As reported on Wednesday by local media outlet bnext.com, Chin-long Yang, governor of the Central Bank of the Republic of China (Taiwan), recommended an interest-free design for the pilot of a central bank digital currency, or CBDC, from the country. Explaining the decision, Yang said that a CBDC in which interest is paid on digital asset deposits would likely become a substitute for fiat New Taiwan Dollar (NT$) deposits in banks. “Once banks’ available deposits decrease,” Yang explained, “there would be a corresponding increase in the cost of funding, and thus the cost of borrowing for consumers would increase.”
Yang further warned that even interest-free CBDCs could trigger “digital banking panics” in times of financial instability and quickly turn into a liquidity crisis for financial institutions. However, the governor of the country’s central bank acknowledged the increased demand for electronic payment solutions in recent years:
“The share of electronic payments as a % of all payments in Taiwan has increased from 40% in 2017 to 60% in the first quarter of 2022. Therefore, there is potential for increased demand in the population for a CBDC that provides a form of secure, reliable digital payment solution, without commissions, without credit risk and without liquidity risk”.
Taiwan is currently in the second phase of its CBDC pilot program, in which its central bank provides CBDC to five selected Taiwanese banks for distribution to consumers. Based on the results of the pilot program, the central bank will proceed to the next steps. However, it has already been found in testing that the distributed ledger technology within the CBDC would not be able to handle the high-volume, high-frequency transactions of consumers. Another point of concern is the loss of functionality of the payment solution in the event of power outages.
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