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#Digital Currency Ecosystem

Wholesale CBDC: key to future tokenized finance

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8 Mins.

Wholesale central bank digital currency (wCBDC) is transforming how high-value interbank settlements and cross-border transactions are handled. In an evolving tokenized financial ecosystem, wCBDC can improve interoperability and scalability, setting the stage for the future of digital finance.

As the global financial landscape evolves, wholesale central bank digital currency (wCBDC) could help support digital transformation. While retail CBDCs cater to everyday consumer use, wCBDC is designed specifically for interbank settlements and high-value transactions, currently operated on real-time gross settlement (RTGS) systems. As a central bank settlement asset, wCBDC enhances the scalability and interoperability of tokenized financial ecosystems, while playing a crucial role in shaping its future progression.

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Improving efficiency and enhancing settlements

The primary advantage of wCBDC lies in its capacity to enhance interbank settlements and in its finality, addressing some of the most challenging issues present in current large-value settlement systems. These systems, often slowed down by non-executed queuing transactions and limited operating hours, can be optimized by instantaneous atomic settlements that wholesale CBDC offers. Furthermore, with the possibility of automating transactions with predefined conditions, wCBDC ensures both finality and speed. 

Additionally, wCBDC would enable capturing more efficiencies offered in the system as an interbank settlement layer for multiple use cases such as in the settlement of colored tokenized deposits (or what are known as commercial bank money tokens, or CBMTs) issued by different commercial banks and deployed across different chains. CBMTs are technically identical, but the issuer has the decisive property right. To make clear which issuer is responsible, a color is assigned to the CBMT for each issuer. Equally important, wCBDC could play a role in enhancing the reserve mechanism of regulated fiat-backed stablecoins, similar to what we saw with explorations of wCBDC-backed stablecoins.

Similarly, wCBDC could facilitate settling transactions involving tokenized real-world assets.

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Disrupting common misconceptions about wCBDC

Despite its transformative potential, several misconceptions1 persist in the CBDC landscape. Here are three key assumptions challenged by wCBDC:

  1. Retail CBDC can function independently without wholesale integration

    Retail CBDC will be used by the general public, but it cannot operate in isolation. Wholesale CBDC could facilitate the technical architectural design and the establishment of the most preferred distribution model for retail CBDC. Positive contributions to the research and implementation of retail CBDC are anticipated as wholesale CBDC advancements continue to evolve.

  2. wCBDC tokens must be distinct from retail tokens by design

    When a central bank issues and distributes CBDC to commercial banks in return for reserves via a real-time gross settlement (RTGS) system, then this is considered a wholesale operation tagging CBDC operating at that level as wholesale CBDC. When commercial banks distribute CBDC to their clients and merchants in exchange of their bank balances or cash holdings then it is retail CBDC. This is analogous to the production of banknotes where there is no differentiation between wholesale and retail notes: all banknotes are considered equal, and can be used for both types of transactions, based on the concept “cash is cash.”

  3. Wholesale CBDC and RTGS systems are mutually exclusive

    Rather than competing with RTGS systems or fast payment systems, wCBDC complements them. By providing more efficient atomic settlements, wCBDC enhances the capabilities of established infrastructures, ensuring a more comprehensive and integrated settlement framework. This is in addition to facilitating programmability and hence fostering innovation, enabling a spectrum of use cases for the future.

“Wholesale CBDC, as a central bank settlement asset, will play a crucial role in optimizing the gains captured from a tokenized ecosystem.“
Dr. Abbas Albasha
Senior Strategy Consultant CBDC, G+D

Real-world impact: global experimentation in wCBDC

Central banks around the world are already engaging in wCBDC pilot projects that demonstrate its transformative potential:1

Project Helvetia,2 spearheaded by the Swiss National Bank, showcased the successful use of real-money wCBDC in settling tokenized securities, underscoring its importance in modernizing securities markets.

The Banque de France and Saudi Central Bank (SAMA), among others, are engaged at various experimentations with cross-border wCBDC to improve the efficiency of foreign exchange (FX) settlements and liquidity provisioning of interbank transfers. These projects aim to reduce costs and time at international financial operations and reduce settlement risks.

BIS Project Jura3 explored the application of wCBDC in cross-border settlements, illustrating its potential to provide secure, scalable, and fast solutions for international financial transactions involving multiple currencies.

Projects like these, alongside others such as Project mBridge,4 with the foundational members of Hong Kong, Thailand, China, the United Arab Emirates, and the recent joining of Saudi Arabia, demonstrate how wholesale CBDC is addressing critical pain points in cross-border transactions, including compliance challenges and FX risks. By shortening transaction chains and offering 24/7 settlement capabilities, wCBDC is paving the way for a more resilient, liquidity-efficient global financial market.

A survey by the Bank for International Settlements (BIS)5 revealed that 94% of central banks are actively exploring central bank digital currencies (CBDCs). While central banks are advancing at varying speeds and adopting diverse design approaches, 2023 has seen a marked increase in wholesale CBDC experimentation, particularly in advanced economies. Emerging markets and developing economies have also intensified their focus on wholesale CBDC development. 

wCBDC’s role as a trusted, credit risk-free settlement asset is particularly important for ensuring the finality, availability, and speed of domestic and cross-border transactions, where liquidity and credit risks can be challenging factors.

“Enabling a tokenized wholesale CBDC system can be perceived as an umbrella project as well that can incentivize the improvement of other crucial financial market infrastructures, such as increasing liquidity within interbank settlements, establishing a more vibrant government bond market and building more inclusive capital markets.“
Daniel Nagy
Senior Business Analyst CBDC, G+D
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G+D’s expertise in wCBDC solutions

With experience in CBDC development, G+D offers deep policy and technical consultancy for wholesale CBDC. G+D’s integrated interface showcases a range of wholesale CBDC settlement use cases, demonstrating its potential in real-world applications. Through proof-of-concept and pilot implementations, the solution facilitates smooth integration with existing payment systems, ensuring seamless interoperability across financial networks. These partnerships enable central banks to modernize their infrastructure and lead the global movement toward tokenized economies.1

The transition to wCBDC is expected to be a gradual, step-by-step process rather than a “Big Bang” event7 but as global financial markets shift toward tokenization, wholesale CBDC will be vital in enabling secure, scalable, and interoperable settlements. It will play an instrumental role in modernizing financial markets, mitigating operational risks, and creating new, more efficient, and more inclusive financial models.

Key takeaways

  • Wholesale CBDC enhances interbank settlements, offering faster and scalable solutions for high-value transactions.
  • Interoperability of wCBDC with distributed ledger technologies supports seamless settlement of transactions involving tokenized assets across financial platforms.
  • Global wCBDC pilot projects highlight its potential to improve cross-border payments, liquidity management, FX determination, and (tokenized) securities settlement, to serve either interbank transaction purposes or monetary policy purposes.
  1. Demystifying wholesale central bank digital currency, Fabio Panetta, ECB, 2022

  2. Modernizing Financial Markets with Wholesale Central Bank Digital Currency (wCBDC), World Economic Forum, 2024

  3. Project Helvetia: a multi-phase investigation on the settlement of tokenised assets in central bank money, BIS, 2023

     

  4. Project Jura: cross-border settlement using wholesale CBDC, BIS, 2021

  5. Project mBridge reaches minimum viable product stage and invites further international participation, BIS, 2024

  6. Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto, BIS, 2024

  7. Enhancing domestic payments with wholesale CBDC OMIF Live Podcast, 2023

Published: 30/10/2024

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