As the Bank for International Settlements pointed out in their Markets Committee report on CBDCs in 2018: “The many different potential forms of CBDC each have different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system.
Central Banks Shift Focus to Retail CDBCs, Central Banking, 11/05/2020, https://www.centralbanking.com/fintech/cbdc/7542766/central-banks-shift-focus-to-retail-cbdcs
How the Tiny Bahamas Beat Global Giants in the E-Currency Race, Bloomberg, 20/05/2021, https://www.bloomberg.com/news/articles/2021-05-20/the-bahamas-central-banker-explains-why-its-sand-dollar-led-the-way
Money is typically based on one of two basic technologies: tokens of stored value or accounts. Cash and many digital currencies are token-based, whereas balances in reserve accounts and most forms of commercial bank money are account-based.”
The same report went on to point out that “A key distinction between token- and account-based money is the form of verification needed when it is exchanged. Token-based money (or payment systems) rely critically on the ability of the payee to verify the validity of the payment object. With cash the worry is counterfeiting, while in the digital world the worry is whether the token is genuine or not (electronic counterfeiting) and whether it has already been spent. By contrast, systems based on account money depend fundamentally on the ability to verify the identity of the account holder”.
So far, there are two main CBDC variants, wholesale or general purpose (retail) versions. The wholesale variant limits access to a predefined group of users, while the retail variant is widely accessible.
A CBDC will require the creation of infrastructure so that it can be used to make payments. This infrastructure includes everything from the database on which CBDC is recorded, through to the applications and point of sale devices that are used to initiate payments. CBDC would offer users another way to pay and to accept payments.
What do central banks think?
Central Banking’s 2020 survey of 39 central banks showed that they are more likely to launch a retail CBDC than a wholesale variant. Central banks that implement CBDCs will then have to choose whether to offer the currency in the form of a token or enable accounts to be opened directly with the central bank.
The survey results showed that 53% of banks preferred economy-wide access, with 42% considering making accounts available directly to the public. A token-based model is the most popular option, with tokens held in a digital wallet.
Percentage of total payments in the UK by volume