components of the future monetary system


Components of the future monetary system
The future monetary system builds on the tried and trusted division of roles
between the central bank – which provides the foundations of the system – and
private sector entities that conduct the customer-facing activities. On top of this
traditional division of labour come new standards such as application programming
interfaces (APIs, see glossary) that greatly enhance the interoperability of services
and associated network effects. Not least are new technical capabilities
encompassing programmability, composability and tokenisation, which have so far
been associated with the crypto universe.
BIS Annual Economic Report 2022 91
This vision contains components at both the wholesale and retail level, which
enable a number of new features (in bold).
At the wholesale level, 

central bank digital currencies (CBDCs) can offer new
capabilities and enable transactions between financial intermediaries that go
beyond the traditional medium of central bank reserves. Wholesale CBDCs that are
transacted using permissioned distributed ledger technology (DLT) offer
programmability and atomic settlement, so that transactions are executed
automatically when set conditions are met. They allow a number of different
functions to be combined and executed together, thus facilitating the
composability of transactions. These new capabilities not only permit the
expansion of the types of transactions, but also enable transactions between a
much wider range of financial intermediaries – not just commercial banks.

 Wholesale CBDCs also work together across borders, through multi-CBDC
arrangements involving multiple central banks and currencies.
Within the new functions unlocked by wholesale CBDCs, one set of applications
deserves special mention – namely, those stemming from the tokenisation of
deposits (M1), and other forms of money that are represented on permissioned
DLT networks.25 The role of intermediaries in settling transactions was one of the
major advances in the history of money, tracing back to the role of public deposit
banks in Europe in the early history of central banking.26 Bank deposits serve as
the payment medium, as the intermediary debits the account of the payer and
credits the account of the receiver. The tokenisation of deposits takes this principle
and translates the operation to DLT by creating a digital representation of deposits
on the DLT platform, and settling them in a decentralised manner. This could
facilitate new forms of exchange, including fractional ownership of securities and
real assets, allowing for innovative financial services that extend well beyond
At the customer-facing, or “retail” level, the enhanced capabilities of the financial
intermediaries benefit users in the form of improved interoperability between
customer-facing platforms provided by intermediaries. Core to this interoperability
are APIs, through which users of one platform can easily communicate and send
instructions to other, interlinked platforms. This way, innovations at the retail level
promote greater competition, lower costs and expanded financial inclusion.
Concretely, FPS and retail CBDCs constitute another core feature of the future
monetary system.

 Retail FPS are systems in which the transmission of a payment
message and the availability of final funds to the payee occur in (near) real time, on
or as near to 24/7 as possible. Many are operated by the central bank. Retail CBDCs
are a type of CBDC that is directly accessible by households and businesses. Both
retail CBDCs and FPS allow for instant payments between end users, through a
range of interfaces and competing private PSPs. They hence build on the two-tiered
system of the central bank and private PSPs. Retail CBDCs and FPS share a number
of further key features and can thus be seen as lying on a continuum. Both are
supported by a data architecture with digital identification and APIs that enable
secure data exchange, thus supporting greater user control over financial data. By
providing an open platform, they promote efficiency and greater competition
between private sector PSPs, thus facilitating lower costs in payment services.
Through inclusive design features, both can support financial inclusion for users
that currently do not have access to digital payments.
Details of the wholesale and retail components are expanded upon below. For
each of these, an advanced representation of central bank money supports private
sector services that serve the real economy. The central bank supports the
singleness of the currency, and interoperability – the ability of participants to
transact in different systems without having to participate in each.27 This allows
92 BIS Annual Economic Report 2022
network effects to take hold, whereby the use of a service by one party makes it
more attractive for others.

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