10 November 2022

ECB's Panetta: Demystifying wholesale central bank digital currency

 The Eurosystem is committed to providing central bank money settlement for wholesale transactions through infrastructures that are fit for purpose and significant progress has been made in integrating and modernising wholesale payment systems in recent years. While the potential of distributed ledger technology (DLT) remains uncertain, the Eurosystem needs to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement, so that central bank money retains its role as settlement asset. The Eurosystem is therefore exploring how market participants who adopt DLT could settle the euro cash leg of their transactions in central bank money. Regardless of technology the Eurosystem’s goal is to ensure that central bank money remains the anchor of stability of the monetary system.

The discussion on the wholesale version of central bank digital currencies – wholesale CBDC for short – is often prone to confusion. Wholesale CBDC is generally presented as something new, made possible by the emergence of distributed ledger technology (DLT).1 But wholesale CBDC has existed for decades. And it has provided efficient digital infrastructures for the settlement of transactions between banks in central bank money.

The discussion about wholesale CBDC should therefore focus on how existing infrastructures have to be adapted as technologies and needs evolve.

This article aims to demystify the concept of wholesale CBDC. It first clarifies what wholesale CBDC is and what it is not. It then discusses the emerging need to adapt the wholesale infrastructure to evolving user demands. Finally, it outlines some of the technological choices that lie ahead.

Defining wholesale CBDC

Wholesale CBDC is frequently subject to misunderstandings.

First, there is confusion surrounding the term “wholesale”.

Wholesale CBDC refers to the settlement of interbank transfers and related wholesale transactions in central bank reserves.2 But some misinterpret “wholesale CBDC” to mean any large-value payment in central bank money, regardless of who is making and receiving the payment.

Second, there is a widespread misconception that wholesale CBDC does not yet exist.

In fact, central bank money has been available in digital form for wholesale transactions between banks for decades. This misconception is fuelled by the commonly held assumption that wholesale CBDC needs to be operated using DLT. But wholesale CBDC is not synonymous with DLT, as it can be based on any digital technology. In the euro area, the Eurosystem offers banks the possibility of settling wholesale digital transactions through its TARGET Services using a centralised ledger.3

Third, wholesale CBDC is sometimes seen as a substitute for retail CBDC.

But in reality they complement each other by addressing the different needs of different users. On the wholesale side, central banks supply the ultimate means of payment for financial institutions, which helps to reduce risks in the financial system. On the retail side, providing the public with highly convenient and secure means of payment helps to underpin confidence in money by enabling private forms of money to be converted, at par, into risk-free central bank money.4

Wholesale and retail CBDC projects also differ in several ways.

To begin with, they have very different starting points.

Central bank money has traditionally only been made available to the general public in physical form – in other words, cash. The aim of retail CBDCs is to create a digital form of central bank money that can be used by everyone. In contrast, central bank money already exists in digital form for wholesale purposes. Wholesale CBDC projects are about making digital interbank transactions, such as securities settlement and cross-currency payments, safer and more efficient.

This in turn means that different actors are involved in retail and wholesale CBDC projects.

Retail CBDC projects involve a wide range of stakeholders: legislators, the retail payments ecosystem and the broader public. This is because retail CBDC is new. How it is designed and distributed needs to be considered very carefully to ensure that it responds to public policy objectives and does not have unintended effects on financial intermediation.

Work on wholesale CBDC, meanwhile, involves a narrower set of stakeholders that already use digital central bank settlement infrastructures today, such as banks or central securities depositories. And in the future, new stakeholders could potentially take part in the wholesale settlement chain using new technologies such as DLT.

So when central banks talk about wholesale CBDCs, they are not debating whether to introduce them. They are discussing how to improve and modernise services that they already offer today...

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