Exploring Wholesale Central Bank Digital Currencies: Design Models, Economic Impacts, and Global Perspectives

August 16, 2025 Research Reports 0

Abstract

Central Bank Digital Currencies (CBDCs), particularly their wholesale variant (wCBDCs), represent a pivotal advancement in the evolution of global financial infrastructure. This comprehensive research report systematically examines the intricate dimensions of wCBDCs, moving beyond foundational concepts to explore their advanced design models, profound economic ramifications, complex monetary policy considerations, diverse global pilot programs, evolving regulatory landscapes, and the indispensable technological infrastructure required for their robust implementation. By meticulously analyzing these multifaceted aspects, this report aims to furnish a granular understanding of wCBDCs, elucidating their potential to significantly enhance the efficiency, transparency, resilience, and security of financial markets, while simultaneously addressing the inherent challenges and risks that necessitate careful navigation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The digital transformation has undeniably reshaped nearly every facet of human endeavor, and the financial sector stands at the vanguard of this monumental shift. In an era increasingly defined by digital transactions and instantaneous information flows, central banks, as the ultimate guardians of monetary stability and the integrity of national payment systems, are actively exploring novel paradigms to modernize their foundational infrastructures. This exploration has led to intense global interest in Central Bank Digital Currencies (CBDCs).

While the concept of a retail CBDC, accessible directly by the general public, has garnered substantial public and media attention due to its potential implications for everyday commerce and financial inclusion, wholesale CBDCs (wCBDCs) are emerging as an equally, if not more, critical area of focus for central banks and financial institutions. Unlike retail CBDCs, which are designed for broad public use, wCBDCs are purpose-built for interbank transactions and large-value financial settlements, primarily among commercial banks and other eligible financial institutions that hold accounts with the central bank. They are intended to provide a highly secure, efficient, and resilient digital form of central bank money for a restricted set of participants, typically within a permissioned environment.

The impetus behind developing wCBDCs is multifaceted. Existing wholesale payment systems, while generally robust, often rely on legacy infrastructure that can be slow, costly, and opaque, particularly for cross-border transactions. Settlement finality can be delayed, leading to liquidity hoarding and increased counterparty risk. wCBDCs promise to address these inefficiencies by leveraging cutting-edge technologies like Distributed Ledger Technology (DLT) to enable real-time gross settlement (RTGS) with enhanced programmability and atomic settlement capabilities. This modernization is not merely about technological upgrade; it is about reinforcing financial stability, fostering market efficiency, and ensuring that central banks retain effective control over monetary policy in an increasingly digitized global economy. This report delves into the various facets of wCBDCs, providing an in-depth analysis of their intricate design models, far-reaching economic impacts, nuanced monetary policy implications, the diverse array of global pilot programs underway, the imperative development of comprehensive regulatory frameworks, and the complex technological requirements for their successful deployment and ongoing operation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Design Models of Wholesale CBDCs

The architectural design of a wCBDC is paramount, fundamentally determining its operational characteristics, security posture, and seamless integration within the intricate tapestry of existing financial ecosystems. A meticulous approach to design is crucial to ensure that a wCBDC effectively serves its intended purpose of enhancing wholesale payments and settlements while mitigating potential risks. Key design considerations span several critical dimensions:

2.1. Access Control and Participant Eligibility

The most fundamental design choice for a wCBDC revolves around defining who is permitted to hold and transact with this digital form of central bank money. Unlike retail CBDCs, wCBDCs are inherently restricted to a specific cohort of financial institutions. This restriction is not arbitrary; it is rooted in fundamental principles of financial stability, risk management, and the central bank’s role as a lender of last resort.

  • Restricted Access: Typically, access to wCBDCs is confined to entities that traditionally hold accounts with the central bank, such as commercial banks, and potentially other regulated financial market infrastructures (FMIs) like clearing houses and central securities depositories. This approach aligns with the current two-tiered financial system, where commercial banks intermediate between the central bank and the broader economy.
  • Rationale for Restriction: The primary reasons for this restricted access include:
    • Risk Mitigation: Limiting access helps manage credit, liquidity, and operational risks within the financial system. It prevents disintermediation of commercial banks, which could destabilize the banking sector by siphoning deposits directly to the central bank.
    • Monetary Policy Control: By channeling wCBDC transactions through regulated financial institutions, central banks can more effectively implement and transmit monetary policy. Direct access by non-financial entities could complicate liquidity management and the control of interest rates.
    • Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Compliance: Confining wCBDC usage to regulated institutions subject to stringent AML/CFT frameworks simplifies compliance and oversight, providing a clear audit trail for large-value transactions.
  • Direct vs. Indirect Models: While the default is an indirect or ‘hybrid’ model where the central bank issues wCBDC to commercial banks, which then use it for interbank settlement, alternative models are sometimes considered. In a purely direct model (less likely for wCBDC), the central bank would manage all accounts and transactions directly, which is impractical for wholesale volumes and would fundamentally alter the banking system. The two-tier model leverages existing financial intermediaries for client-facing services, while the central bank provides the core settlement asset.

2.2. Settlement Mechanism and Finality

Establishing the method by which transactions are settled is a critical design choice, impacting transaction finality, liquidity management, and overall system efficiency.

  • Real-Time Gross Settlement (RTGS): This is the predominant model for high-value wholesale payments globally. Each transaction is settled individually and continuously throughout the day, ensuring immediate and irreversible finality. When applied to wCBDCs, DLT can enhance RTGS by providing a shared, immutable ledger that offers greater transparency and atomicity.
    • Advantages: Reduces systemic risk significantly as settlement is final and instantaneous, eliminating counterparty risk. Provides granular data on liquidity flows.
    • Disadvantages: Requires participants to hold substantial liquidity at the central bank or manage intraday liquidity meticulously, potentially leading to higher liquidity costs.
  • Net Settlement System: In this model, transactions are aggregated over a period (e.g., end-of-day), and only the net positions between participants are settled. This is common in securities clearing systems.
    • Advantages: Requires less liquidity from participants, as only net obligations are settled.
    • Disadvantages: Introduces settlement risk and counterparty risk, as participants depend on all other participants to fulfill their net obligations at settlement time. If one party defaults, it can trigger a cascade of failures.
  • Atomic Settlement (DvP and PvP): A key advantage of DLT-based wCBDCs is their ability to facilitate ‘atomic settlement’ – the simultaneous exchange of two interdependent assets or payments. This is crucial for reducing principal risk in financial transactions.
    • Delivery versus Payment (DvP): Ensures that the transfer of a security occurs if and only if the corresponding payment is made. This eliminates principal risk in securities transactions. wCBDCs can enable DvP by linking digital securities tokens on one DLT with wCBDC tokens on another, settling them simultaneously via smart contracts.
    • Payment versus Payment (PvP): Ensures that the transfer of one currency occurs if and only if the transfer of the other currency occurs. This eliminates principal risk in foreign exchange transactions. Multi-wCBDC platforms (as explored in Project Dunbar, mBridge) aim to achieve PvP across different jurisdictions.

2.3. Interoperability

Interoperability is crucial for the practical utility and widespread adoption of any new financial infrastructure, especially one designed for wholesale markets that interact with diverse systems.

  • Internal Interoperability: Ensuring the wCBDC system can seamlessly connect with a country’s existing payment systems (e.g., ACH, RTGS) and financial market infrastructures.
  • External Interoperability (Cross-Border): This is perhaps the most significant challenge and opportunity. Enabling wCBDCs from different jurisdictions to interact efficiently for cross-border payments and settlements.
    • Models: This could involve ‘linked’ systems (where national wCBDCs are connected via APIs or bridges), ‘compatible’ systems (sharing technical standards but operating independently), or ‘single multi-CBDC platforms’ (multiple wCBDCs issued on a shared DLT platform, as explored in Project mBridge). The latter offers the most seamless cross-border experience but requires significant international cooperation on governance and regulatory alignment.
  • Interoperability with Tokenized Assets: A key driver for wCBDC is to facilitate the settlement of tokenized securities and other digital assets. This requires technical and legal interoperability between the wCBDC ledger and various DLT platforms hosting these tokenized assets.

2.4. Privacy and Anonymity

In a wholesale context, the concept of privacy differs from retail CBDCs. While individuals seek transaction anonymity, financial institutions require confidentiality for their commercial operations, balanced against regulatory transparency requirements.

  • Transaction Privacy for Institutions: Financial institutions typically do not want their proprietary trading strategies or client relationships to be transparent to competitors. A wCBDC system needs to ensure that only relevant parties and authorized regulators can view specific transaction details.
  • Regulatory Transparency: Central banks and financial supervisors require a clear and comprehensive audit trail for AML/CFT compliance, systemic risk monitoring, and forensic investigations. DLT, by its nature, provides an immutable record of transactions, which can be selectively disclosed to authorized parties.
  • Technical Approaches: Permissioned DLTs, where only known and vetted participants can join, intrinsically offer a degree of privacy. Further enhancements can include:
    • Zero-Knowledge Proofs (ZKPs): Cryptographic techniques that allow one party to prove that they possess certain information or that a transaction is valid, without revealing the underlying data itself.
    • Confidential Transactions: Techniques that obscure transaction values or participant identities from unauthorized observers on the ledger.
    • Off-chain Settlement/Processing: Moving some sensitive transaction details off the main ledger while maintaining on-chain integrity checks.

2.5. Programmability

Programmability is a distinguishing feature of DLT-based wCBDCs, allowing for the embedding of logic directly into the digital currency itself, often through smart contracts.

  • Smart Contracts: Self-executing contracts with the terms of the agreement directly written into lines of code. They automatically execute predefined actions when specific conditions are met.
  • Use Cases:
    • Automated Payments: Conditional payments that release funds only upon the fulfillment of specific criteria (e.g., delivery of goods, completion of a service, reaching a specific market price).
    • Collateral Management: Automated margining or collateral calls based on real-time market data.
    • Tokenized Securities: Automated lifecycle events for digital securities, such as coupon payments, redemption, or corporate actions, linked to wCBDC settlement.
    • Trade Finance: Conditional payment releases upon shipment verification or document presentation.
    • Liquidity Optimization: Automated sweeps or allocations of liquidity across different accounts based on predefined rules.
  • Benefits: Reduces counterparty risk, increases automation, lowers operational costs, enhances efficiency, and facilitates the development of innovative financial products.
  • Challenges: Legal enforceability of smart contracts, complexity in coding, potential for bugs or vulnerabilities, and the need for robust governance mechanisms for upgrades and dispute resolution.

2.6. Issuance Model (Central Bank’s Role)

Closely related to access control, the issuance model defines how the wCBDC enters circulation and the central bank’s direct involvement.

  • Two-Tiered System: This is the overwhelmingly preferred model for wCBDCs. The central bank issues wCBDC to financial institutions (commercial banks, payment service providers, FMIs) who hold accounts with the central bank. These institutions then use the wCBDC for interbank settlement and to facilitate their own client transactions. The central bank remains responsible for issuing and redeeming the wCBDC, maintaining the core ledger, and setting monetary policy.
    • Benefits: Leverages existing financial infrastructure, maintains the role of commercial banks as intermediaries, simplifies risk management for the central bank, and ensures continuity with current monetary policy implementation frameworks. It minimizes direct interaction between the central bank and end-users, reducing operational burden and privacy concerns.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Economic Impacts of Wholesale CBDCs

The introduction of wCBDCs holds the potential to precipitate profound and far-reaching economic implications, influencing market structures, operational efficiencies, and the broader financial landscape. These impacts extend beyond mere technological upgrades, touching upon fundamental aspects of liquidity, risk, and capital allocation.

3.1. Cost Reduction and Operational Efficiency

One of the most immediate and tangible benefits of wCBDCs is their capacity to significantly reduce operational costs and enhance efficiency within the financial system.

  • Streamlined Processes: By facilitating instant settlement on a common ledger, wCBDCs can eliminate the need for lengthy reconciliation processes, manual interventions, and multiple intermediaries typically involved in traditional payment systems. This streamlining reduces operational overheads for financial institutions.
  • Lower Transaction Costs: The reduction in intermediaries and processing steps can lead to lower transaction fees for large-value payments and securities settlements. This directly benefits financial institutions and, indirectly, their corporate clients.
  • Optimized Collateral and Capital: Real-time and atomic settlement capabilities (DvP, PvP) mean that financial institutions need to hold less collateral or pre-fund transactions for extended periods. Reduced settlement risk frees up capital that would otherwise be tied up, allowing for more efficient capital allocation and potentially reducing regulatory capital requirements related to counterparty exposures.
  • Reduced Failure-to-Settle Costs: In traditional systems, failed settlements due to timing differences or counterparty issues can incur significant penalties, operational costs, and reputational damage. wCBDCs’ deterministic and atomic settlement drastically reduces these instances.

3.2. Enhanced Liquidity Management

wCBDCs offer transformative potential for improving liquidity management within the financial system.

  • Real-Time Liquidity Monitoring and Control: The continuous and transparent nature of DLT-based wCBDCs allows financial institutions and central banks to monitor liquidity positions in real-time with unprecedented granularity. This enables more precise liquidity management and forecasting.
  • Reduced Need for Liquidity Buffers: In RTGS systems, participants typically need to maintain substantial liquidity buffers to ensure continuous settlement. With features like immediate finality and potentially automated liquidity sweeps enabled by smart contracts, the need for large, static liquidity buffers might be reduced, freeing up funds for more productive uses.
  • Dynamic Intraday Liquidity Adjustments: Programmability allows for the automated allocation and redistribution of liquidity across different accounts or markets based on predefined rules, enhancing the dynamic management of intraday liquidity.
  • Efficient Interbank Lending: By providing a highly secure and real-time settlement asset, wCBDCs could potentially improve the efficiency of the interbank lending market, making it easier for banks to lend and borrow reserves as needed, potentially reducing volatility in short-term money markets.

3.3. Market Efficiency and Innovation

The intrinsic features of wCBDCs, particularly programmability and real-time settlement, are poised to significantly boost market efficiency and foster innovation.

  • Reduced Settlement Cycles: Moving from T+2 or T+1 settlement cycles to near T+0 (real-time) for securities and foreign exchange transactions drastically reduces market risk, specifically counterparty risk and market exposure during the settlement lag. This is critical for high-frequency trading and complex financial instruments.
  • Enhanced Risk Management: The atomic DvP and PvP capabilities inherent in wCBDCs directly eliminate principal risk in securities and FX transactions, respectively. This strengthens overall financial market stability by reducing systemic vulnerabilities arising from unsettled positions.
  • Facilitation of New Financial Products and Markets: The combination of tokenized assets and programmable wCBDC enables entirely new market designs and financial instruments. This includes:
    • Automated Repo Markets: Smart contracts could automate the entire repurchase agreement lifecycle, from collateral transfer to interest payments and repo unwinding.
    • Tokenized Bonds and Equities: Issuance and secondary trading of tokenized securities settled instantly with wCBDC.
    • Fractional Ownership: Easier fractional ownership of illiquid assets (e.g., real estate, art) by tokenizing them and enabling wCBDC settlement.
    • Improved Syndicated Lending: Automated distribution of funds and repayment across multiple lenders.
  • Increased Transparency and Auditability: The immutable ledger provides a clear, verifiable record of all transactions, enhancing transparency for market participants (where appropriate) and regulatory oversight, potentially reducing the scope for fraud and errors.

3.4. Implications for Commercial Bank Business Models

The introduction of wCBDCs will inevitably impact commercial banks, necessitating an adaptation of their business models.

  • Potential for Disintermediation (Limited for wCBDC): While a significant concern for retail CBDCs, the restricted access model for wCBDCs largely mitigates direct disintermediation risks for commercial banks regarding deposit funding. Banks will continue to hold client deposits and provide credit.
  • New Revenue Opportunities: Banks can evolve their services to leverage wCBDC capabilities. This includes offering new digital asset custody solutions, developing smart contract-enabled financial products for their institutional clients, and providing enhanced liquidity management services based on real-time wCBDC flows.
  • Pressure on Traditional Payment Fees: The increased efficiency and potentially lower costs of wCBDC-based settlements might put downward pressure on fees for traditional wholesale payment services, prompting banks to innovate and find new value propositions.
  • Operational Transformation: Banks will need to invest in upgrading their internal systems and processes to integrate with wCBDC platforms, requiring significant technological and operational transformation.

3.5. Improved Cross-Border Payments

One of the most compelling economic arguments for wCBDCs lies in their potential to radically transform cross-border payments, an area long plagued by inefficiency, high costs, and slow settlement times.

  • Current Inefficiencies: Existing cross-border payment systems (like correspondent banking) involve multiple intermediaries, complex messaging systems (e.g., SWIFT), varying operating hours, and exposure to foreign exchange (FX) risk. This leads to high costs, long settlement chains, lack of transparency, and delays (often days).
  • How wCBDCs Can Improve:
    • Reduced Intermediaries: Multi-wCBDC platforms or interconnected national wCBDCs can significantly shorten payment chains, reducing the number of intermediaries and associated fees.
    • Real-Time PvP: Project mBridge and Project Dunbar have demonstrated the technical feasibility of real-time PvP across multiple wCBDCs, eliminating principal risk in FX transactions and enabling immediate settlement.
    • Extended Operating Hours: DLT systems can operate 24/7, overcoming limitations of differing national operating hours and time zones.
    • Enhanced Transparency: A shared ledger allows for greater visibility into the payment journey, improving reconciliation and reducing errors.
    • Reduced FX Risk: Instantaneous settlement can minimize exposure to exchange rate fluctuations during the payment process.
    • Lower Costs: Automation, reduced intermediaries, and greater efficiency lead to lower transaction costs.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Monetary Policy Implications

The deployment of wCBDCs, while primarily focused on enhancing financial market infrastructure, carries several nuanced implications for monetary policy, impacting its transmission, implementation, and overall financial stability considerations.

4.1. Transmission Mechanism and Control of Interest Rates

wCBDCs could subtly alter, and potentially strengthen, the central bank’s control over the monetary policy transmission mechanism.

  • Direct Influence on Reserves: wCBDCs represent a direct liability of the central bank, akin to commercial banks’ reserves. As the central bank can directly control the quantity and remuneration of wCBDCs, it gains a more precise and immediate lever to influence the level of reserves in the financial system. This could translate into more effective steering of short-term interest rates.
  • Enhanced Open Market Operations: Open market operations, the primary tool for managing liquidity and influencing interest rates, could become more efficient. The central bank could directly issue or absorb wCBDCs from eligible financial institutions, leading to faster and more transparent adjustments in system-wide liquidity.
  • Standing Facilities: Access to standing facilities (e.g., overnight lending and deposit facilities) could be directly tied to wCBDC holdings, allowing central banks to fine-tune liquidity provision and absorption with greater precision.
  • Interest-Bearing wCBDC: Unlike physical cash, wCBDCs can be designed to carry interest, either positive or negative. This introduces a powerful new tool for monetary policy:
    • Lower Bound Issues: The ability to implement negative interest rates directly on central bank money held by commercial banks (in the form of wCBDC) could effectively remove the effective lower bound on nominal interest rates, providing central banks with greater flexibility in unconventional monetary policy settings, particularly during economic downturns or deflationary pressures.
    • Remuneration of Reserves: Varying the interest rate paid on wCBDC holdings could provide a more direct and instantaneous signal to the market, influencing interbank rates and the broader yield curve with greater efficacy.

4.2. Financial Stability Considerations

While wCBDCs are designed to enhance financial stability by reducing settlement risk, they also introduce new vectors of risk that central banks must proactively manage.

  • Reduced Settlement Risk: As previously discussed, the atomic DvP and PvP capabilities of wCBDCs fundamentally reduce principal risk in securities and FX settlements. This directly contributes to financial stability by eliminating a significant source of systemic risk in wholesale markets.
  • Cybersecurity and Operational Resilience: A wCBDC system, particularly one based on DLT, becomes a critical piece of national financial infrastructure. Any disruption, cyberattack, or operational failure could have severe systemic consequences. Central banks must invest heavily in robust cybersecurity, resilient infrastructure, and comprehensive disaster recovery plans to safeguard the integrity and continuous operation of the wCBDC system.
  • Liquidity Shifts and Interbank Market Dynamics: While wCBDCs can improve liquidity management, their introduction could also alter the dynamics of interbank lending markets. If wCBDCs are perceived as a safer or more efficient means of holding central bank reserves, it could potentially impact the volume and pricing of traditional interbank lending. Central banks will need to monitor these shifts to ensure market functioning remains smooth.
  • Potential for Bank Runs (Limited for wCBDC): The risk of rapid shifts from commercial bank deposits to central bank money (a ‘digital bank run’) is a significant concern for retail CBDCs. For wCBDCs, this risk is substantially mitigated by the restricted access model, as only eligible financial institutions can hold wCBDC directly. Thus, the direct flow of funds from the public to the central bank, bypassing commercial banks, is not a primary concern.
  • Crisis Management: In times of financial stress, a wCBDC could provide the central bank with a direct and resilient channel to inject liquidity into the financial system, potentially making crisis management more efficient and targeted. However, it also demands robust frameworks for managing central bank’s balance sheet impact and market expectations.

4.3. Monetary Sovereignty and International Spillover

In an increasingly interconnected global financial system, the adoption of wCBDCs by multiple jurisdictions raises questions about monetary sovereignty and potential international spillovers.

  • Maintaining Domestic Control: A wCBDC allows a central bank to maintain full control over its domestic monetary policy and the supply of its currency, even as digital payments proliferate. This is particularly relevant in the face of privately issued stablecoins or foreign CBDCs, which could otherwise erode a central bank’s influence.
  • Cross-Border Spillover Effects: If a major currency’s wCBDC becomes highly efficient and widely used for cross-border transactions, it could potentially influence FX markets and the monetary policy autonomy of smaller nations, especially if their domestic financial systems become heavily reliant on the foreign wCBDC for international trade and finance. This underscores the need for international cooperation and common standards.
  • Role in International Reserve Currencies: The efficiency and resilience offered by a wCBDC could potentially reinforce the status of existing reserve currencies or even shift influence over time, depending on adoption rates and perceived stability.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Global Pilot Programs and Comparisons

The exploration and development of wCBDCs are not confined to theoretical discussions; numerous central banks and international bodies are actively engaged in practical pilot programs and research initiatives. These projects are critical for testing technical feasibility, identifying real-world use cases, and understanding the policy implications.

5.1. Project Acacia (Australia)

Lead Institutions: Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC).
Overview: Project Acacia is a multi-year research initiative aimed at exploring the use of a wholesale CBDC to settle tokenised assets within Australia. Building on previous successful proof-of-concepts (like Project Jasper in Canada, and other RBA DLT experiments), Acacia is designed to be a more comprehensive, real-money pilot program.
Key Aspects:
* Duration & Phases: The project spans three years, with a pilot phase involving industry participants testing various use cases over approximately six months, with findings expected in the first half of 2026.
* Use Cases: The program is testing a wide array of high-value and complex financial market transactions using wCBDC for settlement. These include:
* Fixed Income: Settlement of tokenised government bonds and corporate debt.
* Private Markets: Facilitating liquidity and settlement for tokenised private credit and equity.
* Trade Receivables: Enabling efficient financing and settlement of tokenised trade assets.
* Carbon Credits: Exploring the settlement of tokenised environmental assets.
* DLT Platforms: The trials involve multiple distributed ledger technologies to assess their suitability and interoperability, including Hedera, Redbelly Network, R3 Corda, and Canvas Connect.
* Regulatory Support: The Australian Securities and Investments Commission (ASIC) has provided regulatory relief (waivers from certain existing rules) to allow participants to test the new technologies without undue regulatory burden, while ensuring appropriate safeguards.
* Objectives: To investigate the efficiency gains, risk reduction, and innovation potential of using wCBDC for the settlement of tokenised assets in a multi-platform environment. It aims to inform policy development regarding the future of Australia’s financial market infrastructure.

5.2. Project Dunbar (BIS Innovation Hub, RBA, Bank Negara Malaysia, Monetary Authority of Singapore, South African Reserve Bank)

Lead Institutions: Bank for International Settlements (BIS) Innovation Hub Singapore Centre, in collaboration with the central banks of Australia, Malaysia, Singapore, and South Africa.
Overview: Project Dunbar was a foundational multi-CBDC (mCBDC) initiative that explored the technical feasibility and practical implications of a shared platform for multiple wCBDCs to facilitate efficient cross-border payments.
Key Aspects:
* Goals: To develop common platforms for international settlements using multiple wCBDCs, aiming to reduce costs, increase speed, and improve transparency in cross-border transactions.
* Technology: The project prototyped two distinct DLT platforms (one based on Corda, one on Quorum) to demonstrate how financial institutions could use wCBDCs issued by participating central banks to execute cross-border transactions.
* Key Findings: The project successfully demonstrated the technical feasibility of shared multi-wCBDC platforms for cross-border payments. It highlighted that a common platform approach could significantly enhance efficiency, but also underscored the complex policy and governance challenges, particularly regarding access, data privacy, and regulatory oversight across multiple jurisdictions.
* Impact: Project Dunbar laid critical groundwork for subsequent mCBDC initiatives, proving the concept and identifying key areas for further research and international cooperation.

5.3. Project mBridge (BIS Innovation Hub, Bank of Thailand, Central Bank of the UAE, People’s Bank of China, Hong Kong Monetary Authority)

Lead Institutions: BIS Innovation Hub Hong Kong Centre, collaborating with the central banks/monetary authorities of Thailand, UAE, China, and Hong Kong.
Overview: Building on earlier work (Project Inthanon-LionRock), Project mBridge is one of the most advanced multi-wCBDC projects, focused on building a minimum viable product (MVP) of a common platform for cross-border payments using wCBDCs.
Key Aspects:
* Goals: To facilitate instant, low-cost, and secure cross-border wholesale payments using a single distributed ledger where multiple wCBDCs are issued and exchanged directly.
* Phase II and MVP: The project progressed to a pilot phase with commercial banks in 2022 and successfully completed its MVP in 2023. It aims to eventually move to a commercialization phase.
* Technology: Utilizes a custom-built DLT platform designed for high throughput and atomic settlement across different wCBDCs.
* Participants: Involves numerous commercial banks from the participating jurisdictions, testing real-value transactions.
* Key Findings: Demonstrated robust performance for cross-border payments, achieving atomic PvP across different currencies and significantly reducing settlement times and costs. It highlights the potential for a new paradigm in international settlements.
* Governance: The project also explores the complex legal, regulatory, and governance frameworks required for a multilateral wCBDC platform involving diverse jurisdictions.

5.4. Project Jura (BIS Innovation Hub, Swiss National Bank, Banque de France)

Lead Institutions: BIS Innovation Hub Eurosystem Centre, Swiss National Bank, and Banque de France.
Overview: Project Jura explored the settlement of tokenised securities using wCBDCs.
Key Aspects:
* Goals: To investigate the technical and legal feasibility of settling tokenised euro and Swiss franc wholesale assets on a single DLT platform using wCBDCs issued by the central banks.
* Use Cases: Focused on issuing and redeeming a tokenised French government bond against wCBDC, and cross-border settlement of a tokenised bond.
* Key Findings: Successfully demonstrated DvP settlement of tokenised securities using wCBDCs. Showcased the potential for significant efficiency gains and risk reduction in wholesale securities markets. Also highlighted the need for careful consideration of legal frameworks regarding DLT-based securities and wCBDCs.

5.5. Project Mariana (BIS Innovation Hub, Swiss National Bank, Banque de France, Monetary Authority of Singapore)

Lead Institutions: BIS Innovation Hub Swiss Centre, with the Swiss National Bank, Banque de France, and Monetary Authority of Singapore.
Overview: Project Mariana prototyped a multi-wCBDC platform for cross-border foreign exchange (FX) trading and settlement using automated market makers (AMMs).
Key Aspects:
* Goals: To explore how wCBDCs could improve cross-border FX transactions by leveraging decentralized finance (DeFi) concepts like AMMs for efficient and robust foreign exchange.
* Technology: Explored the use of a common technical standard to link wCBDCs issued on different national DLT networks, rather than a single shared platform.
* Key Findings: Demonstrated the technical feasibility of using AMMs for FX trading with wCBDCs, showing potential for increased efficiency and reduced counterparty risk. The project concluded that while promising, further research is needed on governance, legal frameworks, and the precise design of AMM mechanisms for central bank money.

5.6. Comparison and Trends

These diverse pilot programs highlight several common themes and emerging trends:

  • Focus on Efficiency and Risk Reduction: All projects universally aim to improve the speed, cost-efficiency, and risk profile of wholesale payments and securities settlements.
  • DLT as Core Technology: Distributed Ledger Technology is consistently chosen as the underlying technological backbone, particularly permissioned DLTs due to their control, privacy, and scalability characteristics.
  • Emphasis on Cross-Border: A significant number of projects (Dunbar, mBridge, Mariana) are specifically addressing the challenges of international payments, recognizing that this is where the most substantial inefficiencies lie.
  • Tokenization of Assets: Many wCBDC initiatives are directly linked to the burgeoning field of tokenized securities and other real-world assets, positioning wCBDC as the settlement layer for these new digital markets.
  • International Collaboration: The complexity and interconnectedness of financial markets necessitate close collaboration between central banks and international bodies like the BIS, indicating a strong move towards harmonized approaches rather than fragmented national efforts.
  • Phased Approach: Central banks are generally adopting a cautious, phased approach, starting with proofs-of-concept, moving to pilots, and gradually assessing policy implications before any potential large-scale implementation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Regulatory Frameworks

The successful and responsible implementation of wCBDCs is inextricably linked to the establishment of robust, comprehensive, and adaptive regulatory frameworks. These frameworks must address existing legal uncertainties, mitigate new risks, and foster an environment conducive to innovation while preserving financial stability and integrity.

6.1. Legal Tender Status and Legal Certainty

  • Defining Legal Status: A fundamental step is to clearly define the legal status of the wCBDC. While it would typically be a liability of the central bank, akin to commercial bank reserves, specific legislation may be required to formally confer it with legal tender status in a digital form, ensuring its acceptance and finality in debt discharge within the wholesale context.
  • Contractual Certainty: For programmable wCBDCs utilizing smart contracts, ensuring the legal enforceability of these automated agreements is paramount. Existing contract law may need adaptation to address the unique characteristics of code-based contracts, including issues of interpretation, modification, error resolution, and dispute mechanisms. Clarity is needed on how a central bank’s wCBDC rules interact with private smart contract logic.
  • Property Rights and Custody: Defining clear property rights over digital assets, including wCBDC and tokenized securities settled with wCBDC, is crucial. This involves addressing issues of ownership, transfer, security interests, and the legal implications of holding assets on a distributed ledger. Regulatory clarity on the custody arrangements for wCBDC balances and associated digital assets is also necessary.

6.2. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

  • Enhanced Auditability: DLT’s inherent immutability provides a comprehensive and tamper-proof audit trail of all transactions. This feature can significantly enhance AML/CFT efforts by allowing regulators and financial institutions to trace the flow of funds more effectively than in some legacy systems.
  • Know Your Customer (KYC) for Institutions: While wCBDC access is restricted to regulated financial institutions, strict KYC and Know Your Business (KYB) procedures for these participants remain essential. The wCBDC system can be designed to incorporate digital identity frameworks for participants, streamlining compliance.
  • Transaction Monitoring and Surveillance: Regulatory frameworks must mandate and facilitate real-time or near real-time transaction monitoring capabilities to detect suspicious activity. This includes establishing thresholds for reporting and developing advanced analytical tools to identify patterns indicative of illicit finance.
  • Balancing Privacy and Oversight: The challenge lies in balancing the need for privacy for commercial institutions with the imperative for regulatory oversight. Permissioned ledgers with selective disclosure mechanisms or privacy-enhancing technologies (like ZKPs) can be leveraged, provided regulators have mandated access to necessary information when required for investigations.

6.3. Data Privacy and Security

  • Institutional Data Confidentiality: Unlike retail CBDCs, where individual privacy is a key concern, wCBDCs need to ensure the confidentiality of sensitive commercial transaction data among financial institutions. Regulations must clarify who has access to what data, under what conditions, and for how long.
  • Cybersecurity Standards: Regulatory bodies must establish stringent cybersecurity standards and resilience requirements for wCBDC systems and participating entities. This includes mandating regular security audits, penetration testing, incident response plans, and robust data encryption protocols.
  • Data Governance: Clear rules on data ownership, storage, retention, and cross-border data flows are essential, especially for multi-wCBDC platforms involving multiple jurisdictions with differing data protection laws.

6.4. Cross-Border Coordination and Harmonization

  • International Standards: The utility of wCBDCs is magnified in cross-border contexts. This necessitates significant international regulatory cooperation to harmonize standards, legal frameworks, and operational protocols. Organizations like the Bank for International Settlements (BIS), Financial Stability Board (FSB), International Monetary Fund (IMF), and Financial Action Task Force (FATF) play crucial roles in facilitating this coordination.
  • Interoperability Across Jurisdictions: Regulatory alignment is a prerequisite for technical interoperability. This includes harmonizing rules around settlement finality, legal enforceability of smart contracts across borders, and common approaches to AML/CFT and data sharing for cross-border transactions.
  • Addressing Regulatory Arbitrage: Without coordinated international frameworks, there is a risk of regulatory arbitrage, where financial activities gravitate to jurisdictions with less stringent oversight. Harmonization helps prevent this and ensures a level playing field.

6.5. Operational Resilience and Risk Management

  • Business Continuity and Disaster Recovery: Regulations must require comprehensive business continuity plans, including redundant systems, backup facilities, and clear recovery protocols to ensure the continuous availability of the wCBDC system even in the event of major disruptions.
  • Third-Party Risk Management: If central banks or commercial banks rely on third-party technology providers or cloud services for wCBDC infrastructure, regulatory frameworks must ensure robust oversight of these providers to manage operational and security risks.
  • Systemic Risk Mitigation: Regulators need to assess and mitigate any new systemic risks introduced by wCBDCs, such as potential for single points of failure, concentration risks with DLT providers, or unforeseen market fragmentation. This includes stress testing the wCBDC system under various adverse scenarios.

6.6. Supervision and Oversight

  • Evolving Supervisory Tools: Regulators will need to develop new supervisory tools and methodologies to monitor wCBDC transactions, participant behavior, and overall system health in a DLT environment. This may involve leveraging data analytics and AI for real-time surveillance.
  • Central Bank’s Role as Operator/Oversight Body: For a central bank-operated wCBDC, its dual role as operator and overseer requires careful institutional design to ensure effective governance, accountability, and the separation of functions where appropriate.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Technological Infrastructure

The successful deployment and ongoing operation of a wCBDC hinge critically on the robustness, security, and scalability of its underlying technological infrastructure. This infrastructure must be meticulously designed to meet the high demands of wholesale financial markets.

7.1. Distributed Ledger Technology (DLT)

DLT is widely recognized as the foundational technology for wCBDCs, offering unique advantages over traditional centralized systems, primarily for its immutability, transparency (to authorized parties), and potential for atomic settlement.

  • Permissioned DLT: For wCBDCs, permissioned DLTs are almost universally preferred over permissionless (public) blockchains (like Bitcoin or Ethereum mainnet) due to:
    • Control and Governance: Central banks and regulators require tight control over who can participate, validate transactions, and govern the network rules. Permissioned ledgers allow for strict KYC/AML compliance for all participants.
    • Performance and Scalability: Permissioned networks, with a limited number of known validators, can achieve significantly higher transaction throughput and lower latency compared to permissionless networks reliant on global consensus (e.g., Proof-of-Work).
    • Privacy: While ledgers are distributed, participants’ identities are known, and mechanisms can be implemented to ensure transaction confidentiality for commercial purposes while allowing regulatory access.
    • Energy Efficiency: Consensus mechanisms used in permissioned DLTs (e.g., Proof of Authority, Practical Byzantine Fault Tolerance) are typically far less energy-intensive than those used in public blockchains.
  • Consensus Mechanisms: Key considerations for DLT consensus mechanisms in a wCBDC context include:
    • Finality: The speed and certainty with which transactions are deemed irreversible. Financial markets demand immediate and cryptographically provable finality.
    • Resilience: The ability of the network to continue operating even if some nodes fail or are compromised.
    • Scalability: The capacity to process a high volume of transactions per second (TPS) during peak periods without performance degradation.
    • Examples: Common consensus mechanisms suitable for permissioned enterprise DLTs include Byzantine Fault Tolerance (BFT) variants (e.g., PBFT, Tendermint) and Proof of Authority (PoA).

7.2. Cybersecurity Measures

The wCBDC system will be a prime target for cyberattacks, making robust cybersecurity absolutely paramount.

  • Advanced Cryptography: Implementation of state-of-the-art cryptographic techniques for transaction signing, data encryption (at rest and in transit), and secure key management. This includes planning for post-quantum cryptography to guard against future threats.
  • Multi-Factor Authentication (MFA) and Digital Identities: Strong authentication mechanisms for all participants and administrators accessing the wCBDC network. Digital identities for institutions can leverage cryptographic certificates.
  • Smart Contract Auditing and Security: Rigorous security audits of all smart contract code before deployment to identify and rectify vulnerabilities. Secure coding practices and formal verification methods are essential to prevent exploits.
  • Network Security: Implementing robust firewalls, intrusion detection/prevention systems (IDS/IPS), and denial-of-service (DoS) attack mitigation strategies. Secure network segregation and zero-trust architectures.
  • Regular Vulnerability Assessments and Penetration Testing: Continuous monitoring and testing of the system’s resilience against evolving cyber threats.
  • Threat Intelligence and Incident Response: Establishing robust threat intelligence capabilities to anticipate attacks and a well-defined incident response plan to manage and recover from breaches swiftly.
  • Hardware Security Modules (HSMs): Utilizing HSMs for the secure generation, storage, and management of cryptographic keys, which are critical for protecting the integrity of the wCBDC.

7.3. Scalability and Performance

A wCBDC system must be able to handle the immense transaction volumes characteristic of wholesale markets without compromising performance.

  • Transaction Throughput: The ability to process tens of thousands, or even hundreds of thousands, of transactions per second (TPS) during peak periods. This necessitates efficient consensus algorithms and optimized ledger design.
  • Latency and Finality: Transactions must achieve finality almost instantaneously (milliseconds to a few seconds) to meet RTGS requirements and facilitate atomic DvP/PvP.
  • Data Storage and Archiving: Robust solutions for storing the ever-growing ledger data, including efficient archiving and retrieval mechanisms, while maintaining performance.
  • Scalability Solutions: Exploring and implementing techniques such as:
    • Sharding: Dividing the ledger into smaller, manageable segments to process transactions in parallel.
    • Off-chain Processing/Layer-2 Solutions: Handling less critical or high-volume transactions off the main ledger to reduce congestion, with final settlement or verification occurring on-chain.
    • Optimized Data Structures: Efficient data storage and indexing on the ledger to facilitate fast queries and validation.

7.4. Interoperability Mechanisms

Seamless interoperability is crucial for a wCBDC to integrate with existing financial systems and facilitate cross-border transactions.

  • API-First Design: Providing well-documented and secure Application Programming Interfaces (APIs) to enable seamless integration with commercial banks’ core banking systems, treasury management systems, and other financial applications.
  • Messaging Standards: Adhering to international messaging standards (e.g., ISO 20022) to ensure compatibility and facilitate data exchange across diverse systems.
  • Cross-Chain Communication Protocols: Developing or adopting protocols (e.g., inter-ledger protocol – ILP, atomic swaps, cross-chain bridges) that enable different DLT networks (e.g., a wCBDC ledger and a tokenized securities ledger) to communicate and atomically exchange assets.
  • Interoperability with Legacy Systems: Building gateways and adapters to connect the wCBDC system with traditional RTGS, ACH, and SWIFT networks during a transition period and for ongoing hybrid operations.

7.5. Resilience and Disaster Recovery

Operational resilience is critical to ensuring continuous availability and trust in the wCBDC system.

  • Redundancy and Failover: Implementing redundant infrastructure components (servers, networks, data centers) and automated failover mechanisms to ensure that the system can continue operating seamlessly in the event of hardware failure, software bugs, or localized disasters.
  • Geographical Dispersion: Distributing critical infrastructure across multiple geographically diverse locations to mitigate risks from natural disasters or regional outages.
  • Backup and Recovery Protocols: Establishing comprehensive data backup procedures and robust disaster recovery plans, including regular testing, to enable swift restoration of services following a catastrophic event.

7.6. Identity Management and Access Control

  • Digital Identity for Institutions: Secure digital identity frameworks for participating financial institutions, enabling cryptographic authentication and authorization for access to the wCBDC ledger and associated services.
  • Role-Based Access Control (RBAC): Implementing granular RBAC to ensure that only authorized individuals within participating institutions can perform specific actions on the wCBDC system, based on their roles and responsibilities.

7.7. Cloud Computing Considerations

  • Security and Compliance: While cloud platforms offer scalability and flexibility, central banks must meticulously assess the security posture, data residency requirements, and regulatory compliance of cloud service providers for hosting critical wCBDC infrastructure.
  • Hybrid Cloud/On-Premise: Many central banks may opt for a hybrid approach, maintaining some critical components on-premise while leveraging cloud resources for scalability or specific applications, balancing control with flexibility.

Many thanks to our sponsor Panxora who helped us prepare this research report.

8. Challenges and Risks

While the potential benefits of wCBDCs are substantial, their successful implementation is not without significant challenges and inherent risks that necessitate careful mitigation strategies.

8.1. Technical Challenges

  • Scalability under Extreme Load: While permissioned DLTs offer better scalability than public ones, handling the peak transaction volumes of a national or international wholesale market (potentially hundreds of thousands of TPS) reliably and consistently remains a significant engineering challenge. Ensuring low latency and immediate finality at such scale is complex.
  • Interoperability Complexity: Achieving seamless interoperability, particularly for cross-border wCBDCs and with diverse tokenized asset platforms, is technically intricate. It requires standardized protocols, robust cross-chain mechanisms (bridges, atomic swaps), and careful management of disparate DLT environments.
  • Cybersecurity Threats: A wCBDC system presents a high-value target for sophisticated cyberattacks (e.g., state-sponsored attacks, quantum attacks, smart contract exploits). Maintaining impenetrable security and resilience against ever-evolving threats is an ongoing and formidable challenge.
  • Privacy-Transparency Trade-off: Balancing the need for transaction privacy for financial institutions with regulatory requirements for transparency (AML/CFT, systemic risk monitoring) requires advanced cryptographic solutions and careful access control mechanisms, which add complexity.
  • Technological Obsolescence: The rapid pace of technological change, especially in DLT and cryptography, means that wCBDC systems must be designed with upgradability and adaptability in mind to avoid rapid obsolescence.

8.2. Legal and Regulatory Challenges

  • Legal Certainty for New Instruments: The legal status of wCBDC, and particularly tokenized securities settled with wCBDC, needs clear legislative backing. The legal enforceability of smart contracts, especially across jurisdictions, is a complex area requiring international harmonization.
  • Jurisdictional Complexity for Cross-Border wCBDCs: Multi-wCBDC platforms raise significant legal and regulatory questions regarding applicable law, dispute resolution mechanisms, data governance across borders, and the oversight responsibilities of multiple central banks and regulators.
  • AML/CFT Enforcement in a Digital Context: While DLT offers auditability, integrating it seamlessly with existing AML/CFT frameworks and ensuring effective monitoring of complex digital transactions, especially with privacy-enhancing technologies, presents implementation challenges.
  • Global Regulatory Fragmentation: Lack of harmonized international regulatory approaches could lead to regulatory arbitrage, market fragmentation, and hinder the full potential of cross-border wCBDC applications. Achieving consensus among diverse legal systems and policy objectives is a monumental task.

8.3. Governance Challenges

  • Operational Governance: Establishing clear governance structures for the ongoing operation, maintenance, and evolution of the wCBDC system is crucial. This includes decision-making processes for upgrades, bug fixes, and handling exceptional circumstances.
  • Cross-Border Governance Models: For multi-wCBDC platforms, developing a robust, equitable, and widely accepted governance framework among participating central banks and jurisdictions is arguably the most significant non-technical challenge. This involves addressing issues of consensus mechanisms, dispute resolution, data sharing, and policy coordination.
  • Central Bank Autonomy: While international cooperation is necessary, central banks must ensure that their participation in wCBDC initiatives does not compromise their monetary policy autonomy or financial stability mandates.

8.4. Operational and Resilience Risks

  • Single Points of Failure: Despite DLT’s distributed nature, concentration risks can emerge if too few DLT providers or technology vendors dominate the ecosystem, or if critical components are centralized.
  • Human Error and System Bugs: Complex financial systems are susceptible to human error in operation and software bugs, which can have significant financial consequences. Rigorous testing and robust fallback mechanisms are essential.
  • Operational Costs: While wCBDCs promise efficiency gains, the initial investment in building and maintaining the advanced technological infrastructure, coupled with ongoing cybersecurity and operational costs, can be substantial.

8.5. Economic and Market Structure Risks

  • Market Fragmentation: If different wCBDC initiatives develop on incompatible technical or legal standards, it could lead to fragmented wholesale markets, hindering liquidity and efficiency rather than improving it.
  • Unintended Disintermediation: While restricted access mitigates direct disintermediation for commercial banks, potential shifts in market structure or the emergence of new non-bank financial institutions leveraging wCBDC could still alter the competitive landscape.
  • Liquidity Impacts: Unforeseen consequences on interbank liquidity management or the broader functioning of money markets, though less likely for restricted wCBDC, need careful monitoring.

8.6. Geopolitical Implications

  • Currency Dominance: The efficiency of a wCBDC in a major reserve currency could further entrench its international role, potentially challenging other currencies. Conversely, a highly efficient mCBDC platform could foster greater multilateralism.
  • Financial Sanctions and Control: wCBDCs could offer new avenues for enforcing or circumventing financial sanctions, depending on their design and governance. This carries significant geopolitical ramifications that central banks and governments must carefully consider.

Many thanks to our sponsor Panxora who helped us prepare this research report.

9. Conclusion

Wholesale Central Bank Digital Currencies (wCBDCs) represent a significant and perhaps inevitable evolution in the digitalization of financial systems, holding immense promise to redefine the landscape of interbank settlements and large-value payments. As evidenced by the detailed analysis of their design models, economic impacts, monetary policy considerations, and the proliferation of sophisticated global pilot programs, wCBDCs possess the transformative potential to significantly enhance the efficiency, transparency, and resilience of financial markets worldwide.

The core drivers behind this exploration are compelling: the ability to reduce costs, optimize liquidity management, and facilitate atomic settlement of complex financial transactions, thereby mitigating counterparty and principal risks. Furthermore, the advent of programmable wCBDCs, underpinned by robust Distributed Ledger Technology, promises to unlock new frontiers for innovation in financial products and services, particularly in the realm of tokenized assets and cross-border payments. Projects like mBridge and Dunbar vividly illustrate the tangible progress being made in realizing a more efficient and interconnected global financial infrastructure.

However, the path to widespread wCBDC implementation is not without its formidable challenges. The complexity inherent in designing systems that balance privacy with transparency, ensure unparalleled cybersecurity, and achieve hyper-scalability cannot be overstated. Equally critical are the legal and regulatory hurdles, demanding comprehensive frameworks that provide legal certainty for digital assets and smart contracts, while simultaneously fostering cross-border harmonization to prevent market fragmentation and regulatory arbitrage. The governance models, particularly for multi-jurisdictional platforms, require unprecedented levels of international cooperation and consensus.

Central banks globally are adopting a cautious yet proactive approach, leveraging ongoing research and pilot initiatives, such as Project Acacia and Project Jura, to gather invaluable insights and iteratively refine their understanding and designs. The insights gleaned from these real-world experiments are crucial in informing policy development and technical specifications, ensuring that wCBDCs are not merely technological upgrades but foundational enhancements that meet the evolving needs of modern financial systems while safeguarding stability and public trust.

The journey towards the full realization of wCBDCs is a collaborative endeavor. It necessitates sustained international cooperation among central banks, close engagement with the financial industry, and a commitment from policymakers to adapt legal and regulatory frameworks to a rapidly digitizing financial world. While challenges remain, the clear benefits of wCBDCs in fostering a more efficient, resilient, and innovative wholesale financial ecosystem underscore their importance as a cornerstone of the future financial architecture.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

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