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Central Banks Explore Issuance of Retail Central Bank Digital Currencies

As the world becomes increasingly digital, central banks are looking to stay ahead of the curve by exploring the issuance of retail central bank digital currencies (CBDCs). In a move that could revolutionize the way we think about money, central banks are considering issuing their own digital currencies that could be used for everyday transactions.

Background

The concept of CBDCs is not new. Several central banks have already conducted experiments in operating DLT-based wholesale CBDC real-time gross settlement (RTGS) systems. Examples include:

  • The Bank of Canada’s Project Jasper
  • The European Central Bank and the Bank of Japan’s Project Stella
  • The Monetary Authority of Singapore’s Project Ubin
  • The Bank of Thailand’s Project Inthanon

Challenges

However, these experiments have not been without their challenges. While they were able to replicate existing large value payment systems, the results have not been superior to existing infrastructures. Central banks continue to explore other areas that may yield higher value-added.

Objectives for Retail CBDCs

Retail CBDCs are expected to bring more innovation and wider implications. The objectives of central banks considering the issuance of retail CBDCs include:

  • Enhancing payment system competition, efficiency, and resilience
  • Supporting financial digitization
  • Reducing costs associated with issuing and managing physical cash
  • Improving financial inclusion, especially in countries with underdeveloped financial systems and many unbanked citizens
  • Improving monetary policy effectiveness by implementing targeted policy and tapping more granular payment flow data to enhance macroeconomic projections

Potential Architectures for Retail CBDCs

There are several potential architectures for retail CBDCs, including:

  • Indirect CBDC architecture (also known as the “two-tier CBDC” given its resemblance to the existing two-tier financial system)
    • Under this architecture, the central bank issues CBDC indirectly to consumers through an intermediary
  • Direct and hybrid CBDC models
    • In these models, consumers have a direct claim on the central bank

Features of Retail CBDCs

Retail CBDCs must also have certain features that make cash attractive, including:

  • Trust in the issuing entity
  • Legal tender status
  • Guaranteed real-time finality
  • Wide availability
  • User-friendliness
  • High resilience to infrastructure outages and cyberattacks
  • Safeguarding the safety and integrity of payments

Conclusion

The issuance of retail CBDCs would constitute a radical change for central banks and the private sector banking system. However, with careful planning and execution, it could revolutionize the way we think about money and payment systems.

Figure 1.2: Potential Retail CBDC Architectures

(Source: Auer and Bohme, 2020)

Note: The central bank is the only institution that issues and redeems CBDC in all architectures.

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