How to Architect a Two-Tier CBDC Distribution Model

A two-tier Central Bank Digital Currency (CBDC) architecture is the prevailing model for most global CBDC projects, including the Digital Euro and Digital Yuan (e-CNY). This model separates the issuance and distribution functions: the central bank issues the CBDC and maintains the core ledger, while private-sector intermediaries—commercial banks and regulated payment service providers (PSPs)—handle user-facing operations like onboarding, wallets, and transactions. This structure leverages the existing financial ecosystem's customer service and compliance infrastructure while ensuring the central bank retains direct control over the monetary base.

The technical architecture typically involves a permissioned blockchain or distributed ledger technology (DLT) system. The central bank operates the core settlement layer, often a Real-Time Gross Settlement (RTGS)-like system for wholesale CBDC or a unified ledger. Intermediaries connect to this layer via APIs, operating their own node or relying on a central bank-provided interface. User transactions are validated and settled on the central ledger, providing a direct central bank liability, but all customer interaction is managed through the intermediary's application layer. This creates a clear separation between the wholesale (inter-bank) and retail (consumer) layers of the monetary system.

For developers, implementing a two-tier model requires designing robust APIs and smart contract modules that enforce the rules of the system. Key technical components include:

• Identity and Access Management (IAM): Secure, tiered authentication for intermediaries.
• Transaction Orchestration: Logic to route user payments from the intermediary's system to the core ledger.
• Compliance Modules: Programmable rules for Anti-Money Laundering (AML) checks and transaction limits.
• Privacy-Enhancing Techniques (PETs): Such as zero-knowledge proofs, to balance transparency for regulators with user privacy, a critical design challenge noted by the Bank for International Settlements (BIS).

The primary advantage of this model is financial stability. It prevents the disintermediation of commercial banks, as deposits remain a key funding source, unlike in a direct 'one-tier' CBDC model. It also allows for programmability at the intermediary level, enabling innovative payment services and conditional logic (e.g., smart contracts for escrow or subsidies). However, it introduces integration complexity and places significant operational and cybersecurity responsibility on the chosen intermediaries, requiring stringent oversight from the central bank.

A two-tier CBDC distribution model involves two distinct layers: the central bank issues the digital currency to authorized financial institutions (Tier 1), which then distribute it to the public and businesses (Tier 2). This architecture leverages the existing banking system's customer interface and compliance infrastructure while maintaining central bank control over the core ledger and monetary policy. Key prerequisites include a clear legal framework defining the roles of the central bank and intermediaries, as well as established operational standards for interoperability, security, and privacy.

The core system requires a high-performance, permissioned distributed ledger or a centralized database with strong cryptographic guarantees. For ledger-based systems, platforms like Hyperledger Fabric or Corda are common choices due to their support for private networks and smart contracts. The infrastructure must support high transaction throughput (targeting thousands of transactions per second), sub-second finality, and 24/7 availability. A critical requirement is a secure hardware security module (HSM) network for managing the cryptographic keys that underpin the digital currency, ensuring the integrity of the monetary base.

From a software perspective, the central bank's core ledger needs APIs for Tier 1 institutions to request CBDC issuance and redemption. These institutions, in turn, require wallet infrastructure and APIs for their customers. Development prerequisites include expertise in digital identity (e.g., integrating with national ID systems), cybersecurity for threat modeling, and compliance tooling for anti-money laundering (AML) and counter-financing of terrorism (CFT) checks. A testing environment with a CBDC sandbox is essential for simulating network load and attack scenarios before mainnet launch.

Operational readiness depends on rigorous governance. This includes defining disaster recovery protocols, establishing a legal entity structure for liability, and creating a clear rulebook for participation. The technical team must also plan for offline transaction capabilities to ensure resilience, and design for programmability to enable future use cases like smart contracts for conditional payments, without compromising the system's primary stability and security objectives.

A two-tier distribution model is the predominant architectural framework for Central Bank Digital Currencies (CBDCs). This model separates the issuance layer, controlled exclusively by the central bank, from the distribution and user-facing layer, managed by licensed intermediaries like commercial banks and payment service providers (PSPs). The central bank maintains the core ledger and ultimate sovereignty over the currency, while intermediaries handle customer onboarding, KYC/AML compliance, transaction processing, and wallet services. This preserves the existing financial ecosystem's structure, leveraging private sector innovation and customer reach while ensuring central bank control over monetary policy and settlement finality.

The technical architecture typically involves a permissioned blockchain or distributed ledger technology (DLT) at its core. The central bank operates the validator nodes for the settlement layer, which records the definitive ownership of all CBDC units. Intermediaries run participant nodes with permissions to interact with this core ledger on behalf of their customers. Communication between tiers is governed by APIs and smart contracts. For instance, a transfer smart contract would validate a transaction's signatures and compliance rules before the central bank's ledger updates balances. This design ensures programmable money capabilities, such as enforcing holding limits or enabling offline transactions, are baked into the protocol layer.

Key design decisions include the choice between account-based and token-based models. An account-based CBDC, similar to bank accounts, identifies holders and tracks balances. A token-based model, akin to digital cash, uses cryptographic tokens that carry value. Most hybrid designs use an account model at the wholesale (inter-bank) tier and a token model for retail circulation. Another critical component is the wallet architecture. Intermediaries provide user wallets, which can be custodial (the intermediary holds the keys) or non-custodial (user holds keys, often via a hardware-secured module on a smartphone). The design must balance user privacy, transaction transparency for regulators, and system resilience.

Interoperability with existing financial infrastructure is non-negotiable. The CBDC system must integrate with Real-Time Gross Settlement (RTGS) systems, like Fedwire or TARGET2, for seamless conversion between CBDC and bank reserves. It also needs interfaces for automated clearing houses (ACH) and card networks. This is achieved through adapter layers and standardized API gateways. For example, the Digital Currency Distributed Ledger proposed by the Bank for International Settlements (BIS) uses a "unified ledger" concept to orchestrate transactions across CBDC, tokenized deposits, and other digital assets on a common programmable platform.

Security and resilience define the operational tier. The central bank's core ledger must achieve Byzantine Fault Tolerance (BFT) to withstand malicious actors. The distribution tier requires robust identity and access management (IAM) systems for KYC, and transaction monitoring systems for AML/CFT. A critical feature is offline capability, allowing peer-to-peer transactions without internet access, often using secure hardware and pre-funded "value blocks." Testing such architectures requires extensive sandbox environments and simulations, like those conducted in Project Rosalind by the BIS and Bank of England, which explored API-based CBDC access models.

A wholesale CBDC ledger is the core settlement infrastructure operated exclusively by the central bank. It functions as the ultimate source of truth for the digital currency, recording high-value interbank transactions between authorized financial institutions like commercial banks and payment service providers. Unlike a retail system where end-users hold accounts directly with the central bank, this two-tier model maintains the traditional financial ecosystem's structure. The wholesale ledger's primary roles are final settlement of large-value payments, enabling programmable monetary policy tools, and serving as a secure anchor for the wider retail payment network built atop it.

Architecturally, the wholesale ledger must guarantee unconditional finality, resilience, and privacy for interbank transactions. Common designs leverage Distributed Ledger Technology (DLT) platforms like Hyperledger Fabric or Corda, which offer permissioned networks with known validator nodes. The ledger's smart contract layer, or chaincode, enforces the core monetary logic: minting and burning tokens, validating high-value transfers, and applying central bank policies. A critical design pattern is the use of unspent transaction output (UTXO) or account-based models to track balances, each with implications for privacy and auditability. Transactions are typically settled in real-time or near-real-time, replacing legacy systems like RTGS.

Interoperability with the retail tier is achieved through a clear asset issuance model. The central bank issues a defined amount of CBDC onto the wholesale ledger. Authorized institutions can then 'withdraw' these wholesale tokens by locking them in a smart contract, which triggers the minting of an equivalent amount of retail CBDC on a separate, possibly public, ledger for consumer use. The reverse process—'burning' retail tokens to unlock wholesale ones—ensures the total supply is always accounted for. This linkage is managed via atomic cross-chain transactions or bridging protocols that prevent double-spending across tiers, a non-negotiable security requirement.

Smart contracts automate key central bank functions. For example, a Monetary Policy Contract could automatically distribute or collect reserves as part of open market operations. A Liquidity Management Contract might enforce reserve requirements or provide intraday liquidity against collateral. These contracts execute deterministically based on predefined rules, increasing transparency and reducing operational risk. Code audits and formal verification are essential, as bugs could impact financial stability. The ledger must also support privacy-enhancing techniques like zero-knowledge proofs or channels to protect the confidentiality of sensitive interbank deal information while providing the central bank with necessary oversight.

Deploying this system requires a robust governance and operational framework. This includes defining node operator roles, key management for digital signatures, disaster recovery procedures, and legal frameworks for digital asset ownership. The system must be designed for high throughput (thousands of transactions per second) and low latency, especially if supporting instant retail payments. Furthermore, the architecture should allow for upgradability to accommodate new policy tools or technological advancements without compromising the integrity of the existing monetary base, ensuring the CBDC remains a stable and trustworthy public good.

A two-tier CBDC model separates the roles of the central bank, which issues the digital currency and maintains the core ledger, from commercial banks and payment service providers (PSPs), which handle distribution and user-facing services. The Distribution Layer API is the critical interface that enables this separation, allowing intermediaries to programmatically request currency, manage user accounts, and submit transactions for settlement on the core ledger. This API must enforce strict access controls, ensure regulatory compliance, and provide high availability to support a national-scale payment system.

The API design must prioritize idempotency, atomicity, and non-repudiation. Every request from a commercial bank, such as POST /v1/issuance to mint new CBDC against collateral, must be idempotent to prevent duplicate issuance from network retries. Settlement operations, like batch processing interbank transfers via POST /v1/settlement/submit, must be atomic—either all transactions in a batch succeed or all fail to maintain ledger consistency. Digital signatures on all API payloads, verifiable against the intermediary's registered public key, provide non-repudiation and auditability.

A robust API specification defines clear endpoints for core lifecycle operations. Key endpoints include: GET /v1/accounts/{intermediaryId}/balance for real-time reserve queries, POST /v1/transactions for submitting customer payment batches, and POST /v1/redemption for destroying CBDC and reclaiming collateral. Each request should include a unique idempotency-key header and be authenticated using mutual TLS (mTLS) and OAuth 2.0 client credentials grant, ensuring that only authorized intermediaries can access the system. The response schema should standardize status codes, such as 202 Accepted for a queued settlement batch with a location header pointing to a status endpoint.

Error handling and monitoring are paramount. The API must return precise, actionable error codes—like INSUFFICIENT_COLLATERAL or DAILY_LIMIT_EXCEEDED—without exposing system internals. Structured logging of all API interactions, tied to a specific intermediary and transaction correlation ID, is essential for audit trails and regulatory reporting. Implementing circuit breakers and rate limiting (e.g., using a token bucket algorithm) at the API gateway protects the core ledger from being overwhelmed by a faulty or malicious intermediary, ensuring system-wide stability.

For development and testing, the central bank should provide a comprehensive sandbox environment with a full mock of the Distribution Layer API. This allows intermediaries to integrate their systems using realistic test scenarios, including simulated liquidity crises or regulatory checks. The official API specification should be published as an OpenAPI 3.0 document, enabling automatic client code generation and validation. This approach, used by projects like the Digital Euro prototype and the BIS Project Helvetia, standardizes integration and accelerates ecosystem development.

A two-tier CBDC model is the prevailing architectural choice globally, designed to leverage the existing financial ecosystem. In this structure, the central bank issues the digital currency and maintains the ultimate liability on its balance sheet, ensuring trust and finality. Commercial banks, payment service providers (PSPs), and other regulated entities act as intermediaries, handling customer-facing operations like onboarding, wallets, and payments. This separation preserves the public-private partnership at the heart of modern finance, where the central bank ensures monetary sovereignty and stability, while private firms drive innovation and user access.

The core technical challenge is architecting a system that enforces this liability split. The central bank's ledger, often a permissioned blockchain or distributed ledger technology (DLT) system, records the definitive ownership of all CBDC units. Intermediaries do not hold direct accounts on this core ledger. Instead, they hold pooled, omnibus accounts. When a user's wallet shows a balance, it represents a claim against the intermediary, which in turn has a claim against the central bank's ledger. Smart contracts or institutional-grade access controls are critical to ensure only the designated intermediary can move funds from its omnibus account, enforcing the legal liability chain.

Liquidity management becomes a distributed operation. The central bank manages wholesale liquidity between itself and the intermediaries, typically through a Real-Time Gross Settlement (RTGS) system interface. An intermediary must prefund its omnibus account with CBDC to service customer withdrawals and payments. Programmable features, like trigger-based smart contracts, can automate intraday liquidity provisions or collateralized short-term loans from the central bank. For example, a contract could automatically pledge securities from the intermediary to mint new CBDC if its balance falls below a threshold, then burn the CBDC once the securities are returned.

From the user's perspective, transactions appear instantaneous, but the settlement flow is two-step. A payment between customers of different intermediaries involves: 1) Deducting funds from the payer's wallet (liability of Intermediary A), 2) Intermediary A's system instructing a transfer from its omnibus account on the core ledger to Intermediary B's omnibus account (settlement on the central bank's balance sheet), and 3) Crediting the payee's wallet (liability of Intermediary B). This design ensures final settlement occurs on the central bank's ledger, making the transaction risk-free, while intermediaries manage customer experience and liquidity in real-time.

Implementing this requires clear API specifications and operational rules. The central bank would publish standards for the core ledger interface, including APIs for balance queries, transfer initiation, and liquidity management functions. Intermediaries build their systems to these specs. A key consideration is privacy; while the central bank sees inter-institutional flows, it should not see individual user transactions. Techniques like zero-knowledge proofs or aggregate transaction reporting can be employed to maintain this privacy boundary while allowing for necessary regulatory oversight and financial integrity monitoring.

This architecture provides a robust foundation for a digital currency. It mitigates risks like disintermediation of banks, as they remain crucial for distribution and credit. It also allows for future innovation, as intermediaries can build advanced services—like programmable payments for businesses or integrated DeFi access—on top of the stable, sovereign monetary base provided by the central bank's ledger. Successful implementation hinges on precise legal definitions of liability, robust technical interoperability standards, and clear liquidity backstop mechanisms.

A two-tier CBDC model, where the central bank issues the digital currency to regulated financial intermediaries (like commercial banks) who then distribute it to the public, balances innovation with financial stability. This structure leverages existing banking infrastructure for customer onboarding (KYC/AML) and services, while the central bank maintains control over the core ledger and monetary policy. The technical foundation typically involves a permissioned blockchain or distributed ledger technology (DLT) where the central bank operates the validating nodes or a core settlement layer.

For implementation, start by defining the programmability scope of your CBDC. Will it support simple programmable payments, like vouchers with expiry dates, or complex DeFi-like smart contracts? This decision dictates your technology stack. For a high-throughput, privacy-focused ledger, consider frameworks like Hyperledger Besu or Corda. If you plan for extensive smart contract functionality, an Ethereum Virtual Machine (EVM) compatible layer, such as a permissioned instance of Hyperledger Fabric with EVM, or a custom Cosmos SDK application chain, may be appropriate. The core settlement system must guarantee finality and auditability for the central bank.

The intermediary tier requires robust APIs and sandboxes. Develop a clear set of Application Programming Interfaces (APIs) for tier-2 banks to: query balances, initiate wholesale transfers between themselves, and programmatically manage sub-accounts for end-users. Providing a testing sandbox with a faucet for test-CBDC is essential for developer adoption. Standards like the ISO 20022 message format should be adopted for transaction interoperability. Security here is paramount; all API access must be authenticated via digital certificates and adhere to strict rate limits.

Integration with the existing financial system is the most complex phase. This involves building interoperability layers or "bridges" between the new CBDC ledger and traditional Real-Time Gross Settlement (RTGS) systems. A common pattern is to use a hashed time-locked contract (HTLC) mechanism for atomic swaps between CBDC and bank reserves. Furthermore, you must design for offline capability scenarios, potentially using secure hardware elements (like SIM cards or dedicated chips) that can store and transact a limited amount of CBDC without immediate network access, synchronizing once online.

Finally, adopt an iterative rollout strategy. Begin with a wholesale-only pilot between the central bank and a few commercial banks to test the core ledger and large-value settlement. Follow this with a limited retail pilot, perhaps a closed user group testing digital wallets for specific use cases like government disbursements. Throughout, engage in continuous legal and regulatory analysis, particularly concerning data privacy (e.g., GDPR compliance), liability, and the treatment of CBDC in insolvency proceedings. The goal is a resilient system that enhances payment efficiency without destabilizing the monetary ecosystem.