As U.S. policymakers continue to examine the implications of China’s digital yuan in 2023, they should also take note of accelerating wholesale central bank digital currency (CBDC) research and development efforts across Asia. Unlike “retail CBDC,” which is generally designed as a central bank liability universally accessible to individuals and businesses within a jurisdiction’s financial system, “wholesale CBDC” refers to a digitized central bank liability designed for sizable (generally interbank) transactions, and for which access is limited to certain financial institutions. Last year was marked by a flurry of activity by Asian central banks aimed at exploring how so-called wholesale CBDCs can be leveraged to advance their countries’ respective national interests by improving the efficiency of domestic and intra-regional financial flows.
For example, in late November 2022, Indonesia’s central bank released a white paper indicating that it would soon test CBDCs, prioritizing the launch of wholesale CBDCs that “complement” existing large-value payments infrastructure—and which the central bank believes may ultimately enable more efficient cross-border transactions. India’s central bank launched a wholesale CBDC pilot in October 2022 aimed at facilitating a more efficient secondary market for government securities, with cross-border payments being a stated future pilot goal. The Philippines’ central bank also announced in 2022 that it would pursue a wholesale CBDC pilot project focused on testing wholesale CBDC for 24/7 domestic large-value financial transactions, and Philippines officials see wholesale CBDC as eventually helping reduce cross-border payments frictions as well. Clearly, in addition to domestic-focused objectives, improving the efficiency of cross-border payments is a common motivation of many wholesale CBDC initiatives in Asia.
Indeed, over the past few years central bankers in various other jurisdictions—including China, Hong Kong, Japan, Malaysia, Saudi Arabia, Singapore, Thailand, and the United Arab Emirates (UAE)—have examined or experimented with how wholesale CBDCs could be used to improve large-value cross-border payments and reduce foreign exchange costs. But the ability of various national-level wholesale CBDC networks to efficiently facilitate cross-border transactions would depend in part on how these systems are interlinked or interoperable. For example, how would cross-currency transactions involving multiple national-level wholesale CBDC–based systems using different types of ledgers be carried out? How would new arrangements through which CBDCs are directly exchanged be governed? Also, over 90 percent of intra-regional financial transactions in East and Southeast Asia take place via the dollar, yet some reported efforts to link Asia’s CBDCs that involve Russia and China are squarely aimed at reducing the impact of U.S. sanctions, while other regional efforts implicitly seek to reduce the dollar’s dominance in intra-regional trade. Thus the ultimate impact of new financial infrastructure that emerges in Asia also depends on how new wholesale CBDC–based systems in the region would interoperate with dollar financial channels—and the role that U.S.-aligned institutions and technology will play in potential system linkages.
What Is Wholesale CBDC?
Before examining these important questions and their policy implications, it is critical to clarify what exactly a wholesale CBDC is—and why so many Asian central banks are interested in these instruments. The term “wholesale CBDC” refers to a type of liability on an issuing central bank’s balance sheet that is designed to settle wholesale (large-value) financial transactions, such as interbank transfers and securities transactions. Access to these instruments is restricted by the issuing central bank to select financial institutions.
Recent central bank pilots and initiatives indicate that central banks aim to use wholesale CBDCs to complement or replace existing digitized forms of central bank liabilities already relied upon by financial market infrastructure to settle wholesale financial transactions. These incumbent systems are generally either operated by central banks, like TARGET2 in Europe, or operated by private entities but reliant on a central bank–operated system to facilitate settlement, like the Clearing House Interbank Payments System (CHIPS) in the United States, which uses the Federal Reserve System’s Fedwire. Large-value cross-border transactions settled through financial market infrastructure such as these account for most cross-border payments by value. Commercial banks rely upon digitized central bank–issued money held in their reserve and settlement accounts with a central bank to transact via these systems.
Accordingly, some central bankers note that “wholesale CBDC has existed for decades.” Likewise, as World Bank research points out, reserves held by financial firms at a central bank in digital form are effectively wholesale CBDC; the distinguishing factor between what some may call a wholesale CBDC versus these existing digitized central bank liabilities is presumably just the presence of new technology-based structural features. As an example, unlike existing digitized central bank liabilities, wholesale CBDCs could be tokenized “bearer instruments,” meaning that whoever holds the token (with ownership recorded on a distributed ledger) is presumed to be the rightful owner, as Indonesia’s central bank is seemingly contemplating. Ledgers used for wholesale CBDC transaction and ownership recordkeeping could be jointly maintained by other entities alongside the central bank. Additionally, India’s central bank notes that wholesale CBDC could be programmable, with the ability to support automated transactions or restrictions on particular types of transactions.
However, it is important for policymakers to also understand that in Asia’s emerging markets, the term “wholesale CBDC” can be used to simply refer to digitized central bank liabilities that would incorporate some new technologies, but may ultimately not be too dissimilar from the digitized central bank liabilities that underpin existing payment and settlement systems. Interest in these instruments may in some cases just reflect emerging-market policymakers’ desire to build out a technologically sophisticated backbone for new financial market infrastructure that would replace or be integrated with incumbent systems in an effort to make national-level securities markets and large-value payments channels more efficient.
Why Emerging-Market Central Banks in Asia are Exploring Wholesale CBDC Systems
Indeed, the attractiveness of wholesale CBDCs to some of emerging-market Asia’s central bankers stems from such domestic motivations. For example, central bankers in the Philippines envision wholesale CBDCs underpinning new financial market infrastructure that reduces settlement risks and improves the efficiency of domestic large-value financial transactions. Malaysia’s central bank believes that a wholesale CBDC “has the potential to elevate the domestic wholesale payment system to the next level” by reducing risks, enhancing liquidity, and simplifying compliance processes. Wholesale CBDCs, a recent Malaysian central bank report explained, could be integrated with and help “future-proof” existing national-level large-value payment systems. A report by India’s central bank noted that wholesale CBDCs could allow for a “clean-slate approach” to the country’s financial market infrastructure—leveraging sophisticated technologies to potentially enable more efficient national securities markets and reduce the liquidity costs and risks of incumbent systems.
However, as mentioned earlier, many officials in Asian emerging markets also envision wholesale CBDCs potentially underpinning new, more efficient foreign exchange markets and interbank cross-border payments infrastructure. Importantly, in Asia—unlike in Europe and the Americas—the vast majority of intra-regional trade payments involve a currency foreign to the region: dollars. As explained in previous Carnegie research, the channels through which these dollar transactions flow in emerging markets can be quite inefficient—to facilitate intra-regional dollar payments to a bank serving a payee in another country, payors often must rely upon local banks’ relationships with larger global banks (correspondent banks) that participate directly in U.S. payments infrastructure, and these banks in turn may need to transact with another correspondent bank that serves the payee’s primary banking institution. This dynamic, underdeveloped intra-regional foreign exchange markets, and limited overlap between the operating hours of some of Asia’s large-value payment systems and the United States’ are all factors motivating Asian central banks to explore how standing up new financial market infrastructure could help lower large-value cross-border financial transaction costs.
National-level wholesale CBDC–based systems being contemplated in various Asian markets could in theory lead to significantly more overlap in operating hours between these markets’ payment systems and U.S. wholesale payments infrastructure. This in turn could help make cross-border dollar payments more efficient and less costly. By making domestic interbank transactions that serve as one leg of a cross-border transaction possible around the clock through new national-level financial market infrastructure, policymakers could potentially reduce cross-border transaction costs and inefficiencies.
Some policymakers also envision new wholesale CBDC systems being linked in a way that would dramatically lower the cost of direct interbank intra-regional foreign exchange transactions involving two local currencies, thereby reducing the use of the dollar as a vehicle currency in these transactions (currently, large-value exchanges of two local currencies in Asia can often entail exchanging currency A into dollars, and then exchanging those dollars into currency B). Ultimately, some in Russia, China, and other jurisdictions envision a network of wholesale CBDC–based cross-border payment channels across Asia that can facilitate diminished U.S. influence over intra-regional transactions and act as an efficient alternative to today’s dominant large-value financial channels—which can be shut off by U.S. or European sanctions.
How Could Asia’s Wholesale CBDCs Be Linked with Each Other?
Whether such an outcome happens depends in part on how new payment systems are linked and interoperate with one another. In a world where multiple new national-level wholesale CBDC networks emerge across Asia, facilitating more efficient cross-border payments via these networks could begin with central banks allowing affiliates of foreign financial institutions operating within their respective country’s financial system direct or indirect access to new national-level CBDC-based systems. Alternatively (or additionally), central bankers could facilitate direct interoperability between systems. Doing so would—as a joint report by the IMF, the World Bank, and the Bank for International Settlements notes—necessitate the establishment of: (i) common CBDC standards, (ii) interlinkages whereby participants in distinct CBDC systems can transact with each other without each needing to be a direct participant in more than one system (for example, through “gateway” entities), and/or (iii) single systems whereby CBDCs issued by participating central banks are built on common technical infrastructure and potentially use common rules co-administered by central banks.
Thus far, intra-Asian central bank experiments and pilots aimed at exploring the cross-border capabilities of new wholesale CBDCs have mostly involved these “single system” approaches. For example, in 2020, the central banks of Saudi Arabia and the UAE conducted an experiment focused on a wholesale CBDC dually issued by the central banks via such an approach. In March 2022, the central banks of Malaysia and Singapore—along with counterparts in South Africa and Australia—announced completion of a prototype platform governed by common rules established by participating central banks to enable cross-border transactions using multiple wholesale CBDCs (also called a “multi-CBDC arrangement”). Such an arrangement could in theory allow commercial banks on the platform from participating jurisdictions to directly transact with each other in any of these jurisdictions’ currencies without needing foreign correspondent bank accounts. The two single system approach experiments were built upon distributed ledgers co-administered by participating central banks and built using protocols originating from the private sector.
Another multi-CBDC arrangement project is mBridge, which involves a recently completed single system pilot co-administered by the monetary authorities of China, Hong Kong, Thailand, and the UAE. The October 2022 mBridge pilot reportedly successfully facilitated interoperability between these jurisdictions’ respective wholesale CBDCs, resulting in over $22 million in CBDC-based transactions made between the twenty commercial banks that participated in the pilot. Both foreign exchange and cross-border payments were carried out. These interbank payments were recorded via a ledger on a centralized cloud based in Hong Kong and mBridge’s technology subcommittee is led by China’s central bank, although the project reportedly seeks to become more decentralized from both a technological and a governance perspective.
How Could Asia’s Wholesale CBDCs Be Linked with Dollar Payments Infrastructure?
The October mBridge report states that interoperability between incumbent large-value payment systems and new wholesale CBDC–based systems could be facilitated by the mBridge platform. It is unlikely, however, that U.S. policymakers would want a platform with such deep linkages to China’s central bank to serve as the bridge between new wholesale CBDC networks that emerge and dollar payments infrastructure. Moreover, an implicit goal of mBridge appears to be de-dollarization of intra-Asian cross-border payments, as the project’s report states that the mBridge platform aims to “support the use of local currencies in cross-border settlement” and that existing “dependence on foreign currencies for cross-border payments could inadvertently impact monetary sovereignty.”
Notably, the New York Fed and Singapore’s central bank are experimenting with the concept of using wholesale CBDCs to settle cross-border cross-currency transactions more efficiently by investigating how to establish interoperability between distinct simulated ledgers. But realistically, it is likely that multiple wholesale CBDC–based systems emerge in Asia before any new widely used U.S. wholesale payments network launches, regardless of whether such a network involves instruments called wholesale CBDCs or not. Accordingly, an important question for U.S. policymakers to grapple with is how efficient interlinkages and interoperability between existing large-value dollar payments systems and new national-level financial market infrastructure based on wholesale CBDCs that emerges in Asia could and should be facilitated.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT)—an organization run by the world’s largest banks which operates the world’s dominant cross-border payments messaging system—is examining how to facilitate such connectivity. In a recent report, SWIFT outlined how it could help launch a platform that leverages smart contracts to efficiently enable cross-border transactions involving existing large-value payment systems and new wholesale CBDC networks. However, it is not clear whether many emerging market central banks are actively participating in this effort. Also, mBridge and other planned approaches to linking incumbent financial market infrastructure with new CBDC-based systems aim to create efficient alternatives to correspondent banking cross-border payments channels that rely on SWIFT. This dynamic is important because some severe sanctions regimes—such as those recently used by Europe and the United States against Russia—involve shutting off sanctioned banks’ access to SWIFT and dollar correspondent banking accounts.
Choices for U.S. Policymakers
In the years ahead, new financial market infrastructures based upon digitized central bank liabilities called wholesale CBDCs may emerge in Asia. Given the dollar’s preeminent role in intra-Asia trade and finance, how these new systems are linked to each other—and to dollar payments channels—will depend in part on the role that U.S. institutions play. The launch of new, technologically sophisticated national-level large-value payment systems across emerging market economies in Asia could ultimately help advance U.S. interests in the region—including by increasing the efficiency and reducing the costs of converting dollars into local currencies. The extent to which this will happen depends in part on whether Washington creates a policy environment that helps facilitate U.S. institutions and technologies in playing a more significant role in the build-out of more efficient, lower-cost cross-border channels for wholesale financial transactions in Asia.
It is also critical for U.S. policymakers to monitor and respond to efforts that could lead to the growth of financial channels that undermine U.S. interests. In particular, U.S. policymakers should develop strategies to address the potential future launch of a multi-CBDC arrangement that gives Beijing greater influence over regional payment infrastructure and standards. Moreover, initiatives aimed at reducing dollar usage in intra-regional wholesale financial transactions could give rise to arrangements that, once launched—depending on rules and governance—provide a channel for minimizing the impact of U.S. financial sanctions.
Ultimately, the extent to which new cross-border financial infrastructure that runs counter to U.S. interests gains traction in Asia will depend in part on whether it provides market participants with direct transaction costs lower than those for transactions conducted via channels that align with U.S. economic and national security interests. Accordingly, Washington’s response to initiatives aimed at reducing U.S. influence over dominant cross-border financial linkages should include policy approaches that enable U.S. and emerging-market institutions to collaboratively apply new technologies in ways that help ensure channels of financial intermediation aligned with U.S. interests remain by far the most efficient, most reliable, and lowest cost in the world.
