Distribution Architecture - The Two-Tier Model
Learning Objectives
Explain the two-tier distribution architecture and its rationale
Identify the roles of different intermediaries in CBDC distribution
Describe the technical interfaces between tiers
Analyze the advantages and limitations of two-tier design
Compare alternative distribution approaches
Central banks create CBDC. Citizens use CBDC. But how does it get from one to the other?
The answer for nearly every CBDC: through intermediaries. Banks, payment service providers, and wallet operators stand between the central bank and the public. This "two-tier" model mirrors existing monetary systems where central banks don't serve retail customers directly.
This architecture isn't just practical convenience—it's a deliberate design choice that protects the banking system, leverages existing infrastructure, and keeps central banks out of retail operations they're not equipped to handle.
TWO-TIER DISTRIBUTION MODEL
TIER 1: CENTRAL BANK LAYER
┌─────────────────────────────────────────────────┐
│ CENTRAL BANK │
│ │
│ - Issues CBDC │
│ - Maintains core ledger │
│ - Sets policy and rules │
│ - Supervises intermediaries │
│ - Does NOT serve retail customers │
└───────────────────────┬─────────────────────────┘
│
Wholesale relationship (regulated)
│
TIER 2: INTERMEDIARY LAYER
┌───────────────────────▼─────────────────────────┐
│ ┌──────────┐ ┌──────────┐ ┌──────────┐ │
│ │ Bank A │ │ Bank B │ │ PSP C │ │
│ │ │ │ │ │ │ │
│ │ Wallets │ │ Wallets │ │ Wallets │ │
│ │ Services │ │ Services │ │ Services │ │
│ └────┬─────┘ └────┬─────┘ └────┬─────┘ │
│ │ │ │ │
└───────┼─────────────┼─────────────┼────────────┘
│ │ │
Retail relationship (customer-facing)
│ │ │
┌───────▼─────────────▼─────────────▼────────────┐
│ PUBLIC │
│ │
│ - Citizens │
│ - Businesses │
│ - Use CBDC for payments │
└────────────────────────────────────────────────┘
```
RATIONALE FOR TWO-TIER MODEL
- Monetary policy
- Financial stability
- Wholesale payments
- Serve millions of consumers
- Run customer support hotlines
- Handle KYC for citizens
- Manage retail fraud
"Central banks are policy institutions, not service providers"
- Customer relationships
- KYC systems
- Branch networks
- Digital platforms
- Customer support
"Why rebuild what already exists?"
- Compete directly with bank deposits
- Disintermediate banks entirely
- Threaten financial stability
Two-tier keeps banks in the loop
- Intermediaries handle operational risk
- Fraud losses spread across system
- Central bank not liable for retail issues
- Failure of one intermediary ≠ system failure
CBDC VALUE FLOW IN TWO-TIER
ISSUANCE (Central Bank → Intermediary):
┌──────────────┐ ┌──────────────┐
│ Central Bank │ │ Bank A │
│ │ │ │
│ CBDC created │────────▶│ CBDC received│
│ │ │ │
│ Bank A's │ │ Reserves │
│ reserves │ │ reduced │
│ converted │ │ │
└──────────────┘ └──────────────┘
Bank pays central bank (reserves)
Central bank credits CBDC to bank
Bank now has CBDC to distribute
DISTRIBUTION (Intermediary → Public):
┌──────────────┐ ┌──────────────┐
│ Bank A │ │ Customer │
│ │ │ │
│ Customer │────────▶│ CBDC wallet │
│ requests │ │ credited │
│ CBDC from │ │ │
│ their account│ │ │
└──────────────┘ └──────────────┘
Customer trades deposit for CBDC
Bank's CBDC holdings decrease
Customer's CBDC wallet increases
REDEMPTION (Reverse):
Customer returns CBDC → Gets deposit
Bank returns CBDC → Gets reserves
```
INTERMEDIARY CATEGORIES
- Account/wallet provision
- KYC/onboarding
- Customer service
- Deposit-CBDC conversion
- May integrate with existing banking app
- Existing customer base
- Regulatory compliance infrastructure
- Trust and stability
- Wallet provision
- Payment processing
- May not hold deposits
- Focus on transactions
- Payment expertise
- Digital-native
- May reach underbanked
- Digital wallet
- Value storage
- Often simpler KYC tiers
- Already serve underbanked
- Digital expertise
- Lower barriers
- Wallet apps only
- Depend on banks for CBDC backing
- Front-end focus
- UX expertise
- Innovation
- Competition driver
INTERMEDIARY RESPONSIBILITIES
CUSTOMER-FACING:
┌────────────────────────────────────────────────┐
│ │
│ ONBOARDING: │
│ - KYC verification │
│ - Account opening │
│ - Identity documentation │
│ │
│ WALLET SERVICES: │
│ - Provide wallet app │
│ - Maintain customer balance view │
│ - Transaction interface │
│ │
│ CUSTOMER SUPPORT: │
│ - Help desk │
│ - Dispute resolution │
│ - Technical assistance │
│ │
└────────────────────────────────────────────────┘
OPERATIONAL:
┌────────────────────────────────────────────────┐
│ │
│ COMPLIANCE: │
│ - AML/CFT monitoring │
│ - Sanctions screening │
│ - Suspicious activity reporting │
│ │
│ SECURITY: │
│ - Protect customer credentials │
│ - Fraud detection │
│ - System security │
│ │
│ INTEGRATION: │
│ - Connect to central bank systems │
│ - Real-time settlement │
│ - Reporting and reconciliation │
│ │
└────────────────────────────────────────────────┘
```
HOW INTERMEDIARIES ARE COMPENSATED
QUESTION: If CBDC is free to use, how do intermediaries profit?
POSSIBLE MODELS:
Transaction fees (merchant pays)
Premium services (consumer pays)
Cross-border fees
Business services
Central bank pays per user/transaction
Covers operational costs
Incentivizes distribution
Digital Euro considering this
CBDC as customer acquisition
Profit from other products
Banking relationship
Data value (within limits)
Lower cash handling costs
Automated processes
Reduced fraud
Operational savings
Basic services free to users
Central bank may compensate intermediaries
Merchant fees possible but capped
Still being designed
TIER 1 INTERFACE: CB ↔ INTERMEDIARIES
API LAYER:
┌─────────────────────────────────────────────────┐
│ CENTRAL BANK API │
│ │
│ Issuance API: │
│ - Request CBDC issuance │
│ - Exchange reserves for CBDC │
│ - Redemption requests │
│ │
│ Settlement API: │
│ - Real-time settlement │
│ - Batch processing │
│ - Inter-intermediary transfers │
│ │
│ Reporting API: │
│ - Balance reporting │
│ - Transaction reporting │
│ - Compliance data │
│ │
│ Admin API: │
│ - Onboarding intermediaries │
│ - Credential management │
│ - Limit management │
└─────────────────────────────────────────────────┘
- High security (institutional grade)
- High availability (always operational)
- Low latency (real-time capable)
- Authenticated and encrypted
- Audited and logged
TIER 2 INTERFACE: INTERMEDIARY ↔ PUBLIC
USER INTERFACE OPTIONS:
Mobile App:
┌─────────────────────────────────┐
│ CBDC WALLET APP │
│ │
│ Balance: €150.00 │
│ │
│ [Send] [Receive] [History] │
│ │
│ Recent: │
│ - Coffee Shop -€4.50 │
│ - From: Alice +€50.00 │
└─────────────────────────────────┘
Bank App Integration:
┌─────────────────────────────────┐
│ BANK APP │
│ │
│ Checking: €2,500 │
│ Savings: €10,000 │
│ CBDC: €150 │
│ │
│ [Transfer to CBDC] │
└─────────────────────────────────┘
NFC for contactless
Links to CBDC balance
May require online auth
Text-based interface
Works without internet
For feature phones
INTER-INTERMEDIARY TRANSACTIONS
SCENARIO: Alice (Bank A) pays Bob (Bank B)
OPTION 1: THROUGH CENTRAL BANK
┌──────────┐ ┌──────────┐ ┌──────────┐
│ Alice │────────▶│ Bank A │────────▶│ CENTRAL │
│ (Bank A) │ │ │ │ BANK │
└──────────┘ └──────────┘ └────┬─────┘
│
▼
┌──────────┐ ┌──────────┐ ┌──────────┐
│ Bob │◀────────│ Bank B │◀────────│ Settlement│
│ (Bank B) │ │ │ │ │
└──────────┘ └──────────┘ └──────────┘
All transfers settle at central bank
Guaranteed finality
Central visibility
OPTION 2: BILATERAL SETTLEMENT
Banks settle directly with CB periodically
Faster for users (pre-funded)
Net settlement reduces traffic
- Common message standards
- Real-time or near-real-time
- Cross-intermediary visibility
- Dispute resolution process
SINGLE-TIER: CENTRAL BANK → PUBLIC DIRECTLY
ARCHITECTURE:
┌─────────────────────────────────────────────────┐
│ CENTRAL BANK │
│ │
│ - Issues CBDC │
│ - Operates wallets │
│ - Serves all customers │
│ - Handles KYC │
│ - Provides support │
└───────────────────────┬─────────────────────────┘
│
Direct relationship
│
┌───────────────────────▼─────────────────────────┐
│ PUBLIC │
│ │
│ All citizens have accounts at central bank │
└────────────────────────────────────────────────┘
- Central banks not equipped for retail
- Would disintermediate banks entirely
- Operational burden enormous
- Not their core competency
- Academic proposals
- "Narrow banking" concepts
- Not in mainstream CBDC designs
HYBRID: MULTIPLE TIERS AND PATHS
ARCHITECTURE:
┌─────────────────────────────────────────────────┐
│ CENTRAL BANK │
└──────┬─────────────────┬───────────────┬────────┘
│ │ │
▼ ▼ ▼
┌──────────┐ ┌──────────┐ ┌──────────┐
│ Banks │ │ PSPs │ │ Direct │
│ │ │ │ │ Access │
│ Full svc │ │ Payments │ │ Basic │
└────┬─────┘ └────┬─────┘ └────┬─────┘
│ │ │
▼ ▼ ▼
┌────────────────────────────────────────────────┐
│ PUBLIC │
│ │
│ Multiple paths to CBDC access │
└────────────────────────────────────────────────┘
Central bank provides basic wallet for unbanked
Banks provide full-featured access
PSPs provide specialized services
- Competition between paths
- Inclusion for unbanked (direct basic)
- Full services for banked (through banks)
- Multiple systems to maintain
- Regulatory variation by channel
- Coordination challenges
INTERMEDIARY ONBOARDING PROCESS
REQUIREMENTS TO BECOME CBDC INTERMEDIARY:
Licensed in jurisdiction
Meets capital requirements
AML/CFT compliant
Supervised entity
API integration capability
Security standards met
Operational resilience
Disaster recovery
Customer service capability
Complaint handling
Reporting capability
Staff training
- Application to central bank
- Due diligence review
- Technical testing
- Security audit
- Pilot with limited users
- Full approval
- Go-live
- Regular reporting
- Compliance audits
- Technical updates
- Performance standards
SETTLEMENT BETWEEN TIERS
- Each transaction settles immediately
- Highest certainty
- Higher system load
- Used for large values
- Transactions accumulated
- Net positions calculated
- Settlement at intervals (hourly, daily)
- More efficient
- Introduces settlement risk
- Large transactions: Real-time
- Small transactions: Batched
- Balance of efficiency and certainty
- Settlement in central bank money
- Real-time between intermediaries
- Central bank provides infrastructure
- T+0 (same-day) settlement
✅ Two-tier is near-universal choice—virtually every CBDC uses intermediaries.
✅ Leverages existing infrastructure—banks already have what's needed.
✅ Protects banking system—keeps banks in the value chain.
⚠️ Intermediary compensation models—still being designed.
⚠️ Competition dynamics—will banks compete or coordinate?
⚠️ Fintech inclusion—how broad will intermediary access be?
📌 Assuming two-tier preserves innovation—may entrench incumbents.
📌 Underestimating coordination complexity—many intermediaries mean many interfaces.
📌 Ignoring inclusion implications—intermediary requirements may exclude some providers.
Two-tier distribution is the pragmatic choice that protects banking systems and leverages existing infrastructure. It's not necessarily optimal for users—intermediary layers add complexity and potential friction. But it's the politically and operationally viable path, which is why it dominates.
Assignment: Design a distribution architecture for a hypothetical CBDC.
Requirements: Specify intermediary types, roles, technical interfaces, and settlement approach for a country of your choice.
Time Investment: 3-4 hours
End of Lesson 11
Course 58: CBDC Architecture & Design
Lesson 11 of 20
Key Takeaways
Two-tier means intermediaries between central bank and public
: Central bank issues; banks/PSPs distribute; users access through intermediaries.
Rationale is practical and political
: Central banks aren't equipped for retail; existing infrastructure should be leveraged; banking system must be protected.
Intermediaries handle customer-facing operations
: KYC, wallets, customer service, compliance—all intermediary responsibilities.
Technical interfaces connect the tiers
: APIs for issuance, settlement, and reporting between central bank and intermediaries; apps and interfaces between intermediaries and users.
Alternatives exist but aren't used
: Direct central bank access is theoretically possible but practically abandoned; hybrid models add complexity. ---