Members of central banks, international agencies, and private consulting firms have suggested a number of different central bank digital currency (CBDC) designs that subtly change how one might operate in practice. Generally, these CBDC models fall into two categories: retail and wholesale. But as this post will show, these categories have their own variations as well.

***Editor’s note: This post is a complementary resource for our recent briefing paper and forthcoming policy analysis addressing the risks of CBDCs.***

Retail CBDCs

As the name might suggest, retail CBDCs are meant for retail, or consumer, use. These would be designed to be used just like the digital payments that already exist today where people could use them to purchase goods, pay salaries, or store wealth. Currently, there are three core variations of retail CBDCs: the direct CBDC, the intermediated or indirect CBDC, and the synthetic CBDC.

Direct CBDC

A “direct CBDC” would be a CBDC that is available to everyone and managed directly by the central bank. As the Reserve Bank of India described it: “In this model, the CBDC represents a direct claim on the central bank, which keeps a record of all balances and updates it with every transaction.” While sweeping surveillance has long been considered a disadvantage in the eyes of citizens and advocates of civil liberties, the Reserve Bank of India went on to note that an advantage of a direct CBDC is that “the central bank has complete knowledge of retail account balances.” However, the Reserve Bank of India noted that a disadvantage is that a direct CBDC “marginalizes private sector involvement and hinders innovation in the payment system.” Furthermore, the Reserve Bank of India warned that the retail CBDC “model is designed for disintermediation[,] has the potential to disrupt the current financial system[,] and will put additional burden on the central banks in terms of managing customer on-boarding, KYC and AML checks[—]which may prove difficult and costly to the central bank.” In short, a direct CBDC would be a straightforward path to increased financial surveillance and government control over the payments system.

Intermediated or Indirect CBDC

An “intermediated CBDC” or “indirect CBDC” is probably best understood as an attempt to appease the private sector by lessening the risk of disrupting, or disintermediating, the current financial system. The idea is to provide a direct CBDC, but then enlist the private sector to provide and maintain the accounts or wallets used for CBDC holdings. As explained by the Federal Reserve:

An intermediated model would facilitate the use of the private sector’s existing privacy and identity-management frameworks; leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system.

While such a statement may suggest this model would not undermine private markets, an intermediated CBDC would only lessen the risk of disrupting the financial system relative to the risk posed by a direct CBDC—it would not eliminate that risk. The private sector may maintain the accounts, but the CBDCs in those accounts would still be a direct liability of the central bank. More so, having traditional banks maintain CBDC accounts could heighten the risk of a bank run considering, theoretically, moving one’s deposits into a CBDC account could be done within the same banking app that customers are already used to using. Just as important, the government would still be able to keep a record of balances and have a direct hand in consumer affairs. So, while this model may be an attempt to appease the private sector, the risks posed by the direct CBDC model are far from eliminated. In fact, the intermediated model really boils down to being a “direct CBDC with extra steps.”

Synthetic CBDC

A “synthetic CBDC” really isn’t a CBDC at all. Rather, “synthetic CBDC” describes a stablecoin with the reserves backing its value held in a central bank master account. Let’s break down what this description means in more detail. First, a stablecoin is a cryptocurrency with its value pegged to government currencies, short-term securities, or commodities in an effort to stabilize its value. To achieve this peg, stablecoin issuers commonly hold reserves on a one-for-one basis. The safety and soundness of those reserves can depend on where they are being held. For instance, traditional banks typically hold their reserves at the Federal Reserve in what is known as a master account. However, access to master accounts is generally limited to federally regulated banks. By opening this access up to stablecoin issuers, a synthetic CBDC would be like the dollar-denominated stablecoins that already exist, but the dollars that back it would be held in a master account earning interest at the Federal Reserve.

Wholesale CBDCs

In contrast to the different retail CBDC models, wholesale CBDCs would be restricted to financial institutions for use during interbank settlement. In other words, a wholesale CBDC would serve as a way for banks to send money between themselves. As many have recognized, such a service would offer few if any benefits given the existing payments systems that are already widely available. For instance, Federal Reserve Governor Michelle Bowman said, “My expectation is that FedNow addresses the issues that some have raised about the need for a CBDC.” Likewise, Reserve Bank of Australia Governor Philip Lowe said, “To date, though, we have not seen a strong public policy case to move [toward a CBDC], especially given Australia’s efficient, fast, and convenient electronic payments system.”

Conclusion

Additional variations of these CBDC models will likely emerge as debates move forward and new technologies are developed. For instance, this post did not discuss the distinction between account-based and token-based CBDCs. But there is one takeaway that stands out across the board.

While the wholesale model may appear to be a benign version of a CBDC because it is so much like the existing financial ecosystem, it would be easy to transition from a wholesale version to a retail CBDC. So while one model may ultimately be chosen over another, it is important to keep the features of all of them in mind because the initial choice may not prove to be the final choice.