New CBDCs Likely to be Wholesale

There’s an interesting perspective outlined in this article from Ledger Insights, which is that budding CBDCs issued in advanced economies will more likely be wholesale than retail.

Digital Finance CRC, a research organization working with Australia’s central bank (RBA) recently issued a report that suggests the wholesale model has a stronger policy rationale than retail CBDC in these economies. This is quite opposite to what we have seen in the previous couple of years, where the development of CBDCs has been mostly discussed in the paradigm of replacing bank notes and coins in retail uses. We of course have been aware of some recent successful testing of wholesale CBDCs for cross-border payments and tokenized asset settlement (capital markets) in Asia. These are the two areas we have been suggesting are potential opportunities and in this referenced report from Digital Finance CRC, they agree. It will certainly have to be reviewed further. 

Now of course given this report—and the relationship between this organization and the RBA—it would suggest that this is where they are headed down under. There are two reasons given for wholesale preference versus retail. The first is the less demanding technology design required for wholesale and the second is that wholesale CBDCs are not really politically controversial, with the U.S. referenced as an example.

Some readers may be aware of the heavy “equity” priority placed on the digital dollar discussion, as it appears in the White House executive order language and subsequently issued reports by various agencies. The key issues are access and privacy, which in western nations with commercial banking environments are left to the markets. It’s not clear what the Federal Reserve’s legal status is for conducting direct currency account relationships with the public, but likely not going to happen, so then the subject is more related to a citizen’s right to privacy, which could be jeopardized by a CBDC in the actual design (e.g.; e-yuan in China). 

The piece goes on to summarize that Australia will be running pilots next year for CBDCs, with the main goal to understand economic implications as opposed to technology design, which they believe should be drive by specific uses cases, as related in the article. We’ll keep an eye on it.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.