How the different CBDC models work

Members of central banks, international agencies, and private consulting firms have suggested a number of different central bank digital currency (CBDC) designs. Here are the different CBDC models…

Central banks, international organizations, and private consulting firms have all come up with different ideas for how central bank digital currency (CBDC) could work in the real world. Most of the time, these CBDC models can be divided into two groups: retail and wholesale. But as this post will show, each of these groups also has its own differences.
***Editor’s note: This post is a complimentary resource for our recent briefing paper and forthcoming policy analysis addressing the risks of CBDCs.***
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Retail CBDCs

As the name suggests, retail CBDCs are made for use by the public. These would be made to work like the digital payments that already exist. People could use them to buy things, pay their salaries, or store money. At the moment, there are three main types of CBDC sold in stores: direct CBDC, indirect or intermediated CBDC, and synthetic CBDC.
Direct CBDC

A "direct CBDC" is a CBDC that can be used by anyone and is run by the central bank. The Royal Bank of India put it this way: "In this model, the CBDC is a direct claim on the central bank. The central bank keeps track of all balances and updates this record after every transaction." Citizens and people who care about civil liberties have long thought that broad surveillance is a bad thing. However, the Royal Bank of India pointed out that one benefit of a direct CBDC is that "the central bank knows everything about retail account balances." But the Royal Bank of India said that a direct CBDC "diminishes the role of the private sector and slows down innovation in the payment system." Also, the Royal Bank of India warned that the retail CBDC "model is designed for disintermediation, has the potential to disrupt the current financial system, and will put more pressure on the central banks to handle customer onboarding, KYC, and AML checks, which may be hard and expensive for the central banks." In short, a direct CBDC would make it easy for the government to keep a closer eye on finances and have more control over the payments system.
Intermediated or Indirect CBDC

An "intermediated CBDC" or "indirect CBDC" is probably best understood as an attempt to make the private sector happy by making it less likely that the current financial system will be disrupted, or "disintermediated." The idea is to give people a direct CBDC, but to have the private sector set up and manage the accounts or wallets that people will use to hold their CBDC. As the Federal Reserve has said:

An intermediated model would facilitate the use of the private sector’s existing privacy and identity‐​management frameworks; leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well‐​functioning U.S. financial system.

This might make it sound like this model wouldn't hurt private markets, but an intermediated CBDC wouldn't get rid of the risk of causing problems in the financial system. Instead, it would make it less likely than a direct CBDC. Even if the private sector manages the accounts, the CBDCs in those accounts would still be a direct liability of the central bank. More so, having traditional banks offer CBDC accounts could increase the risk of a bank run, since customers could theoretically move their deposits into a CBDC account using the same banking app they already use. Just as important, the government would still be able to keep track of balances and have a direct say in consumer affairs. So, this model may be an attempt to make the private sector happy, but it doesn't get rid of the risks that the direct CBDC model brings. In reality, the intermediated model is just a "direct CBDC with more steps."
Synthetic CBDC

A "synthetic CBDC" is not really a CBDC. "Synthetic CBDC," on the other hand, refers to a stablecoin whose reserves are held in a central bank master account. Let's get into more detail about what this means. First, a stablecoin is a cryptocurrency that tries to keep its value stable by being tied to government currencies, short-term securities, or commodities. To keep this peg, issuers of stablecoins usually hold reserves that are equal to the amount of stablecoins they have. Where these reserves are kept can make a difference in how safe and sound they are. For example, traditional banks usually keep their reserves in what is called a "master account" at the Federal Reserve. But master accounts are usually only accessible to banks that are regulated by the federal government. By giving stablecoin issuers access to this, a synthetic CBDC would be like the dollar-based stablecoins that already exist, but the dollars that back it would be held in a master account at the Federal Reserve that earns interest.
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Wholesale CBDCs

In contrast to the different retail CBDC models, only financial institutions would be able to use wholesale CBDCs during interbank settlement. In other words, a wholesale CBDC would allow banks to send money to each other. As many people have pointed out, this kind of service wouldn't help much, if at all, since there are already many ways to make payments. For example, the head of the Federal Reserve, Michelle Bowman, said, "I hope that FedNow will address the concerns that some people have raised about the need for a CBDC." In the same way, Reserve Bank of Australia Governor Philip Lowe said, "To date, we have not seen a strong public policy case to move [toward a CBDC], especially given Australia's efficient, fast, and easy electronic payments system."


As debates go on and new technologies are made, it's likely that more versions of these CBDC models will be made. For example, this post didn't talk about how account-based CBDCs are different from token-based CBDCs. But everyone seems to agree on one important thing.

Even though the wholesale model of a CBDC might seem harmless because it is so similar to the current financial system, it would be easy to switch from a wholesale model to a retail model. So, even though one model might be chosen over another in the end, it's important to remember what each one has to offer, since the first choice might not be the right one.