As central bank digital currency (CBDC) projects progress worldwide, patterns have started to emerge. One is the tendency for wholesale CBDCs to be token based, whereas the foundational layer of retail CBDCs is often account based. There’s a need for a bridge between the two to avoid operating two entirely separate CBDC systems. CBDC startup Fluency has developed a bridge solution that starts with an account-based but DLT-stored system. It provides interoperability with token-based and conventional payment systems, and supports offline CBDC payments.
Account versus token-based CBDCs
Average users do not care about differentiating between an account or token-based CBDCs, as they focus on the CBDC’s utility rather than the backend.
However, two features related to token-based platforms make them undesirable for retail CBDCs. The first limitation is associated with offline functionalities. If a token-based CBDC uses a distributed ledger to prevent double spending, offline functionality is usually a significant challenge. However, token-based CBDCs don’t have to use DLT and account-based can use a DLT. Many jurisdictions, including the EU require offline functionality, which tilts the scales towards an account-based retail CBDC offering.
The second barrier concerns scalability, as any DLT would need to be highly scalable to log every single retail CBDC transaction. This is currently not the case, so an account-based CBDC is preferable for the retail option (at least at the base level).
Conversely, the approach for a wholesale CBDC is different because most banks already have accounts at the central bank. Instead, wholesale CBDCs will likely involve blockchains and tokens to allow for the adoption of distributed ledger technologies (DLTs) in financial market infrastructures. This would enable more manageable on-chain payments to power things such as tokenized securities settlements, which is what countries like France and Switzerland have been testing, and the ECB is about to unveil a formal pilot.
But central banks don’t have to provide a wholesale CBDC for DLT securities settlement. Onchain settlement could be done using tokenized commercial bank money, privately issued synthetic CBDCs (such as Fnality) or trigger payments from real-time gross settlement systems (RTGS).
Fluency’s CBDC solution
Circling back to the challenge, if a central bank chooses to provide both a wholesale and a retail CBDC, they want to avoid creating a parallel system where the various types of money could be difficult to reconcile.
In response, Fluency has developed a solution that offers central bankers “a straightforward means of connecting their internal networks with all other payment systems across the globe via a single issuance layer,” said the company in an announcement.
According to CEO Inga Mullins, this account-based CBDC will offer “a seamless CBDC transaction flow between wholesale and retail on a highly scalable model” that will allow central banks to bridge the two options and solve the account versus token-based debate.
We asked Fluency for more details about the solution but didn’t receive a response in time for publication.
Update: clarified that Fluency’s is DLT-based system. Further updates to follow.