Most banks are not keen on retail central bank digital currencies (CBDCs) because they fear it will lure away bank deposits. The recent support by the American Bankers Association for the anti-CBDC Bill is evidence of this. Wholesale CBDCs – the ones only usable by institutions – were considered useful for banks. However, some institutions are keener than others, often depending on the application of the wholesale CBDC. Executives in the securities services sector are usually the most enthusiastic. On the payments side, JP Morgan’s Umar Farooq appeared to have reservations during last month’s Consensus event.
The advantage of using a wholesale CBDC is that it enables interbank and securities settlement in central bank money rather than commercial bank money, which comes with counterparty risk.
Currently interbank settlement has come to the fore as several initiatives have started to explore tokenized deposits, allowing for bank-backed programmable payments. Tokenized deposit payments between banks have two legs. There’s the customer token transfer from one bank to another and another leg where the banks settle between themselves. This is done either through a real time gross settlement (RTGS) system or ideally with a wholesale CBDC.
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