How architecture, privacy trade-offs, and the wholesale-retail divide, shape central bank liabilities and financial stability.

The evolution of money from commodity to state liabilities in the form of scriptural tokens hits another wall in its development as Central Bank Digital Currency (CBDC). As of year-end 2026, 134 jurisdictions, representing over 98% of global gross domestic product (GDP), are considering, piloting, or have deployed a CBDC in some form. A central bank money claim, unlike commercial bank money, is a direct liability of the monetary authority, and hence, the issuing central bank holds it as either electronic script or physical banknotes, representing base money (M0).

Meanwhile, this seemingly innocuous experiment has acquired a distinctly ideological tinge. While state economic models favor a retail CDBC for enhanced domestic monetary control and transaction surveillance, western economies are poised to adopt a wholesale approach, hedging public concerns about personal finance privacy, by focusing on institutional accounts and stablecoins.

Retail CBDCs & The Disintermediation Risk

The key economic concern with a retail-oriented CBDC, which would be directly held by households and non-financial corporations, is the risk of disintermediation of the banking system. In a fractional reserve framework, when the central bank issues digital currency, which offers the security of central bank backing, investors and profit-maximizing firms are expected to shift their money from the commercial banks’ deposit accounts to the central bank. Hence, in case of localized banking crises, deposit outflows from the commercial banks could trigger defaults threatening the stability of the broader financial system.

To address this issue, monetary policymakers are considering either a two-tier architecture with restricted access to the central bank and limited-rate compensation for crypto-claim holders, or negative interest rates on balances above a certain threshold, as the digital euro project contemplates.

Meanwhile, the two-tier approach appears to be the favored institutional design, which makes the central bank the sole monetary authority issuer of the digital currency, while the commercial banks and other payment service providers act as agents facilitating retail sales, customer KYC verification, and digital wallet top-ups.

Indeed, the European Central Bank (ECB) is considering imposing a €3,000 cap per individual on digital euro holdings, with negative taxation on the amount above the threshold, as a means to ensure the stability of the commercial banking system, with limited impact on the rate-setting capacity of the central bank.

China’s e-CNY vs. the Western Political Economy

The practical implications of issuing a retail-oriented CBDC appear to differ across political economy paradigms, with the world’s two largest economies, China and the United States (U.S.), taking distinctly different approaches. In China, the PBOC has pioneered the introduction of the digital yuan , which has already reached a value of 16.7 trillion yuan ($2.3 trillion) in value across 3.4 billion transactions, while being embedded in the wider payment ecosystem dominated by big tech payment processors such as Alipay, WeChat Pay, and integrated into the payroll system of 26 of China’s largest cities. The e-CNY allows the central bank to exert monetary control and observe the flow of funds across the country in real-time providing an enhanced level of macro-prudential oversight and capital controls. At the same time, the anonymity of transactions is preserved for individuals from commercial surveillance.

By contrast, in the U.S., legislative initiatives have banned the central bank from proceeding with the digital dollar project, as members of both parties have recognized the potential for a retail CDBC to enable state surveillance and erode individual privacy. At the same time, the U.S. monetary policymakers have endorsed the idea of building a financial ecosystem around private-sector stablecoins, representing a digital dollar issued via regulated financial instruments.

The digital euro project in the EU has entered the decision-making and pilot-testing phase, with the ECB contemplating similar privacy-preserving measures as China, with the capacity for offline payments, which would be fully anonymous for small-value transactions and business-to-business (B2B) payments, while large-value movements of funds would be traceable. At the same time, the political economy in the EU is set to ensure that the introduction of the digital euro does not undermine the role of private domestic payment processors and the banking system’s capacity to intermediate corporate credit.

Monetary Policy Implementation and the Role of Wholesale CBDCs

Meanwhile, monetary policymakers recognize that the implications of introducing a wholesale CBDC (wCBDC) for central bank liquidity management, and the transmission mechanism of monetary policy, far outweigh the benefits of pursuing a retail initiative. Hence, the focus of policymakers is on designing a digital token economy, which would enable the central bank to operate real-time gross settlement (RTGS) systems, which would facilitate instantaneous settlement of tokenized securities and claims, thereby eliminating counterparty risks and reducing collateral requirements.

Pilots by the Swiss National Bank (SNB), Project Helvetia , and the Bank for

International Settlements (BIS), Project Agorá , demonstrate the capacity of tokenized central bank money to settle securities transactions against deposits held at commercial banks, which represent tokenized reserves.

In terms of the monetary policy transmission mechanism, the introduction of wCBDCs would enhance the effectiveness of interest rate changes, as central banks can exert direct control over the rate of return on digital token deposits, which will apply to the entire financial system via the token-based market infrastructure.

Meanwhile, in cross-border transactions, the BIS-led Project mBridge , which connects the PBOC, HKMA, and SNB, demonstrates the capacity of wCBDCs to facilitate direct bilateral FX trading between central banks, bypassing correspondent banks and SWIFT, thereby, reducing transaction costs and enhancing settlement efficiency.

Outlook

As the world navigates the complexities of designing and deploying CBDC, it appears that the original vision of a general-purpose government-issued digital token, which would directly replace cash and commercial bank deposits, has been overly ambitious. The emerging consensus suggests that the future monetary system will be characterized by a multi-speed digital finance ecosystem, with state economies set to embrace retail-oriented CDBCs, expanding domestic monetary control, while the western economies pursue a hybrid approach, utilizing a combination of wholesale digital currencies and stablecoins. Indeed, the battle between the proponents of the digital yuan, digital euro, and private stablecoins, is a manifestation of deeper political and economic tensions concerning the appropriate role of the state, the banking system, and individual privacy in a digital economy.

Sources & Citations

  • "CBDC Tracker: Global Progress Report 2026," Atlantic Council GeoEconomics Center (September 2026).
  • "Digital Renminbi Progress Report and Internationalization Metrics," People’s Bank of China (PBOC) (January 2026).
  • "Digital Euro Preparation Phase: Progress Report on Privacy and Limits," European Central Bank (June 2026).
  • "Wholesale CBDC and Tokenized Asset Settlement: Project Agorá Updates," Bank for International Settlements (BIS) (May 2026).