Wholesale CBDC Use Cases

Wholesale Central Bank Digital Currency (CBDC) refers to a digital form of a country's fiat currency that is issued and backed by the central bank, primarily for use by financial institutions, rather than the general public (which is the focus of retail CBDC). Wholesale CBDCs are designed to facilitate interbank transactions, improve financial stability, and enhance the efficiency of payment and settlement systems. Below are some key use cases for wholesale CBDC:

1. Interbank Settlements

• Use Case: Wholesale CBDC can be used to settle transactions between banks in real-time, reducing the delays and costs associated with traditional settlement systems like RTGS (Real-Time Gross Settlement).


• Benefits:


• Faster and more efficient settlements (24/7 availability).


• Reduced counterparty risk as transactions are settled directly on the central bank ledger.


• Lower operational costs for banks by eliminating intermediaries.


• Example: The Bank of England's RTGS system renewal explores CBDC to enable instant settlement.

2. Cross-Border Payments

• Use Case: Wholesale CBDC can streamline cross-border transactions by enabling direct interbank transfers without the need for multiple intermediaries or correspondent banking networks.


• Benefits:


• Reduced transaction costs and time (traditional cross-border payments can take days).


• Improved transparency and traceability of funds.


• Mitigation of risks associated with foreign exchange and liquidity.


• Example: Projects like mBridge (a collaboration between the Bank for International Settlements and central banks of China, Hong Kong, Thailand, and the UAE) aim to use wholesale CBDC for cross-border payments.

3. Liquidity Management

• Use Case: Central banks can use wholesale CBDC to provide liquidity to financial institutions more efficiently during times of stress or for day-to-day operations.


• Benefits:


• Instant access to central bank money for banks, improving liquidity management.


• Enhanced ability for central banks to implement monetary policy by directly controlling money supply.


• Example: During financial crises, central banks could distribute liquidity digitally to stabilize markets.

4. Securities Settlement

• Use Case: Wholesale CBDC can facilitate the settlement of securities transactions, such as bonds or equities, through tokenized assets on a distributed ledger technology (DLT) platform.


• Benefits:


• Enables Delivery vs. Payment (DvP) mechanisms, ensuring that payment and asset transfer occur simultaneously, reducing settlement risk.


• Reduces the time and cost of clearing and settlement processes.


• Example: The European Central Bank (ECB) and other central banks are exploring CBDC for settling tokenized securities.

5. Monetary Policy Implementation

• Use Case: Central banks can use wholesale CBDC to fine-tune monetary policy by directly controlling the money supply and interest rates within the banking system.


• Benefits:


• More precise and immediate impact on liquidity and credit conditions.


• Ability to introduce negative interest rates or tiered interest systems digitally.


• Example: A central bank could adjust CBDC interest rates to incentivize or discourage lending by commercial banks.

6. Financial Inclusion (Indirectly)

• Use Case: While wholesale CBDC is not directly accessible to the public, it can improve the efficiency of financial systems, enabling banks to offer better services to unbanked or underbanked populations.


• Benefits:


• Lower transaction costs for financial institutions can translate into cheaper services for end users.


• Supports the infrastructure for retail CBDC or digital payment systems.


• Example: A more efficient interbank system using CBDC could enable smaller banks or fintechs to serve remote areas at lower costs.

7. Combatting Financial Crime and Enhancing Compliance

• Use Case: Transactions using wholesale CBDC can be tracked on a centralized or DLT-based ledger, improving transparency and aiding in the detection of illicit activities.


• Benefits:


• Easier monitoring of large transactions for anti-money laundering (AML) and combating the financing of terrorism (CFT).


• Enhanced compliance with regulatory frameworks.


• Example: Central banks could implement smart contracts or programmable money features to ensure compliance with specific rules.

8. Integration with Decentralized Finance (DeFi)

• Use Case: Wholesale CBDC can serve as a stable, central bank-backed digital currency for DeFi platforms, bridging traditional finance with blockchain-based systems.


• Benefits:


• Provides a reliable and regulated digital asset for DeFi protocols.


• Reduces reliance on volatile cryptocurrencies or stablecoins issued by private entities.


• Example: Experimentation by central banks to integrate CBDC into DLT-based financial ecosystems.

9. Reserve Management for Central Banks

• Use Case: Central banks can hold and manage reserves in digital form, streamlining international reserve transactions with other central banks or international organizations.


• Benefits:


• Faster and more secure transfers of reserves.


• Improved coordination during global financial crises.


• Example: Wholesale CBDC could be used in agreements between central banks for currency swaps or emergency funding.

10. Support for Programmable Money and Smart Contracts

• Use Case: Wholesale CBDC on a DLT platform can enable programmable money and smart contracts for automated, condition-based transactions between financial institutions.


• Benefits:


• Automates complex financial agreements, reducing manual intervention.


• Ensures compliance with predefined rules (e.g., escrow arrangements or collateral requirements).


• Example: A wholesale CBDC could trigger automatic payments or penalties in securities or derivatives contracts based on pre-set conditions.

Examples of Real-World Initiatives:

• Project Jasper (Canada): Bank of Canada tested wholesale CBDC for interbank payments using DLT.


• Ubin (Singapore): Monetary Authority of Singapore explored wholesale CBDC for cross-border payments and securities settlement.


• Project Helvetia (Switzerland): Swiss National Bank and BIS tested CBDC for settling tokenized assets.


• Digital Euro (Europe): ECB is investigating wholesale CBDC applications alongside retail CBDC for the Eurozone.

Challenges to Consider:

• Interoperability: Ensuring wholesale CBDC systems work across different jurisdictions and technologies.


• Cybersecurity: Protecting CBDC platforms from hacks and fraud.


• Disintermediation Risk: Potential impact on commercial banks if central bank money becomes too dominant.


• Regulatory Framework: Developing clear rules for CBDC use without stifling innovation.

Wholesale CBDC has the potential to revolutionize the financial system by enhancing efficiency, reducing costs, and improving transparency in high-value transactions between financial institutions. However, its implementation requires careful consideration of technological, regulatory, and economic factors.