Wholesale CBDC (central bank digital currency) of the Eurosystem: all information at a glance

The ECB (European Central Bank) has been exploring the possibilities of distributed ledger technology (DLT) and its use in payments since the year 2017. If a central bank issues a digital currency on a DLT basis, this is referred to as a central bank digital currency (CBDC). In addition to retail CBDC (rCBDC) for private customers, various wholesale CBDC solutions (wCBDC) for high-value payments between financial institutions in the euro area are being considered, which are presented in this article.

At the end of 2022 the ECB and the users of the Eurosystem  discussed possible new  requirements for the future infrastructure. Most stakeholders expect a significant increase in DLT solutions in the wCBDC sector over the next 5-10 years. To mitigate dependence on private providers for programmable payments and ensure greater control over the solutions, the ECB has chosen to explore in-house alternatives. The result of this initial research were three possible solutions: the first solution from the Deutsche Bundesbank, the second from the Banca d'Italia and the third from the Banque de France. All three solutions are now available for testing, as it was uncertain which one will meet the markets requirements best. If the timeline is compared with the one of the TARGET2 consolidation, the speed from the idea to the implementation is remarkable. 

In the following, the three solution concepts of the ECB's New Technologies for Wholesale Settlement – Contact Group (NTW-CG) are presented and the advantages and disadvantages explained. The NTW-CG describes itself as a sounding board and supports the Eurosystem in organisational and directional decisions. Market participants from various financial institutions, stakeholders and central banks are represented in the NTW-CG. The solutions offered focus on use cases such as delivery vs. payment (DvP), i.e. delivery against payment in the securities environment, and payment vs. payment (PvP), for example for different currencies in the cross-border payments environment. The ECB focusses on those solutions that are classified as interoperability types. The euro payment ("cash leg" – money side) is to be processed within the Eurosystem, while the asset chains ("asset leg" – securities side) and foreign currencies ("foreign currency leg" – foreign currency side) are to be located outside the Eurosystem and handle the securities transactions. 

The Deutsche Bundesbank's trigger solution, the Banca d'Italia's TIPS hash link and the Banque de France's DL3S DLT are based on interoperability, as otherwise strict requirements for the control of central bank money and, if necessary, additional standards for the integration of the solution would have to be defined.

All three ECB solutions are based on the current TARGET2 consolidation standards and can be tested independently of each other. However, a certain specification of the T2 messages could prove to be advantageous during testing. Participation in the "experiments" (test system) and "trials" (productive operation) is voluntary. 

The trigger solution of the Deutsche Bundesbank – an account-based CBDC 

The Deutsche Bundesbank's trigger solution is based on a kind of bridge between the existing T2 infrastructure and external DLT platforms. Two components are provided by this solution: an interoperability adapter and a DLT-based trigger chain. The trigger chain requires no specific technical  developments or adaptation on the asset chains (which are developed and operated externally). Tokenised assets are issued and traded on the asset chain. The solution has  already been tested successfully in 2021, with the former TARGET2 system. 

A DvP transaction is triggered in the asset chain and the payment instruction is transferred to the Bundesbank's trigger solution via a smart contract (HTLC – hashed timelock contract). The trigger solution forwards  the transaction  to RTGS in an ISO 20022 message via ESMIG. The notification on successful bookings in RTGS are forwarded to the asset chain via the trigger chain. The transaction is then finalised on the asset chain. The HTLC is completed . Market participants can  add additional smart contracts to the trigger chain. 

Figure 1: Schematic figure of the trigger solution

Banca d'Italia's TIPS hash link solution – an account-based CBDC 

Banca d'Italia's solution envisages a TIPS-like platform that communicates with users via an API gateway. The Banca d'Italia's TIPS hash link and the Deutsche Bundesbank's solution do not require wallets, as it is an account-based CBDC, unlike the Banque de France's solution. 

On the market DLT (equivalent to the asset chain), a smart contract (HLC – hash link contract) locks the asset and forwards the payment transaction via an API gateway. The confirmation of a payment in central bank money in the T2 services results in the delivery of the asset or a foreign currency on the market DLT. The hash link contract (HLC) has a similar role to the hashed timelock contract (HTLC) used in the Bundesbank's solution. 

Figure 2: Schematic figure of the TIPS hash link

The Banque de France's full DLT solution – a token-based CBDC

The Banque de France's proposal envisages the development of a DLT (DL3S) on which the central bank can create tokenised euros. The result is therefore not an account-based but a token-based CBDC.  The settlement of assets with a market DLT is as follows. 

  1. A smart contract (HTLC) on a market DLT locks the asset and forwards the payment transaction to the DL3S DLT via an interoperability mechanism.    
  2. The cash leg is processed in the DL3S DLT. 
  3. The HTLC is responsible for finalising the delivery of the cash leg (in the form of cash tokens (wCBDC)) on the DL3S DLT and releases the asset on the market DLT. 

The Banque de France's full DLT interoperability model includes the holding of foreign currencies as part of its  token-based approach. Bank customers need a cash wallet (sub-wallet) at their bank. The bank therefore not only holds and transfers its own cash tokens but also those of its customers. While the bank manages the cash wallets of its customers, its own wallets are managed by the central bank´s node (network node/connection point). If the national central bank does not have its own node, the bank can use the node of the Banque de France. Banks are responsible for creating HTLCs on an "all-or-none" basis. Liquidity transfers between RTGS and DLT are easily possible. 

Figure 3: Schematic figure of the DL3S DLT


The three solutions mentioned are intended to be primarily evaluated from anoperational, a business and a technical perspective , even though most details are not yet known. In connection with the established timetable, areas such as settlement performance, efficiency, security, and reliability have already been defined as topics that are to be examined in more detail. These topics were further broken down into objectives, based on which remaining issues have been identified. An open issue is, for example, to what extent Instant Settlement will be a central component of the future infrastructure (TIPS is unaffected by this question) or whether 'Atomic Settlement' is sufficient. In this context, atomic refers to the settlement process either completing entirely and successfully or failing completely.

The timeline

There is not much time left to take part in the 1st wave of tests. To take part in the "experiments" and "trials", users must register via the public "Call for Interest" and take part in the testing activities. Initially, the start of the “Call for Interest” was planned for November, now the start date seems to be postponed to December 2023. The testing activities should  ensure i.e. the technical connection. The first test phase is scheduled for December 2023 and a second test phase is scheduled for July 2024. Deadlines for the "Call for Interest" are in January 2024 for the 1st wave and April 2024 for the 2nd wave. November 2024 also marks the end of the "experiments" and "trials" for users who wish to take advantage of the second onboarding window. 

Active participation in the tests, coupled with a detailed examination of the designs, allows for proactive involvement in shaping a solution. The described trials and experiments are intended to approach the defined goals. Regular reporting will document the results. Therefore, it remains to be seen which solution will ultimately prevail and how the precise implementation will unfold.

Authors: Viktoria Liehmann, Philipp Uhinck


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