Depending on the CBDC model adopted, the role of domestic banks and private-sector financial actors could be drastically different. A direct retail model would, in theory, eliminate the need for domestic banks and most payment intermediaries. This model represents the most radical departure from the current system and involves the central bank in all payments, while disintermediating the banking system and marginalizing the private sector. This system would give the central bank the most complete data on retail balances and facilitate honoring claims against the central bank. However, implementing this model would necessitate significantly expanding central bank infrastructure and capacity and would also increase the risk of payment delays or pauses if central bank servers were to go down. A two-tiered or hybrid model would potentially leave domestic banks in place while also including additional payment intermediaries and private-sector companies to facilitate CBDC distribution and payments. In contrast, a wholesale CBDC model without retail access would leave the current domestic banking system completely in place.
To date, most CBDC pilots have used hybrid models—defining their CBDCs as claims against the central bank but distributing digital currency through domestic banks and payment intermediaries. This model is in use for both the Bahamas’ and China’s CBDCs, which act as claims against the central banks but leverage domestic banks as well as private payment providers such Mastercard (in the Bahamas) and Ant Group (in China) for currency distribution. These early projects indicate that there will still be strong private-sector involvement in the development and distribution of CBDCs. Additionally, wholesale CBDC pilots, like Canada’s Project Jasper, have leveraged private-sector companies to help test and design the underlying DLT. The extent to which the private sector is involved in CBDC development is likely to vary significantly, but it is unlikely that private-sector actors will be sidelined completely, since they possess most of the technological knowledge and customer interface experience necessary to effectively launch a retail CBDC. Design considerations for CBDCs will help determine the extent to which the private sector is involved in their development, but it remains unlikely that any central bank will completely cut out commercial banks from the process. For private-sector actors in the digital currency space, the major question remains the extent to which regulators will allow private stablecoins and cryptocurrencies to exist alongside CBDCs.
The Status of Global CBDC Development and the Risks, Benefits, and Implications of Widespread Adoption
Between May 2020 and August 2021, the number of central banks researching digital currencies increased from 35 to 81. While interest in CBDCs is quickly growing, most projects (over 75 percent) are still in the early stages of research and development, and several projects have been cancelled (such as Ecuador’s dinero electrónico, or DE, and Denmark’s e-Kroner), and at least 10 more are currently inactive (including projects in Malaysia and Finland). Retail CBDCs still face major hurdles to adoption, including concerns over privacy, cybersecurity, accessibility, and potentially de-stabilizing effects on the financial system. Likewise, wholesale CBDCs face questions about interoperability and whether they would truly make already highly developed settlement systems, such as the Clearing House Interbank Payments System (CHIPS), more efficient. Domestically, the roles of the private sector and commercial banks in a CBDC economy are still being debated. Public-private partnerships are currently being leveraged to help design numerous major CBDCs. These include the Central Bank of Nigeria (CBN) partnering with the fintech firm Bitt Inc., and the Bank of Canada partnering with TMX group, to help launch pilot CBDC programs. In addition, many central banks are looking at a hybrid model like that proposed by the Bank of England in which the central bank maintains a core ledger, but properly vetted private payment companies are granted API access, allowing them to build consumer-facing payment services on top of an existing CBDC network. This model would enable widespread private-sector competition in the payments space without stifling innovation or disintermediating financial services. It would also allow commercial payment companies to compete directly with domestic banks to provide payment services.
Using hybrid designs for CBDCs would allow them to address some of the issues inherent in stablecoins and cryptocurrencies, such as reserve requirements and price volatility, without marginalizing the private sector. The successful launch and adoption of a CBDC would provide the ability to enhance financial inclusion, like a stablecoin would, while allowing the central bank to maintain control over the money supply and monetary policy. CBDCs would provide even greater flexibility for conducting monetary and fiscal policy by allowing central banks to theoretically set interest rates below zero, or issue stimulus cash directly into bank accounts. Fiscal policy could be expanded to include mechanisms such as temporary cash infusions (CBDC that expires if not spent within a certain time window) or even facilitate experiments with universal basic income.
CBDCs would not address some of the issues with financial transfers or value stores that a global stablecoin potentially could. In developing economies, launching CBDCs would expand access to banking services, but holding savings in CBDCs would not shield them from inflation or guarantee the ability to withdraw currency or transfer savings across borders. While developing countries have strong imperatives to launch CBDCs, their adoption still depends on public trust of the government, a key issue that led to the failure of projects in Venezuela and Ecuador. The BIS has raised additional concerns that a transition to CBDCs could worsen the impact of bank runs in the event of a crisis. The transition to CBDCs in developing countries could increase financial access, but they would not solve underlying currency issues, creating potential for stablecoins or other cryptocurrencies to play important roles alongside CBDCs in these markets.
Internationally, CBDCs could weaken sanctions impacts (particularly from the U.S.), decrease the cost of international transactions, and eliminate the need for financial intermediaries like Society for Worldwide Interbank Financial Telecommunications (SWIFT). To get to that point, major technical, legal, and design hurdles need to be overcome for both wholesale and retail CBDCs to become internationally interoperable. For CBDCs to truly begin transforming the international financial system and not just recreate a more digitized version of the current system, there would need to be international agreements in place allowing seamless currency conversion between CBDCs. The process of creating a universal system would be immensely complicated, but the emergence of such a system and its potential to impact the power of U.S. sanctions provide significant incentive for some countries to try to create one. The BIS, IMF, and World Bank have all emphasized the need for international interoperability being designed into CBDCs from the start, but designing such a system would require a degree of international collaboration that would be extremely difficult to achieve given the different incentives and stages of CBDC development. Alternatively, there is a possibility for a multitude of private clearinghouses, messaging systems, and foreign exchange providers to fill the gaps in interoperability, or for countries to collaborate directly to build centralized clearing systems for a select group of member currencies. While each of these models would address existing issues with settlement times and transaction costs, their impacts on existing intermediaries, private-sector actors, and global CBDC adoption could vary significantly.