Alternative viewpoints: Thoughts on CBDC Lending

7 min readOct 12, 2023

Studies in adoption of Central Bank Digital Currencies (CBDCs) have focused on impacts to retail banking and payments. In this article the authors consider lending activity and models for adoption which could be beneficial for economies and the introduction of CBDCs.

The Deposit Problem, Faith and Lending Impacts

In 2012, the Isle of Man Treasury issued a crown coin featuring the portrait of Juno Moneta, a Roman goddess, next to whose temple, the Roman silver mint was constructed and produced coins stamped with her image from 273 BC onwards¹. The role of temples in storing wealth across Rome and the perceived guardianship by Moneta remind of the element of faith underpinning fiat currencies, which modern central banks must maintain, as well as the institutional arrangements for currency issuance and payment systems operations.

In the context of cryptocurrencies and CBDCs — such concerns have occupied much of the commentary. One of the core challenges for central bankers has been how to address the perceptions of faith which they consider introduced CBDCs will have and the effect on other banking instruments.

Put shortly, academics have directed much of their focus to the “Deposit Problem” — that perceptions of stability and the risk-free nature of arrangements underpinning CBDCs mean citizens will switch some of their holdings from current fiat-currency accounts with existing banks into accounts denominated in CBDC. A potentially significant reduction of deposits held by commercial banks would lead to reductions in the amount of lending (as the bank’s capital reserves shall also be reduced) and/or increased costs of capital and lending, unless banks took on additional wholesale funding or other measures.

The Deposit Problem (with its impacts on financial stability and lending activity) along with privacy concerns, have proved key sticking points for the analysis of CBDCs.

Two tier CBDC model and the importance of RTGS

Other proposed models of introducing CBDCs and digital currency generally, suggest ways around the Deposit Problem.

It is worth introducing a distinction between two types of CBDC depending on use/distribution — retail CBDC (which is issued to consumers as a payment instrument) and wholesale CBDC (which is issued to financial institutions as a settlement instrument). While under both types the CBDC issuance generates a liability of the Central Bank, there are big differences in the distributional effects between the two models (including, as mentioned above, the Deposit Problem for retail CBDCs). In contrast to retail CBDCs, the distributional effects of introducing wholesale CBDCs are often considered to be relatively minimal (since they involve switching balances from reserves)².

Models of CBDC issuance which incorporate elements of both retail and wholesale distribution (and different roles for the banking sector), called ”two tier models” have been considered by researchers, including the Bank of International Settlements (BIS). In a study with the Hong Kong Monetary Authority in 2022 (Project Aurum)³, the BIS considered four models of implementing CBDCs into the Hong Kong banking system (the first three were developed by Auer and Böhme):

  • direct/ single tier retail CBDC (Central Bank issuance, no role for banks other than KYC/account management);
  • two tier “hybrid” retail CBDC (Central Bank issuance, banks onboard and process payments, but Central Bank maintains ledger of retail payments);
  • two tier “intermediated” retail CBDC (similar to the hybrid model except the Central Bank only processes wholesale payments); and
  • two tier “indirect” / CBDC-backed (bank) stablecoins (wholesale CBDC issued to banks/intermediaries which issue claims or stablecoins to accountholders/retail customers).

The fourth model (CBDC-backed stablecoins) was novel (first proposed by the HKMA and BIS) and notable as it would involve stablecoin balances being reconciled against real time gross settlement (RTGS) balances of the issuing bank with the Central Bank. Also the Project Aurum report noted that it was conceptually closest to the current Hong Kong SAR system for issuance of banknotes by issuing banks (HSBC, Standard Chartered and the Bank of China issue bank notes rather than the HKMA, an arrangement also in effect in the United Kingdom and Macau).

Other Central Bank projects have also focused on making available settlement (to financial institutions) of (wholesale) CBDC balances — including Project Atom, an examination of Wholesale CBDC for Syndicated Lending overseen by the Reserve Bank of Australia (RBA)[6], which proposed minting CBDCs (for use in lending by participating financial institutions and members with exchange settlement accounts) by debiting the settlement accounts of member institutions, depositing the proceeds into an omnibus account with the Australian RTGS (RITS) (which would back the proposed CBDC) and then transferring minted CBDCs to the cryptocurrency wallet of the respective member financial institution. Similarly in 2021 the announcement by the Bank of England of the expansion of the RTGS to include omnibus accounts which allow for interface with a wider range of payment systems, including distributed ledger technology, was considered to expand possibilities for cryptoasset firms to conduct wholesale settlement and therefore for CBDCs to be rolled out in a two-tier model.

The rise of Tokenised Deposits

At the same time, investment banks have followed a separate path of innovation, with firms like J.P. Morgan (through its affiliate Onyx) and Societe Generale (via its affiliate SG-Forge¹⁰) establishing structures for the issuance of stablecoin tokens, with the fiat currency reserves held in bank deposit and securities accounts –a key feature being that unlike many other stablecoins, the reserves are accounted for (within regulated bank deposit and securities custody structures) and covered by institutional protections (including mandatory minimum liquidity, capital and risk management regulations applicable to banks and additional backing of bank balance sheets and emergency funding arrangements with central banks).

While mostly focused on serving the needs of their institutional customers with tailored offerings, some do consider that the growth of tokenised deposits could see them used more widely in the digital assets sector — including if arrangements to establish interoperability (for settlement between different digital asset ledgers and records) can be achieved.

Currently, while there has been no data published, it is to be presumed that lending of deposit tokens (by bank issuer entities) is occurring, but on a discrete case by case basis.

If CBDC Lending, then how? — Models of RWA Collateralised Lending

In a recent report examining the impact of Retail CBDCs on credit creation in the UK published by UK Finance, a body representing 300 banks and financial institutions in the UK¹¹ noted CBDC-denominated Lending was “another opportunity that could be explored further” and the possibility of banks lending CBDC balances to other CBDC customers would enable “credit creation” and provide a novel source of credit for the economy while achieving an “equilibrium of CBDC issuance and borrowing”¹². This does beg the question as to what types of lending are optimal for introducing CBDC-denominated lending?

Arguably one suitable route would be lending secured by real estate assets — a type of collateral which underpins a vast share of fiat currency lending globally and has begun to be adopted by DeFi protocols (as part of RWAs or “Real World Assets”, which can diversify collateral away from deposits of stablecoins and other tokens). In a recent paper, it was argued that legal frameworks and potential bank collateral standards, are developing to fit with and encourage stablecoin and CBDC-denominated lending with collateral taken over interests in real estate assets, where the collateral is itself evidenced by digital assets¹³.

One example of a tech business whose proposed experimentation speaks directly to this, is UK-headquartered Kodelab, whose ‘HELOC’ (smart lending contract) product allows a GBP-denominated stablecoin to be minted and lent out by virtue of a User (as borrower) depositing as collateral a single ‘Property NFT’. Some impressive legal engineering by their tokenisation partner, ‘TokenHouse’ (also based in the UK), means that this Property NFT is actually representative of right-to-title of the underlying physical property; i.e. this stablecoin lending becomes ‘secured’. Although the extent of this solution currently exists only in the internal testing stage, it could give useful indications as to how a CBDC lending infrastructure might look.

Benefits of CBDC Lending

Under the assumption of the two-tier, indirect CBDC model being implemented, coupled with a lending solution similar to that of Kodelab’s, then benefits could be extensive. For example, any retail CBDC backed 1:1 by a wholesale CBDC is by its nature ‘non-invasive’ to the existing private banking sector, in that such a model precludes capital flight taking place from private fiat bank accounts to any fiat-collateralised CBDC account that may be used for lending (i.e. avoiding the Deposit Problem). Instead, one could have a ‘responsible engine’ of retail CBDC production, on the credit-creation level, that in turn could support a wider instant payment and settlement infrastructure and a more secure, transparent AML environment.

Operational efficiencies on the commercial/Central Bank level could also materialise, in the form of an ability to monitor credit risk and perform reconciliations in real-time (blockchain enables second-by-second changes to positions to be tracked immutably). Some regulators are prioritising ‘SupTech¹⁴’ (Supervisory Technology, a complement to ’RegTech‘ or Regulatory Technology) in order to enhance visibility of and automate/streamline reporting with the banks they oversee; such a lending solution as we describe could serve to better support such goals.


Rapid developments are occurring in the fields of decentralised and centralised finance (DeFi and CeFi) and regulated institutions are adopting stablecoin and tokenised finance models. There remain great opportunities for fiat-denominated tokenised and CBDC-denominated lending. Such developments may see improved outcomes for consumers and businesses.

About the Authors

Bourn Collier is a Senior Corporate Counsel at BeesMont Law in Bermuda. BeesMont Law is a leading Bermuda law firm specialising in corporate and commercial and fintech matters. Bourn leads the digital asset practice and advises cryptoasset and stablecoin issuing clients.




A dynamic and visionary team of entrepreneurs fuelled by a shared passion for driving positive change.