Wholesale CBDC (wCBDC)
Exploring crosschain interop use cases related to wCBDC.
Interbank Settlements/
Delivery versus Payment(DvP)
Wholesale CBDC could be used for real-time gross settlement (RTGS) systems, allowing financial institutions to settle interbank transfers instantly using a digital currency backed by the central bank. This can reduce settlement times and counterparty risks.
i.e. payment and delivery of securities are finalized.
Day 1: Bank A's client sells 100 shares of Company XYZ to Bank B's client at $10 per share. The total transaction value is $1,000.
Day 2 (Settlement Day): Using a wholesale CBDC, Bank A receives $1,000 from Bank B. Simultaneously, Bank A transfers the ownership of the 100 shares of Company XYZ to Bank B. This is a "Delivery versus Payment" (DvP) mechanism, where the security (shares) and the payment (wholesale CBDC) are exchanged simultaneously.
Cross-border Transactions
Wholesale CBDCs could potentially simplify and expedite cross-border interbank transactions, reducing the need for intermediaries and the associated costs and delays.
Example 1
Bank X is located in Country A, and Bank Y is in Country B. A major corporation that is a client of Bank X has just finalized a deal to purchase machinery from a manufacturer that banks with Bank Y. The deal is worth $10 million.
In the traditional banking system: settling this cross-border payment involves multiple intermediaries, including correspondent banks, clearing houses, and possibly currency conversion entities. Each step incurs fees, and the entire process can take several days, if not longer. Additionally, fluctuating exchange rates can introduce cost uncertainties.
With Wholesale CBDC: Both Country A and Country B have adopted wholesale CBDC systems, and there's an agreement in place for interbank cross-border transactions using these digital currencies.
Example 2:
An investment fund in the U.S. (using Bank A) decides to purchase bonds issued by a corporation in Germany (using Bank B).
The investment fund pays in U.S. dollars, but the German corporation expects payment in euros.
Using wholesale CBDC, Bank A can instantly transfer the equivalent amount in CBDC to Bank B, which then gets converted to euros for the German corporation. This seamless transaction ensures that the bonds are transferred to the U.S. investment fund while the German corporation receives its payment in euros.
Liquidity provision
By using wholesale CBDCs, financial institutions could have immediate access to liquidity, which can be crucial during times of financial stress or market volatility.
Interbank Payments
Direct transfer of funds between banks to fulfill obligations that are not related to securities transactions.
Day 1: Bank A borrows $5 million from Bank B for a short-term liquidity need. They agree on a one-week term for the loan.
Day 8: Bank A needs to repay the $5 million loan to Bank B. Using a wholesale CBDC, Bank A transfers the $5 million to Bank B instantly, settling the loan obligation.
FX transactions to facilitate cross-border payments
Commercial banks acting on behalf of corporates or end-users making cross-border payments, and to facilitate global liquidity management. Primary goal is to facilitate cross-border payments using wCBDC. Use case focuses on executing a cross-border payment, where the originating bank uses wCBDC to facilitate the FX transaction and pay a recipient bank in another country. i.e. the bank acts on behalf of clients to facilitate a payment.
It is illustrated using the euro area commercial bank and the Singaporean commercial bank executing a cross-border payment from the euro area to Singapore. In a first step, the euro area commercial bank requests issuance of EUR wCBDC (process I). It then transfers the EUR wCBDC to the international network using the bridge (process II). On the international network, the euro area commercial bank (i) executes the FX transaction, paying EUR wCBDC to receive SGD wCBDC using the AMM (process IV); and (ii) pays SGD wCBDC to the Singaporean bank (process V). The Singaporean bank transfers the newly received SGD wCBDC to the Singaporean platform (process II). Finally, it redeems the wCBDC (process VI).
Liquidity provision by commercial banks to facilitate FX transactions
The primary goal is to provide liquidity for FX transactions using wCBDC. Use case focuses on a bank acting as a liquidity provider. Instead of executing a cross-border payment, the bank deposits wCBDC to facilitate FX transactions for other participants. i.e. the bank acts as a liquidity provider for the FX market.
Liquidity provision by commercial banks to facilitate FX transactions. It is illustrated using the Swiss commercial bank. The Swiss commercial bank requests issuance of CHF wCBDC on the domestic platform (process I). It then transfers the CHF wCBDC to the international network using the bridge (process II). On the international network, the Swiss commercial bank provides liquidity to the AMM, ie it pays CHF wCBDC to the AMM in return for a corresponding amount of LP tokens (process III).
1. In Capital Markets
Securities Transactions
Agreement to sell and buy securities.
Example:
Bank A agrees to sell 100,000 shares of Company XYZ to Bank B at $20 per share, amounting to a total of $2 million.
The actual exchange of shares and money will happen later, on the agreed settlement date.
Interbank Settlements/Delivery versus Payment(DvP)
Wholesale CBDC can be used for real-time gross settlement (RTGS) systems, allowing financial institutions to settle interbank transfers instantly using a digital currency backed by the central bank. This can reduce settlement times and counterparty risks.
i.e. payment and delivery of securities are finalized.
Example:
Day 1: Bank A's client sells 100 shares of Company XYZ to Bank B's client at $10 per share. The total transaction value is $1,000.
Day 2 (Settlement Day): Using a wholesale CBDC, Bank A receives $1,000 from Bank B. Simultaneously, Bank A transfers the ownership of the 100 shares of Company XYZ to Bank B. This is a "Delivery versus Payment" (DvP) mechanism, where the security (shares) and the payment (wholesale CBDC) are exchanged simultaneously.
Cross-border Transactions
Wholesale CBDCs can potentially simplify and expedite cross-border interbank transactions, reducing the need for intermediaries and the associated costs and delays.
Example 1
Bank X is located in Country A, and Bank Y is in Country B. A major corporation that is a client of Bank X has just finalized a deal to purchase machinery from a manufacturer that banks with Bank Y. The deal is worth $10 million.
In the traditional banking system: settling this cross-border payment involves multiple intermediaries, including correspondent banks, clearing houses, and possibly currency conversion entities. Each step incurs fees, and the entire process can take several days, if not longer. Additionally, fluctuating exchange rates can introduce cost uncertainties.
With Wholesale CBDC: Both Country A and Country B have adopted wholesale CBDC systems, and there's an agreement in place for interbank cross-border transactions using these digital currencies.
Example 2:
An investment fund in the U.S. (using Bank A) decides to purchase bonds issued by a corporation in Germany (using Bank B).
The investment fund pays in U.S. dollars, but the German corporation expects payment in euros.
Using wholesale CBDC, Bank A can instantly transfer the equivalent amount in CBDC to Bank B, which then gets converted to euros for the German corporation. This seamless transaction ensures that the bonds are transferred to the U.S. investment fund while the German corporation receives its payment in euros.
Liquidity provision
By using wholesale CBDCs, financial institutions can have immediate access to liquidity, which can be crucial during times of financial stress or market volatility.
2. Outside Capital Markets
Payment Systems
Interbank Payments: Direct transfer of funds between banks to fulfill obligations that are not related to securities transactions. This could be due to reasons like cross-border transactions, interbank loans, or other banking activities.
Example:
Day 1: Bank A borrows $5 million from Bank B for a short-term liquidity need. They agree on a one-week term for the loan.
Day 8: Bank A needs to repay the $5 million loan to Bank B. Using a wholesale CBDC, Bank A transfers the $5 million to Bank B instantly, settling the loan obligation.
FX transactions to facilitate cross-border payments
Commercial banks acting on behalf of corporates or end-users making cross-border payments, and to facilitate global liquidity management. Primary goal is to facilitate cross-border payments using wCBDC. Use case focuses on executing a cross-border payment, where the originating bank uses wCBDC to facilitate the FX transaction and pay a recipient bank in another country. i.e. the bank acts on behalf of clients to facilitate a payment.
Example
It is illustrated using the euro area commercial bank and the Singaporean commercial bank executing a cross-border payment from the euro area to Singapore. In a first step, the euro area commercial bank requests issuance of EUR wCBDC (process I). It then transfers the EUR wCBDC to the international network using the bridge (process II). On the international network, the euro area commercial bank (i) executes the FX transaction, paying EUR wCBDC to receive SGD wCBDC using the AMM (process IV); and (ii) pays SGD wCBDC to the Singaporean bank (process V). The Singaporean bank transfers the newly received SGD wCBDC to the Singaporean platform (process II). Finally, it redeems the wCBDC (process VI).
Example source: BIS
Liquidity provision by commercial banks to facilitate FX transactions
The primary goal is to provide liquidity for FX transactions using wCBDC. Use case focuses on a bank acting as a liquidity provider. Instead of executing a cross-border payment, the bank deposits wCBDC to facilitate FX transactions for other participants. i.e. the bank acts as a liquidity provider for the FX market.
Example:
Liquidity provision by commercial banks to facilitate FX transactions. It is illustrated using the Swiss commercial bank. The Swiss commercial bank requests issuance of CHF wCBDC on the domestic platform (process I). It then transfers the CHF wCBDC to the international network using the bridge (process II). On the international network, the Swiss commercial bank provides liquidity to the AMM, ie it pays CHF wCBDC to the AMM in return for a corresponding amount of LP tokens (process III).
Example source: BIS
Trade and Commerce
"Wholesale CBDC refers to the settlement of interbank transfers and related wholesale transactions in central bank reserves.[2] But some misinterpret “wholesale CBDC” to mean any large-value payment in central bank money, regardless of who is making and receiving the payment." - Fabio Panetta
B2B Transactions: ?
Supply Chain Finance: ?
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