Wholesale CBDC projects to follow

As a reminder: There are two types of CBDC - retail (used by consumers in everyday transactions) and wholesale (used by financial institutions). Retail CBDC projects seem to be ahead of wholesale projects when it comes to actual deployments and pilots. However, as we will elaborate in this article, wholesale CBDC projects are more likely to be realised in the short- to mid-term.

Currently, there are four emerging markets - the Bahamas, Eastern Caribbean, Jamaica, and Nigeria - which have launched a retail CBDC. "This accomplishment is underpinned by these countries' young demographics, their large unbanked populations, the proliferation of mobile phone usage, and the popularity of peer-to-peer payments," write Laboure and Ravindran. Yet, they also point to the fact that adoption uptake has been slower than expected.

For example, in Nigeria, which launched the eNaira in October 2021, the adoption rate is estimated at 6% with just over 13 million wallets that have been opened in a population of 223 million. eNaira as a percentage of total currency in circulation has increased from 0.02% to 0.36% since its launch in October 2021 to March 2024.

Figure 1: Timeline of selected retail CBDCs dates

Source: Deutsche Bank, Financial Times, Bloomberg Finance LP, Reuters, ECB, Bank of England, New York Fed, Boston Fed

As most retail CBDCs are not meant to be used for business payments but rather for peer-to-peer transactions and consumer-to-business (C2B) transactions, the impact for corporates is limited, explains Manuel Klein, Product Manager Blockchain Solutions and Digital Currencies, Deutsche Bank: "For example, the digital euro, which the European Central Bank (ECB) is currently exploring, will have a zero holding limit for merchants and governments."¹

Companies that accept digital euro transactions as an additional payment option, will automatically have these funds 'defunded' to their regular bank accounts at a commercial bank, Klein says. Given that the digital Euro will become legal tender, banks or payment service providers (PSPs) that help merchants to accept digital payments (so called acquirers) need to provide them with solutions that give the capability to accept digital euros. "Consequently, corporates also cannot actively instruct payments via the digital euro system beyond refunds", he adds.

According to a survey from the Bank for International Settlements (BIS) which was published in June 2024, 94% of the surveyed 86 central banks were working on or researching a CBDC in 2023. While many CBDC features are yet to be decided, more than half of central banks are considering holding limits for retail CBDCs.²

At the same time, central banks are now increasingly focusing on wholesale applications - particularly those in advanced economies. The BIS survey found that the likelihood that central banks will issue a wholesale CBDC by 2030 now exceeds the likelihood that they will issue a retail CBDC. In fact, by 2030, BIS expects nine live wholesale CBDCs.

"Potential benefits of wholesale CBDCs include faster settlement speed, enhanced efficiency and security for […] securities settlement and cross-currency payments"
Marion Laboure, Senior Strategist, Deutsche Bank Research

The aim of these wholesale projects is to make capital market or cross border interbank transactions more efficient by using distributed ledger technology (DLT). "Potential benefits of wholesale CBDCs include faster settlement speed, enhanced efficiency and security for interbank transactions such as securities settlement and cross-country and cross-currency payments, as well as more efficiency and therefore reduced costs," states Laboure.

She refers to simulations that were conducted under Cedar x Ubin+, a research project by the Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) which explored whether wholesale CBDC using DLT could improve the efficiency and transparency of cross-border payments involving one or more vehicle currencies. Ultimately, all test scenarios conducted in May 2023 showed that settlement was achieved in under thirty seconds, including payment chains requiring several cross-ledger currency exchange. "This could reduce the need for manual correspondence across time zones that can drive delays in these complex, cross-border transactions", the report says.

"While the bigger lever lies in the interbank sphere, corporates could benefit as well"
Manuel Klein, Product Manager Blockchain Solutions and Digital Currencies, Deutsche Bank

Moreover, wholesale CBDCs would allow for a Delivery-versus-Payment (DvP) approach of tokenised assets and money, i.e. the simultaneous exchange of securities and central bank money between two parties. "While the bigger lever lies in the interbank sphere, corporates could also benefit from lower costs and quicker settlement of securities like bonds," says Klein.

Figure 2: Why central banks are looking into wholesale CBDCs

Over the last couple of months, several major experiments to develop a wholesale CBDC have been launched. In November 2023, the Monetary Authority of Singapore (MAS) announced that it would pilot live issuance and use of a wholesale CBDC in 2024 to facilitate domestic interbank payments.³

In November 2024, the MAS specified its plans, stating that it would launch a new wholesale CBDC testnet, named the SGD Testnet, which aims to facilitate the commercialisation of tokenisation in the financial sector. According to the MAS, the testnet will be "made available to eligible financial institutions in Project Guardian and Project Orchid, enabling financial institutions to settle transactions with Singapore Dollar wholesale CBDC". Use cases include payments and securities settlement.⁴

Project Guardian was launched in 2022 and involves over 40 financial institutions and policymakers across seven jurisdictions. It is led by the Singaporean central bank and explores the use of fund and asset tokenisation - now in conjunction with a wholesale CBDC. Some of these 40 involved institutions have launched the Guardian Wholesale Network industry group, to establish a multi-member network which aims at commercialisation of the respective asset tokenisation trials.

At the same time, the Swiss National Bank (SNB) has moved its wholesale CBDC activity from test environments into production ('Project Helvetia III'). From December 2023 to June 2024, selected banks were able to use Swiss franc wholesale CBDC to settle transactions with DLT-based, tokenised bonds on the trading and settlement platform SIX Digital Exchange (SDX). In this six-month-period, SNB saw six digital bond issuances with a total value of CHF750m.⁵

"Settlement in central bank money is crucial for two reasons," commented Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the BIS Innovation Summit 2024 in Basel on 6 May: "First, it eliminates credit risk and minimises liquidity risk in settlement, thereby contributing to financial stability. And second, it reinforces the role of central bank money as the anchor for the monetary system."⁶

According to the SNB, "Project Helvetia III has been very successful" which is why the central bank decided in June 2024 to continue the pilot project "for at least two more years and to broaden its scope", i.e. attracting additional banks and opening the Swiss franc wholesale CBDC to a wider range of transactions.

The Eurosystem began its first wave of experiments in May 2024, exploring three different approaches to provide blockchain-based central bank money for wholesale settlement.⁷ One project enables market participants to connect the blockchains of their choice, which they use for bond issuance and trading, for example, to the Banque de France blockchain. On this blockchain, central bank money is issued directly as a wholesale CBDC token.

The other two solutions are looking into so-called 'trigger solutions' which connect existing payment systems - such as TARGET2 and Instant Payment Settlement (TIPS) - to a blockchain. The projects are driven by the Bundesbank and Bank of Italy respectively.⁸

The Bundesbank trigger solution is currently being tested extensively. Most recently, two transactions scored headlines among the digital finance community in Germany: In early September 2024, the industrial and technology giant Siemens issued the second digital bond in its history. The security with a one-year maturity and a volume of €300m was issued and settled on the private blockchain infrastructure SWIAT. The banks involved in the transaction used the trigger solution, which - according to the company - made it possible to settle a "Siemens bond for the first time in a fully automated manner, within minutes and in central bank money". Deutsche Bank enabled the settlement and credited the funds to the Siemens account.

"Since the successful issuance of our first digital bond on a blockchain [in February 2023], we have been rigorously focusing on the further development of this forward-looking technology," said Ralf P. Thomas, Chief Financial Officer of Siemens AG. "By issuing another digital bond, we are demonstrating once again our spirit of innovation and underscoring our aim to continuously drive digital solutions for the financial markets."⁹

"Blockchain technology is a game changer for the digitalisation of the European capital market"
Matthias Voelkel, CEO, Boerse Stuttgart Group

A few weeks later, in early October 2024, Börse Stuttgart Group conducted a series of test transactions with tokenised securities. These included bonds, funds, and shares. The focus of the tests was again the interoperability of blockchain-based securities and central bank money: Just like Siemens, the digital multilateral trading facility (MTF) was able to demonstrate that this combination allows settlement within a few minutes (rather than multiple days). According to Börse Stuttgart Group, settlement took place fully automated and directly between trading participants - securely and without counterparty risk. Six banks were involved in the transaction, including Deutsche Bank.

"Blockchain technology is a game changer for the digitalisation of the European capital market", Dr Matthias Voelkel, CEO of Boerse Stuttgart Group commented on the transaction. With the successful completion of the ECB blockchain tests, we have taken an important step in the EU."¹⁰

The role of tokenisation in the securities services space is also discussed in the flow article China's capital market illuminations which summarises key takeaways from Sibos.

While there have been numerous experiments with wholesale CBDCs for securities settlement over the last couple of months, tests in the cross-border payment space are expected to accelerate following the launch of Project Agorá (Greek for 'marketplace') - a collaboration between the Bank for International Settlements (BIS), seven central banks and 43 institutions from the private sector.

Kicked off in Basel in September 2024, the project aims to examine how tokenised commercial bank deposits can be seamlessly integrated with tokenised wholesale central bank money in a public-private programmable core financial platform. Its main objective is "to demonstrate how a unified ledger could enhance the efficiency of business and regulatory processes in correspondent banking payment chains, thereby reducing transaction times and costs, enhancing payment transparency, and mitigating risks for banks involved in cross-border payments".¹¹

This also happens on the back of the G20 Roadmap for Enhancing Cross-Border Payments, which G20 leaders endorsed in November 2020. The roadmap sets quantitative targets to lower costs, increase speed, accessibility, and transparency of international payments by the end of 2027 as described in the flow white paper G20 Roadmap: Forging a path to enhanced cross-border payments.

"Tokenisation has the potential to be the next frontier in the long trend of digitising money and assets," the BIS writes in an FAQ on Project Agorá. "The lessons learned during the project may set out a path for a new type of financial market infrastructure tailored to cross-border payments based on new technology."

All these projects show the high hopes associated with wholesale CBDCs and tokenisation. While retail CBDC projects are mostly motivated by increasing financial inclusion (in emerging markets), providing access to public money issued by the central bank in the digital age and strengthening the sovereignty of retail payment system (in Europe), wholesale CBDC projects are mostly focused on improving efficiency and lowering costs of incumbent settlement and payment infrastructures. Both are also driven by creating public alternatives to stablecoins and cryptocurrencies both in day-to-day retail transactions, as well as capital markets transactions. In any case, the journey has only begun.

Central Bank Digital Currencies & Cash: A long, Quiet River by Marion Laboure and Sai Ravindran (September 2024)

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