Retail vs Wholesale CBDCs: What You Need to Know

Central Bank Digital Currencies (CBDCs) have emerged as a significant development in the world of finance and technology. CBDCs are digital representations of a nation's fiat currency issued and regulated by the central bank. They hold the potential to dramatically change how people and institutions interact with money by offering efficiency, transparency, and programmatic control. Within the realm of CBDCs, there are two primary classifications: retail and wholesale.

In this article, we will delve into the details of retail and wholesale CBDCs, exploring their similarities, differences, and their implications for the future of finance.

Understanding Retail CBDCs

Retail CBDCs are designed to be accessible directly to the general public, individuals, and businesses. They are digital forms of currency that mimic traditional cash and provide individuals with a direct claim on the central bank. Retail CBDCs enable peer-to-peer transactions, online purchases, and in-store payments, offering an alternative to traditional payment methods. Key goals of a CBDC design include:

Accessibility: Retail CBDCs aim to ensure broad accessibility, enabling individuals without access to traditional banking services to participate in the digital economy.

Privacy and anonymity: Retail CBDCs can provide users with varying levels of privacy, striking a balance between transaction transparency and maintaining user anonymity.

Financial inclusion: Retail CBDCs have the potential to enhance financial inclusion by enabling seamless and cost-effective financial services for underserved populations.

Consumer protection: Retail CBDCs can incorporate built-in safeguards, such as fraud protection mechanisms, dispute resolution frameworks, and transactional transparency, to protect consumers.

The challenges related to retail CBDCs are often tied to the scale which a new digital dollar must achieve. When considering making a new type of currency available to an entire population, how do we educate them on the new financial tools? What tools, like simple mobile wallets, do we give them to access this money? And how do we onboard retail locations to accept this form of payment?

Some of these challenges are why retail CBDCs lag behind wholesale CBDCs in experimentation and adoption.

Emerging economies, like those in Africa and Central and South America, have been the first to get retail digital currencies live. This may be because these countries have fewer citizens to onboard, more unbanked persons in need of a new solution, and a pressing need to connect to global financial markets.

While the future of retail CBDCs remains in flux, experimentation and learnings are farther along in the wholesale space where fewer participants and more well-resourced institutions are driving toward production.

Exploring Wholesale CBDCs

Wholesale CBDCs target financial institutions and facilitate the settlement of large-value interbank transactions and other financial operations. Wholesale CBDCs are primarily designed to enhance the efficiency of the financial system and enable real-time settlement.

Key benefits of wholesale CBDCs include:

Streamlined interbank settlement: Wholesale CBDCs streamline the settlement process between financial institutions, reducing costs, settlement times, and counterparty risks associated with traditional systems.

Increased market efficiency: Wholesale CBDCs offer real-time settlement capabilities, enabling faster and more secure transactions in financial markets, including securities trading, derivatives, and foreign exchange.

Improved regulatory oversight: Wholesale CBDCs provide central banks with greater visibility into financial transactions, facilitating improved regulatory oversight and reducing risks associated with opaque financial operations.

We have worked with many leading financial institutions to design and implement CBDC’s for wholesale use. Our experiences with Project Atom, Swift, and other national and commercial banks are leading the way in defining the future of money. The project with Swift was especially notable. The live sandbox we developed now hosts 18 central banks and commercial banks who aim to transform cross-border payments with CBDCs.

In early 2023, Swift published a white paper announcing that participants were seeing “clear potential and value” in the solution and supported further development for additional use cases. This ability to build high-quality, enterprise-grade chains to facilitate industry consortia is core to Kaleido’s platform—and recent enhancements in how we allow financial institutions to make and manage digital assets has positioned us to help banks quickly launch, test, and iterate on CBDC solutions.

Comparing Retail and Wholesale CBDCs

While retail and wholesale CBDCs share the underlying concept of digital currency issued by the central bank, there are several noteworthy distinctions between the two.

Target audience: Retail CBDCs cater to individuals and businesses, facilitating everyday transactions, whereas wholesale CBDCs target financial institutions and large-value interbank settlements.

Transaction scale: Retail CBDCs handle numerous small-value transactions, while wholesale CBDCs focus on fewer, high-value transactions among financial institutions.

Accessibility: Retail CBDCs prioritize broad accessibility to individuals, including the unbanked and underbanked, while wholesale CBDCs are typically limited to authorized financial institutions.

Privacy and anonymity: Retail CBDCs often balance transaction transparency and user privacy, whereas wholesale CBDCs need to take into account privacy considerations for individuals versus oversigth considerations for corporations.

Technology infrastructure: Retail CBDCs require a user-friendly interface for accessibility, while wholesale CBDCs need robust infrastructure and connectivity for financial institutions.

What is different about these two implementations is who will use them and the scale at which they’ll be used. Each is built and owned by the government but has a completely different place in the economy. Kaleido can help build CBDC experiments for both retail and wholesale use cases.

Where Kaleido Fits In

At the core, much of the technology that powers retail and wholesale CBDCs is similar. Hardened chains, token management capabilities, connections to existing systems, and tools for building user-friendly experiences are needed to make both of these constructs work.

These “CBDC building blocks” are necessary to build functioning currencies and are core to our platform. From chain configurations to privacy options, we’re uniquely capable of getting wholesale projects to production. Our work in the broader web3 space—minting tokens at scale, secure custody of digital assets, and the ability to handle millions of users—makes our platform well suited to retail use cases where lots of people need to access the system easily and reliably.

The emergence of CBDCs represents a transformative shift in the global financial landscape. Retail and wholesale CBDCs serve distinct purposes, but both require a technology partner well-versed in the space to get projects to testing quickly and cost effectively.

You can read about our NextGen CBDC platform here. And if you have a CBDC project and want to talk to one of our solution architects, get in touch.