighted some of the benefits for wholesale markets from the introduction of CBDCs, but it also revealed some uncertainty among market practitioners. While 58% of respondents said that a CBDC would significantly reduce counterparty and settlement risk, and 24% said CBDCs would make wholesale financial markets more efficient. (See Figure 2.) In addition,28% of respondents said they would use a CBDC in a professional or personal capacity. 

Assuming many charterholders hold professional roles with an interest in efficient financial markets, that disconnect suggests that worries about the implications of introducing CBDCs are not limited to retail use cases. 

“These kinds of contradictions highlight the complex nature of the CBDCs and the need for governments to carefully consider the potential risks and benefits,” said Fines at CFA Institute.

Discover more insights. Explore the other articles in this series:

• The Fourth Kind of Money: Where CBDCs Fit in the Global Monetary System 
• Could CBDCs Destroy Privacy? 
• CBDCs and the Concept of Trust

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