What's Next for Wholesale CBDCs?

Financial markets are at a crossroads. The slow but steady increase in tokenisation of assets, combined with an explosion of stablecoins (with market cap growing from $60bn in mid 2021 to over $170bn today) and increasing focus by banks on tokenising their deposits, is all leading to major questions for central banks on how to maintain financial stability and the singleness of money as markets become increasingly digital. 

Around the world, many central banks have been focused on retail Central Bank Digital Currency (CBDC) research, with the Bahamas and Nigeria implementing digital versions of their currencies, and China in the midst of a multi-year pilot. These initiatives ensure continued access to central bank money as physical cash usage declines and digital economies develop. However, in the last 2-3 years activity in ‘wholesale’ central bank digital currency (wCBDC) has grown significantly as markets have moved from proof of concept to implementations of asset tokenisation increasing the need for digital money for the cash leg of transactions. Settling in central bank money brings operational and legal finality as well as other benefits and is thus safer and more efficient.

Our study, based on extensive research and industry as well as regulatory interviews conducted with more than 23 central banks, private and public sector participants, examines the key motivations, models, and policy considerations for a wholesale Central Bank Digital Currency (wCBDC). We discuss the need for wCBDCs as a risk-free settlement asset to support digital transaction infrastructure and mitigate potential instability arising from reliance on tokenised private assets. Our research answers five key questions:

What is a wCBDC?  

High-level definitions by central banks tend to be fairly consistent, but the devil is very much in the detail. A full answer to this question needs to consider many factors such as questions of function vs form, how it is implemented, whether it lives (ie, on a central bank operated platform or a third party), who can access it and how, the rules it needs to follow, what programmability is possible and so on. We conclude that the unique solvability of a wCBDC arises from its benefits of true atomic settlement and facilitating a digital ‘always-on’ future of dynamic price-by-the-minute intraday FX swaps and repo. Whilst the many experiments by central banks and industry have shed significant light on the rationale for, and design pros and cons of, a wholesale CBDC, in our view further structured public/private collaboration is needed to define a clear and unambiguous definition at the necessary level of detail. 

Is There a Best Approach for Delivering a wCBDC? 

We have reviewed multiple approaches to wCBDC implementation developed by a number of central banks, all of which have their advantages and disadvantages. Industry interviews point to a strong preference for atomic settlement to take place on a single shared ledger, either as in the Distribution Model (involving the use of a bridge to connect a central bank-operated DLT platform, which handles the cash leg, with a third party-run asset ledger) or as in the Banque de France DL3S Model (which aims to enable atomic DvP and PvP transactions between wCBDCs issued by different central banks on separate DLT platforms), but several interviewees recognise that a path to that ultimate goal may require a ‘trigger’ or ‘synchronisation’ model (involving the coordination of two distinct platforms—one managing the asset leg, often tokenised on a DLT or other non-RTGS platform—and the other handling the cash leg, which is settled through a RTGS system) as an initial step towards a more strategic future state. Whilst market participant interviewees recognise the need for central banks to move carefully as regards wCBDC, there remains a risk given that tokenisation of markets may move significantly faster than central banks’ ability to deliver a satisfactory answer for wCBDC.  

Is There an ‘Innovation Gap’ Between the Industry and Central Banks, and is it Widening? 

Our interviews highlighted a significant difference in opinion on the market need for a wCBDC between central banks and market participants on this question. Many market participants saw innovation being constrained by the slow progress in wCBDC and an increased use of tokenised deposits and stablecoins as settlement assets as market tokenisation continues to develop.  

Again, the question points to the need for continuing and committed collaboration between public and private sectors and the need to balance the need of protecting the current two-tier financial system whilst facilitating the evolution to digital markets in a suitably controlled and safe way. Many banks’ budgets and innovation capacities are limited which implies both central banks and market participants need to agree and select on what specific next steps are needed to bridge the gap, with clarity on anticipated outcomes. Initiatives such as the UK Digital Securities Sandbox, the DTCC’s Industry Sandbox are also welcome steps to help close gaps.  

What are the Risks of Non-Central Bank Money Settlement Assets Growing? 

Several of the interviewees referred to the use of tokenised deposits and stablecoins as settlement assets, whilst acknowledging a strong preference for moving to a wCBDC if one were available.

Tokenisation is indeed progressing at a slow pace, with USD 13bn real world assets on-chain, which is still a fraction of the trillions of dollars of tokenised assets anticipated to exist by 2030. To some extent, this mirrors the slow progress towards a wCBDC leading to whether this is a ‘chicken and egg’ conundrum—private market actors are refraining from investing in and committing funds to exploring tokenised assets and wCBDCs, while central banks seem to be waiting for more productive use cases. If a wCBDC was available, would asset tokenisation speed up? Or if asset tokenisation accelerates will the risk to the foundational aspects of central bank money through settling in private assets drive further focus on wCBDC? This necessitates careful monitoring of the markets’ evolution as well as careful thought on the specific nature of future public and private sector collaboration. 

What is the Case for Change Regarding wCBDC? 

We identify a gap between the expectations and actions of market participants and central banks regarding wCBDC. While our sample size is small, both the quantitative and qualitative comments from interviewees point to the existence of such a gap, and by implication a need to bridge through further public/private collaboration. On one side of the gap, market participants are increasingly using stablecoins and tokenised deposits as settlement assets, on the other side the rate of progress of central banks in supporting these market developments are seen by some as ‘slow and steady’.

Our analysis shows a significant appetite from many market participants for the availability of tokenised wCBDC, with a smaller number taking a more ‘wait and see’ approach; whilst for many central banks, the case for fully tokenised wCBDC as opposed to other approaches still has to be made.  

Conclusions

In summary, there are three key takeaways from our report, which we hope will guide future discussion, as well as offer considerations for market participants and central banks. 

1. What? The research and experiments undertaken by central banks and the industry have helped the mutual understanding of how wCBDC could be implemented, but more work is needed to develop specific solutions that meet both market and central banks requirements. This includes not only the exact definition of what a wCBDC is, but how it can be delivered, used and implemented.

2. How? Private and public collaboration has significantly helped the industry plot its future evolution. Whilst this is very much a symbiotic relationship, bandwidths and budgets mean that future collaboration needs to be even more focused and structured to deliver outcomes that help the safe evolution to digital markets. 

3. How much? The business case for tokenised markets and specifically wCBDC requires more analysis. It's one thing to demonstrate the technical art of the possible in settling bonds with wCBDC, its quite another to work out with confidence the revenue and cost impact together with the cost to achieve for individual firms, as well as how the industry can fund the new financial market infrastructure capabilities needed for this purpose. 

The authors’ complete study is available here.

Hatim Hussain is a Research Affiliate at the University of Cambridge Centre for Alternative Finance and a DPhil candidate in Law at the University of Oxford.

Keith Bear is a Fellow at the University of Cambridge Centre for Alternative Finance.

Polina Vertex is a Research Affiliate at the University of Cambridge Centre for Alternative Finance.