Everything you need to know about wholesale and retail central bank (CBDC) digital currency

Recently, while participating in a high-level roundtable on “Money at a Crossroads” organized by the International Monetary Fund (IMF) in the United States, Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS) pointed out that they have made a careful distinction between wholesale CBDCs and retail CBDCs. But what is wholesale CBDC and how is it different from retail CBDC?

To begin with, CBDC refers to the digital form of a country’s fiat currency, which is issued by the country’s central bank. Although it is in digital form, it can be exchanged with the country’s fiat currency. The CBDC is a liability of the central bank.

What is Wholesale CBDC?

Wholesale CBDCs refer to financial institutions that make reserve deposits with a central bank. It facilitates the improvement of the efficiency of payments and securities settlement, as well as the reduction of counterparty credit and liquidity risks.

According to Menon, while the digital currencies of wholesale CBDCs and retail CBDCs are issued by the central bank, in the case of wholesale CBDCs, “we see a variety of use cases as they are used in the interbank system to make a cross-border payment”.

In wholesale CBDCs, in a domestic payment system, the central bank acts as a central counterparty in a cross-border setting. “So you need a decentralized ledger or a blockchain, and you need wholesale CBDC to facilitate that CBDC transfer,” he says.

Aruna Sharma, former secretary and member of the RBI committee on deepening digital payment, said the wholesale CBDC is like what RBI gives to the bank. “It’s something we all get with new printed notes,” she says.

The wholesale CBDC is similar to what the RBI grants to banks, according to the RBI Committee on Deepening Digital Payment.

What is Retail CBDC?

Unlike a wholesale CBDC, the retail CBDC can be defined as one of the currencies that has been issued to the general public. It is based on Distributed Ledger Technology – popularly known as DLT – and has the features of anonymity, traceability and is available 24/7/365 as well as the feasibility of an interest rate application.

How do they differ?

Utkarsh Sinha, managing director of Bexley Advisors, a boutique investment bank, says retail and wholesale CBDCs would both suffer from the fundamental challenge of whether they are issued to financial institutions or individuals.

“Our supply of banknotes is also wholesale, as it is issued to retail banks who then put them back into the hands of individuals. Unless we’re talking about some form of direct benefit transfer (DBT), currency is still issued at the wholesale level by the Reserve Bank and makes its way to retailers through designated institutions. Even for DBT, intermediary institutions are involved,” he says.

Some experts believe that while the CBDC simply results in a net reduction in the circulation of banknotes and coins, this is a trend well underway and likely to continue regardless of the introduction of currency under the form of CBDC.

What about the Indian CBDC?

During the presentation of the 2022 budget, Finance Minister Nirmala Sitharaman had said that the digital rupee, the name of the central bank digital currency (CBDC) in India, will be introduced using Blockchain and other technologies. , and that the Reserve Bank of India (RBI) will issue them. in 2022-23.

Nirmala Sitharaman, Union Finance Minister.
The Reserve Bank of India (RBI) will release the digital rupee in 2022-23, according to Finance Minister Nirmala Sitharaman.

“The introduction of central bank digital currency will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system,” she said.

Adds Dr. Oriol Caudevilla, FinTech Advisor and Influencer, and Director of the Global Impact FinTech Forum (GIFT): “While wholesale CBDCs also offer many advantages, it would be particularly interesting for India to have its own CBDC, the Digital Rupee, as CBDCs can be an effective tool to promote financial inclusion, as they can meet the needs of the unbanked and underbanked, which is very important, considering that 190 million adults are not still unbanked in India.

“The launch of a digital rupee will give a big boost to the digital economy. The digital rupee will also lead to a more efficient and cheaper currency management system,” he says.

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