Report: exploring wholesale central bank digital currencies

Financial markets are at a crossroads. The slow but steady increase in tokenisation of assets, combined with an explosion in stablecoin market cap (growing from $60bn in mid-2021 to over $190bn today) and increasing focus by banks on tokenising their deposits, is leading to major questions for central banks on how to maintain financial stability and the singleness of money as markets become increasingly digital. 

Around the world, central banks have been researching new ways of making central bank money available in digital form for both retail and wholesale purposes. Such central bank digital currency (CBDC) initiatives are increasingly focusing on providing safe and secure settlement assets for wholesale transactions to the extent that such initiatives are now overtaking retail CBDC developments around the world. 

Recognising the many questions this raises in terms of rationale, approach, risks and benefits, the Cambridge Centre for Alternative Finance at Cambridge Judge Business School, University of Cambridge, has published a landmark report analysing these topics.  

Perspectives on wholesale CBDC implementation 

Based on interviews with 23 central banks and market participants, and a survey of global regulators and extensive desk research, the report reviews the case for a wholesale CBDC, the various approaches in how it can be delivered, and an assessment of the pilots and experiments undertaken by the industry and the European Central Bank, Banque de France, the Bundesbank, Swiss National Bank and Bank of England. 

The report, whose Principal Researcher is Keith Bear, Fellow at CCAF, also identifies an innovation gap between the public and private sectors. Buy-side and sell-side firms are progressing the issuance of tokenised bonds, funds and collateral, driving a need for digital money for the cash leg which may increasingly be delivered through tokenised commercial bank deposits or stablecoins. Meanwhile, central banks are raising concerns on the risks of using commercial bank and private settlement assets for settlement, facilitating experiments demonstrating how central bank money can be used for tokenised settlement, but with no clear indication yet on how and when this may be delivered in practice. 

This new report, developed in collaboration with National Westminster Bank, together with our Cambridge Digital Asset Programme Partners, is a timely assessment on these key questions facing the transformation to tokenised financial markets.  

“Central banks now face a key decision: should they enhance their existing real-time gross settlement (RTGS) systems to meet the demands of the digital economy, or should they embrace the potential of cash tokenisation by issuing wholesale CBDCs on blockchain networks?,” says Bryan Zhang, Co-Founder and Executive Director of the CCAF, in a foreword to the report. “Our Cambridge Digital Asset Programme (CDAP) aims to shed light on the rapid digitisation of assets and value transfer systems, by collaborating with 18 leading public and private sector institutions on empirical research, education and capacity building.” 

Central banks now face a key decision: should they enhance their existing real-time gross settlement (RTGS) systems to meet the demands of the digital economy, or should they embrace the potential of cash tokenisation by issuing wholesale CBDCs on blockchain networks?

Bryan Zhang, Co-Founder and Executive Director of the CCAF

Adds Nick Pedersen, Managing Director, Global Head of Digital, Nat West Markets:  “In the past 2 years, the idea of tokenisation in traditional financial markets has moved from conceptual theory to active experimentation. Many institutions across the world believe in the potential for tokenisation to substantially upgrade the wiring of how capital markets function, and throughout these experiments the demands for forms of wholesale CBDC to support and enable this thesis grows. Despite this, clarity on what the industry means by a wholesale CBDC, how it could be designed and implemented, and what the tangible near-term cost/benefit/risk analysis is, remain elusive.” 

Past and present supporters of the Cambridge Digital Asset Programme include: