You may be wondering about the headline of this blog, but it’s all about the rapidly changing would of money. It used to be simple. Government would control monetary supply in the economy and wholesale and retail banks would distribute such money to businesses and citizens. It’s still the same, just that it’s all moving to be digital currency rather than fiat currency. What’s the difference? Well, it’s pretty simple. Fiat currency is your dollar bills, euro notes and yuan paper; digital currency or CBDC (Central Bank Digital Currency) is meant to be exactly the same, except digitalised.
However, it does mean that we are moving from cash notes issued by government and central banks, to digital notes issued by government and central banks directly to a variety of constituencies.
That’s where the G2CB2WB2RB2B2C2CBDC comes in or, if you prefer, Government to Central Bank to Wholesale Bank to Retail Bank to Business to Citizen/Consumer through a Central Bank issued digital currency (CBDC).
The thing is that retail and wholesale Central Bank Digital Currencies (CBDCs) have different uses, and each has its own pros and cons:
Retail CBDC
A central bank digital currency issued for retail usage provides a digital version of cash that can be used by individuals and businesses. Potential benefits include:
- Increased availability: Retail CBDCs can increase the availability of money.
- Better cross-border payments: Retail CBDCs can improve cross-border payments.
- Diversified payment options: Retail CBDCs can provide a variety of payment options.
Potential risks: Retail CBDCs may pose economic risks, such as cybersecurity and data privacy challenges. They could also impact credit conditions and reduce commercial bank funding.
In fact the key questions about a retail CBDC include:
- Should a CBDC bear interest?
- Should there be limits on the amount of a CBDC that can be held?
- Should a CBDC be freely convertible into bank deposits or bank notes?
For more on retail CBDCs, checkout this report from the Bank of International Settlements (BIS).
Wholesale CBDC
A new infrastructure for interbank settlements that allows banks to electronically transact with each other. Potential benefits include:
- Improved interbank payment settlement: Wholesale CBDCs can improve interbank payment settlement.
- Reduced counterparty risk: Wholesale CBDCs can reduce counterparty risk.
- Participation in digital asset markets: Wholesale CBDCs can participate in digital asset markets.
Argument against: Some argue that wholesale CBDC already exists, as central bank reserves are a digital form of central bank money that banks can use for wholesale transactions.
If you want to know more about wholesale CBDC, or wCBDC for short, checkout this World Economic Forum report produced in partnership with Accenture.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...