Central Bank Digital Currencies: Wholesale and Retail CBDCs, and Status of Global Initiatives

Central Bank Digital Currencies (CBDCs) have emerged as a significant topic in the world of finance and technology, with many countries exploring their potential implementation. 

They can be broadly categorized into two types: Wholesale CBDCs and Retail CBDCs.

Wholesale CBDCs

Wholesale CBDCs are designed for use by financial institutions and large corporations in the settlement of high-value transactions and interbank payments. These digital currencies aim to enhance the efficiency and security of existing financial systems.

Key Features:

• Limited access to financial institutions and select participants
• Facilitate large-scale transactions and interbank settlements
• Potential to reduce counterparty risk and improve liquidity management

Retail CBDCs

Retail CBDCs, on the other hand, are intended for use by the general public and businesses for everyday transactions. They serve as a digital equivalent of physical cash, providing a secure and convenient means of payment.

Key Features:

• Widely accessible to the general public
• Used for everyday transactions and peer-to-peer payments
• Potential to promote financial inclusion and reduce the cost of cash handling

Global CBDC Initiatives

Many major economies around the world are actively researching, developing, or piloting CBDC projects. Here’s an overview of the current status of CBDC efforts in several key countries:

United States

The Federal Reserve is actively researching the potential of a Digital Dollar, with a focus on wholesale CBDC applications. While no formal decision has been made on a retail CBDC, the current political climate suggests a shift in priorities.

Key developments:

• In January 2022, the Fed released a report defining a CBDC as “a digital liability of a central bank that is widely available to the general public”.
• In March 2022, President Biden issued an Executive Order on digital assets, which stated that the U.S. government “should prioritize timely assessments of potential benefits and risks [of a U.S. CBDC] under various designs to ensure that the United States remains a leader in the international financial system.” 
• In September 2022, Treasury, in consultation with various agencies, issued a report on CBDC. In addition, Treasury issued a framework for international engagement.
• An interagency working group led by the Treasury Department was created to further consider CBDC issues.
• In September 2022, the White House Office of Science and Technology Policy issued a technical evaluation,  and the Attorney General issued a (non-public) opinion on whether legislative changes would be necessary to issue a CBDC.
• The Fed has participated in pilot programs (Projects Hamilton, Cedar, and Agora) to build technical capacity pending a decision to adopt a CBDC.
• The Fed emphasizes that any potential CBDC implementation would be done through the banking system rather than direct accounts for individuals.
• Political opposition to a CBDC exists, with some members of Congress proposing legislation to prohibit the Fed from issuing a CBDC without explicit authorization.

European Union

The European Central Bank (ECB) has made significant progress on its Digital Euro project, which is one of the most advanced retail CBDC initiatives among G7 economies. 

Key developments:

• The European Commission published a proposal for a Digital Euro Regulation in June 2023, which is currently being debated.
• In October 2023, the ECB’s Governing Council approved the launch of a two-year preparation phase for the digital euro, set to run until October 31, 2025.
• The preparation phase aims to finalize the Digital Euro rulebook, select potential providers for the Digital Euro platform and infrastructure, and conduct further testing and experimentation.
• In January 2024, the ECB kicked off the year by issuing five calls for applications to set up framework agreements with potential providers of Digital Euro components and related services, with a total estimated spend of €432.1 million.
• The Rulebook Development Group (RDG) completed an interim review of the first draft rulebook in April 2024, covering functional and operational models, technical scheme requirements, and an initial adherence model.
• Seven new RDG workstreams were launched in May 2024, focusing on key areas such as minimum user experience standards and risk management.
• The ECB is making progress on the design of the Digital Euro, including the calibration of holding limits and the deployment of offline solutions on secure elements of mobile devices.
• The ECB is collaborating with industry standard-setting bodies to analyze how existing standards can support the integration of the offline Digital Euro into current point of sale terminals.
• The ECB is forming innovation partnerships with key stakeholders to test conditional payments and explore other innovative use cases for a Digital Euro.
• By the end of 2025, the ECB’s Governing Council will decide whether to move to the next phase of preparations. The final decision on issuing a Digital Euro will only be made after the EU’s legislative framework has been adopted.

United Kingdom

The Bank of England (BoE) and HM Treasury have made significant progress in their exploration of a CBDC, often referred to as the “digital pound” or “Britcoin.” 

Key developments:

• The BoE has been exploring both wholesale and retail CBDC options. Governor Andrew Bailey had expressed a preference for wholesale CBDC but acknowledges the need to prepare for retail CBDC as well.
• In January 2024, the BoE and HM Treasury published their response to the 2023 consultation on a digital pound, addressing public concerns and outlining future steps.
• In July 2024, the BoE announced a new series of experiments with CBDCs for retail use, citing the need to engage with innovations and risks in the payments industry.
• If implemented, primary legislation would be introduced to guarantee users’ privacy and control. The BoE and government would not have access to personal data, and users would have freedom in how they spend their digital pounds.
• The BoE is committed to maintaining access to cash alongside any potential CBDC introduction.
• The authorities confirmed that no final decision has been made to introduce a digital pound. The project is currently in the design phase, which is expected to conclude in 2025/2026.

Japan

The Bank of Japan (BOJ) has made significant progress in its CBDC research and development efforts. 

Key developments:

• The BOJ completed the second phase of its CBDC proof-of-concept in March 2023, which tested additional functions such as restricting holdings, restricting transactions, and paying interest.
• In April 2023, the BOJ officially launched its CBDC pilot program, focusing on testing how citizens would access and use the CBDC through intermediaries like banks and other financial institutions.
• In January 2024, the BOJ held its first official meeting with the Japanese government to discuss CBDC implementation. They agreed to resolve legal issues related to issuing a digital yen by the second quarter of 2024.
• As of March 2024, the BOJ has developed an end-to-end system for the pilot, including the central system, intermediary systems, and endpoint devices.
• The CBDC Forum has established working groups to address various aspects of CBDC implementation, such as system connectivity, overlay services, KYC procedures, and new technologies.
• The BOJ is also participating in international CBDC initiatives, such as Project Agorá, launched in April 2024 in collaboration with other major central banks.

Türkiye

The Central Bank of the Republic of Türkiye (CBRT) has made significant progress on its CBDC project, known as the Digital Turkish Lira. 

Key developments:

• Successful completion of the first phase of pilot tests in 2022, with the first payment transactions executed on the Digital Turkish Lira network.
• The CBRT has established the Digital Turkish Lira Collaboration Platform, partnering with TUBITAK (The Scientific and Technological Research Council of Turkey), Aselsan, and Havelsan for technological expertise.
• In 2023, the bank conducted closed-loop application pilot tests with technological stakeholders and published a comprehensive evaluation report of the first phase.
• The project entered its second phase in 2024, focusing on advanced trials with broader participation from banks and fintech companies.
• Future research will explore interoperability with other payment infrastructures, programmable payments, offline transactions, and cross-border CBDC applications.