A primer on CBDC—the money of tomorrow

Central Bank Digital Currencies (CBDCs) have become one of the most prominent topics in recent years; without a doubt, it is the money of the future.



Laurent Collet - Partner - Strategy Regulatory & Corporate Finance - Deloitte

Francesca Messini - Director - FinTech Leader - Deloitte

Giulia Pescatore - Manager - Innovation - Deloitte

Published on 28 January 2020

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Yesterday’s reality may not be tomorrow’s—which is particularly relevant when talking about the impact of CBDCs. Major shifts in the payment industry such as the decline in the use of cash and the launch of cryptocurrencies and Stablecoins are only a few examples with disruptive potential. However, they are also enablers of a CBDC-driven world.

Central banks are keen to seize the opportunities of these digital innovations to power the economy of tomorrow. Due to its highly versatile and customizable nature, including several forms of retail and wholesale CBDCs, an increasing number of countries and central banks are assessing CBDC implementation to achieve their jurisdiction-specific objectives.

The response of central banks to the emergence of new forms of digital currencies will deliver efficiency and significant benefits to the economy; however, CBDC is still a new concept that poses many open questions and risks.

1Various CBDC models have arisen, including several forms of retail and wholesale CBDCs.

Retail CBDC

A retail CBDC is the equivalent of a peer-to-peer and widely accessible digital and central bank-issued currency, which can also be qualified as “the digital cash for the masses”. With the rise in electronic payments—about 101% between 2010 and 2018 in the Eurozone, and greater still over the course of the pandemic—a digital version of cash could allow individuals to have a claim on a central bank, just like cash currently. In addition, it can ensure the sovereignty of a country’s currency compared to emerging currencies such as Bitcoin or Stablecoins.

A retail CBDC can also increase the effectiveness of monetary policy tools by allowing central banks to distribute and control the digital money supply. And it can provide time and cost savings through its faster settlement time and increased efficiency, which can be passed onto individuals and businesses who can, in turn, benefit from lower transaction costs2.

Deloitte has identified three different potential scenarios of retail CBDCs, where all CBDCs are issued by a central bank but vary on who is ultimately liable. The main variations are known as “indirect”, “direct” and “hybrid”.

  1. The indirect retail CBDC is very similar to the ordinary retail payment process. It includes an intermediary layer of financial institutions, which are responsible for onboarding and communicating with businesses and individuals, sending payment messages to other financial institutions, and ultimately emitting payment instructions to the central bank for final settlement.
  2. For the direct retail CBDC, no intermediaries are needed. Individuals and businesses hold CBDC directly at a central bank through private accounts and the central bank is in charge of handling customer service and payment processing.
  3. The hybrid retail CBDC is the most realistic model and a combination of the previous two scenarios. An intermediary layer of financial institutions exists, but they can keep the CBDC segregated from their balance sheet, which enables increased portability3.

Wholesale CBDC

A wholesale CBDC model could significantly improve the settlement process’ risk management and possibly extend its availability to financial market participants who are not allowed to hold accounts at a central bank. Additionally, cross-border wholesale CBDC payments would offer a 24/7-available infrastructure; compared to taking several days to process transactions, it would eliminate cut-off times between jurisdictions and speed up the process. Further, settlement risk and liquidity risk could be reduced as part of the open banking network, where the reliable execution of payments instills confidence in the transaction’s participants. Finally, payment tracking would allow decision-making based on accurate and instantly tracked information4.

Akin to retail CBDCs, a wholesale CBDC could be offered in three different ways:

1. A local wholesale CBDC, which is currency-specific and only transferable within the local jurisdiction and not across borders.

2. A local transferable wholesale CBDC, which differentiates itself through the ability to use a local CBDC across borders in other jurisdictions. 3. A universal wholesale CBDC, which is collectively accepted by multiple jurisdictions and backed by a basket of currencies, similar to a Stablecoin. This scenario allows commercial banks to transact using a single CBDC across borders, jurisdictions and central banks, while being in control of their local real-time gross settlement (RTGS) systems (e.g., TARGET2 in Europe)5.

Interestingly, a wholesale CBDC does not only present opportunities for money transfers, but also for security transactions following the delivery-versus-payment method in a universal wholesale CBDC framework.

The map below illustrates the jurisdictions where the topic of retail and wholesale CBDC is being explored.

Despite their many benefits, CBDCs raise many questions and pose significant risks. Before moving forward, regulatory and legal considerations must be addressed.

  • Data privacy

In the case of a retail CBDC, private data could be exposed when holding digital money, due to data being stored on centralized systems. If a retail CBDC is set to monitor the consumption habits of a population to improve macroeconomic policy, a certain level of tracking is implied that has significant implications on data privacy.

  • Anti-money laundering/know your customer (AML/KYC)

Anti-money laundering and counter-terrorist financing (AML/CTF) risks associated with CBDCs require amendments to existing regulations, which must be precisely implemented for sanction regulations and due diligence procedures. A correct assessment of the impact of cross-border CBDC payments on AML/CTF requirements must also be put in place.

  • Cybersecurity

A robust risk mitigation framework is essential for any central bank willing to issue a CBDC. Security must be a core component of every CBDC system. For example, a retail CBDC model is more vulnerable and has multiple points of attack because it is open to a large number of participants.

  • Legal and regulatory

The issuance of a CBDC would not be an inconsequential technological upgrade, as it could provide new tools to central banks in terms of negative interest rates or higher access to transactional data. Additionally, a retail CBDC increases the legal complexities stemming from possible banking disintermediation. If issued in a direct way, deposits at commercial banks would shrink. This would lead to a decrease in commercial loan issuance, which would contradict the open market economy and challenge the key principle of the Treaty on the Functioning of the European Union that the European Central Bank (ECB) ought to abide by6.

  • Divergence in operational and technical infrastructures

Payments and transactions are currently powered by a host of different operational and technical infrastructures and systems. While CBDCs could enable a rationalized and even entirely new infrastructure, connections to existing systems will be necessary, at least during a transitional period.

1 Bank for International Settlements (BIS), Quarterly Review, “The money flower with selected examples”, 2017. 2 International Monetary Fund, “A Survey of Research on Retail Central Bank Digital Currency”, 2020. 3 BIS, Quarterly Review, “International banking and financial market developments”, 2020. 4 World Economic Forum, “CBDC Policy-Maker Toolkit – Appendices”, 2020. 5 BIS, Quarterly Review, “International banking and financial market developments”, 2020. 6 Hossein Nabilou, “Central Bank Digital Currencies, Preliminary Legal Observations”;


CBDCs could significantly affect the current financial operating model, providing major value for individuals, businesses and nations. Given the number and preliminary outcomes of ongoing projects around the world, it is clear that CBDCs are a game-changer and will soon become a reality. Already in September 2020, the European Commission issued the first proposal of its Markets in Crypto Assets (MiCA) regulation, aiming to create a new regulatory framework for the responsible innovation within the European Union to benefit consumers and businesses through the introduction of a retail payment digital strategy. The launch of a CBDC-based alternative to the Euro can be a cornerstone of this regulation; the only question is “when?”

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Are Central Bank Digital Currencies (CBDCs) the money of tomorrow?

Central bank digital currencies (CBDCs) have undeniably stepped into the limelight and we believe they are here to stay.

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