Taiwan Central Bank Digital Currency Progress Overview | What are the benefits and risks of CBDC? At what stage is the trial progress?

At the annual Financial Information Systems Conference held at the end of June, Central Bank Governor Yang Jinlong gave a keynote speech on our country's central bank digital currency (CBDC). In addition to discussing the benefits and risks of CBDC, he also shared the current progress of the pilot program.

Key Developments of CBDC

According to the presentation and speeches at this conference, the central bank stated that the development of currency has always revolved around establishing "trust" throughout history. However, recent stablecoin collapses, events such as the UST uncoupling, concerns raised by USDT, declining cash usage in some countries, and insufficient payment infrastructure have once again brought up the issue of CBDC issuance.

Before discussing the current progress of CBDC, the central bank first assessed the potential benefits and risks that CBDC could bring to the public.

Potential Benefits of CBDC

1. Providing the public with secure cryptocurrency: In addition to the current diverse electronic payment methods, the emergence of CBDC is expected to meet the public's demand for digitalization of cash in the future.

2. Meeting the needs of future payment services: With the help of smart contracts, CBDC can automatically execute transactions based on conditions and be used in various scenarios.

3. Deepening financial inclusion: Since CBDC is not a bank deposit, anyone wishing to try digital payments can open a CBDC wallet, making financial services accessible to economically disadvantaged individuals.

4. Improving the possibilities of cross-border payments: CBDC will help address inefficiencies in cross-border payments, but issues such as specification standards, infrastructure, and legal frameworks require international coordination.

Potential Risks of CBDC and Policy Responses

1. Financial intermediary function: CBDC adopts a traditional currency issuance dual-layer structure, allowing banks to continue to act as financial intermediaries.

2. Financial stability: CBDC sets limits on transactions and holdings to prevent significant outflows of bank deposits that could affect financial stability.

3. Monetary policy implementation: Interest calculation on CBDC has a broad impact on monetary policy implementation and is initially considered as non-interest-bearing digital cash to avoid disruption.

4. Privacy protection and prevention of financial crimes: Through existing mechanisms of intermediaries, privacy is protected, and compliance with anti-money laundering and counter-terrorism financing regulations is followed.

5. Security and resilience of system operations: Strengthening cybersecurity measures and continuing to research the feasibility of offline payment options.

CBDC Trial Progress

In 2019, the central bank planned two research projects:

• Feasibility study of wholesale CBDC technology 2019.6 – 2020.6:
  It was found that the operational efficiency of distributed ledgers could not meet the high-frequency, high-volume, real-time clearing requirements of payment transactions.
• General CBDC trial program 2020.9 – 2022.9: The project is still ongoing, but at this year's annual meeting, a simulated scenario of CBDC use was demonstrated. In this scenario, the central bank provides CBDC to banks, which then provide CBDC to the public. The public can use CBDC in retail payment scenarios. Therefore, there are two exhibition areas: "Bank" and "Merchant."

  The Bank exhibition area showcases opening CBDC wallets, depositing and exchanging CBDC, exchanging ATM cash for CBDC, CBDC transfers, cross-border remittances, and programmatically distributing digital coupons using CBDC; the Merchant exhibition area demonstrates shopping and payment with CBDC or digital coupons, providing scanning and NFC payment options.

After the completion of the current projects, the central bank will gather public opinions as references for the next phase, improve platform design and technology adoption, and formulate legal frameworks to establish regulations on anti-money laundering, counter-terrorism financing, privacy protection, and enhance market trust in CBDC.

"If the central bank decides to issue CBDC in the end, besides needing to formulate a series of plans and steps to proceed in an orderly manner, it should continue to follow the three basic principles jointly established by the BIS and major central banks: 'do no harm,' 'coexistence,' and 'innovation and efficiency.' Most importantly, it should collaborate with financial institutions to jointly build a complete CBDC ecosystem," said Yang Chin-long, Governor of the central bank, in conclusion.