Author: Wei-Chieh(Jack), Chai
【Background】
Taiwan has one of the highest densities of Automated Teller Machines (ATMs) in the world, making it convenient to withdraw cash and making cash transactions in Taiwan quite popular.
However, with the rapid spread of mobile devices and wireless networks, the rise of mobile payment has been driven by the integration of credit cards, debit cards, stored value cards, and other payment tools with mobile devices, which has dramatically increased the convenience of people’s lives. Due to the rise of digital technology, the development of the digital economy has also emerged.
The epidemic has accelerated the development of the digital economy. During the spread of the epidemic, the frequency of non-cash payments has increased, changing people’s payment behavior and making them more willing and accustomed to digital payments than ever before. Such changes are likely to continue after the epidemic, pushing human society to move toward a more digital future. In response to this trend, central banks around the world have begun exploring central bank digital currency (CBDC), and are continuing to improve their development base, as well as conducting research or preparing pilot projects.
Taiwan’s central bank has also responded to this trend by exploring CBDC in depth. The President of the Central Bank, Mr. Chin-Long, Yang, has given more than one speech on the topic of digital transformation of money and CBDC at various summits and annual conferences, demonstrating the government’s willingness to build a new culture and embrace innovation.
To promote the CBDC research project, Taiwan established the CBDC Research Project Task Force in 2019 to begin the first phase of planning, evaluation, and research on the issue of central bank digital currency in Taiwan and has now completed the second phase of research.
For Taiwan, the focus of CBDC is to complete the “last mile” of “cash digitization”. Now there are many digital payments, and CBDC can make it more complete.
【Taiwan’s CBDC compare to other payment instruments】
With the popularity of e-commerce and mobile payments, e-money issued by non-bank payment providers is becoming increasingly common, especially mobile payments are driven by low-cost QR Code scanning in Asian countries, such as Alipay and WeChat Pay in mainland China, and JKOPay and Line Pay in Taiwan. The above e-money operates by providing customer payment services through commercial banks’ currencies and then settling cross-bank transactions through the reserves deposited by commercial banks with the central bank. This three-tier payment system, with the central bank’s currency as the asset base for interbank settlement and the participation of regulated payment providers and licensed industries, has a sound institutional arrangement and has become a widely trusted operating mechanism.
On the other hand, commercial bank currency is also a means of payment, mainly demand deposits placed with commercial banks that can be used for payment purposes. For self-transfer, commercial bank currency is used for settlement； In the case of inter-bank transactions, the settlement is done through the use of reserve funds deposited with the central bank by the financial companies. Commercial banks’ demand deposits provide payment services as well as easy access to other financial services (e.g. investment, financial management, insurance, etc.)
CBDC is a kind of cash replenishment. In addition to the fact that CBDC can be used offline, CBDC also has legal effects and can be used at any store at any time, which is equivalent to cash. At present, there are various means of digital payment in Taiwan. Since CBDC is different from other payment tools, each has its strengths in application development, and the payment method also uses a QR code or NFC sensor. It is expected that CBDC will not completely replace the existing payment instruments in the future, but will exist in a coexisting and complementary manner.
【Current Situation】
CBDCs are issued by central banks and have full control over supply, so their value is very stable and there is no credit or liquidity risk. Wholesale CBDC is a tool to transfer funds between financial institutions for interbank settlement, while general CBDC is available to the general public, just like cash. Currently, most of the international focus is on the development of general-purpose CBDCs.
The CBDC Research Project Task Force was established by the Central Bank to conduct CBDC-related research and pilot projects in phases. In June 2020, the Central Bank completed the first phase of its wholesale CBDC feasibility study, a technical feasibility study on the use of DLT for wholesale CBDC, through a collaborative approach with academic institutions to understand the potential and drawbacks of applying distributed ledger technology (DLT) to wholesale CBDC.
The Central Bank’s study found that wholesale CBDC has its limitations, first of all, especially its operational efficiency is not yet able to meet the demand for real-time, high-frequency, and high-volume payment transactions. So at that time, they were not satisfied with the operational efficiency of the blockchain technology. In addition, the central bank originally hoped to break away from the central bank reserve in the traditional large-value payment system and traditional account-centered operation model. Using innovative technologies such as DLT, it issued tokenized “wholesale CBDC”, directly using tokens to transfer funds between banks and complete settlement, resulting in a cash-like effect of payment and settlement. However, since central bank reserves have already been digitized, a wholesale CBDC with a DLT design would have limited additional benefits, so recent international research has gradually shifted to a general-purpose CBDC that attempts to reproduce cash functions in digital form.
Therefore, at the end of September 2020, the second phase of the general-purpose CBDC pilot project officially launched. The project was scheduled for two years, and the CBDC prototype platform was built to simulate the application of CBDC in retail payment scenarios.
CBDC plans to adopt a centralized system, and transaction applications are handled by a centralized structure. That is to establish a centralized transaction processing platform to meet the performance requirements of general CBDC large transaction volume and high-frequency transactions, taking into account privacy protection and monitoring, using decentralized ledgers to save transaction data, and strengthening the security of the system. The core ledger will be a multi-node decentralized ledger maintained by a central bank so that it can still run uninterrupted when some data is lost.
There were some special features during the second phase of the project “General purpose CBDC Pilot Program”. With the help of CTBC Bank, Hua Nan Commercial Bank, SCSB, Cathay United Bank, and Taishin Bank as well as collaborate with PX Mart, Family Mart, Louisa, and vending machines to try out retail payment scenarios. Although the project is expected to end in September 2022, it has been completed three months ahead of schedule. The general-purpose CBDC pilot plan adopts a two-tier structure of public-private cooperation, and the central bank issues CBDC to intermediaries (including banks and non-banking institutions that provide payment-related services, etc.), and then provided by intermediaries to users, and CBDC can directly conduct P2P payments between intermediaries and users.
Among them, intermediaries connect core ledgers through API, are responsible for user wallet opening operations such as KYC, and can develop various innovative payment services on their own. The user part, including individuals and enterprises, applies CBDC in various payment scenarios through various payment interfaces provided by intermediaries, such as mobile apps. Users can open CBDC wallets, exchange deposits for CBDC, exchange ATM cash for CBDC, CBDC transfers, cross-border small-value remittances, and CBDC issuance of digital vouchers, etc.
After the completion of the current plan, the central bank will take public opinions as a reference for the next stage, improving platform design and technology adoption. In order to increase market trust in CBDC.
Compared with China mentioned in my last article, Taiwan currently has a very high network coverage, complete basic financial facilities, and the development of electronic payment is well developed and continues to improve. Therefore, there is no urgency to issue CBDC at present. And the launch schedule has not been announced. What we need to do now is to focus on the development potential of CBDC as a digital payment tool in the future digital economy. Recently, the third stage of research and experiments has been launched to complete the possibility of future payment development options.
【Opportunities and Challenges】
We are interested in CBDCs because this is a time of major changes in money and payments. Therefore, the development of CBDC will have the following potential benefits
For the potential benefits of the central bank’s development of CBDC in the future, it can be divided into four levels, including: first, allowing the public to obtain safe digital currency; second, meeting the needs of future payment services; third, enhancing inclusive finance, Last but not least, improve cross-border settlements.
Obtain safe digital currency:
In addition to the current diversified electronic payment methods, the emergence of CBDC is expected to meet the needs of the public for the digitization of cash in the future. At present, Sweden and China are facing such a problem. Private mobile payment is strongly grabbing market share and continues to crowd out the use of cash. Consumers will also have considerable concerns about personal privacy. Taiwan’s digital currency is the legal currency of the central bank and is protected by the central bank of Taiwan, but the money stored by the public in the wallets of third-party electronic payment institutions is settled through the currency deposited by commercial banks. Once the third-party electronic payment institution declares bankruptcy, the money inside the electronic wallet will also be liquidated according to the bankruptcy process, which lacks security.
Meeting the needs of future payment services:
CBDC is a programmable currency. With the help of smart contracts, CBDC can automatically execute transactions according to conditions and use them in various fields, such as tuition, rent, and other prepayments. If the central bank provides a safe, trusted, and risk-free CBDC option, it will allow the public to meet the needs of future cash digitization with greater peace of mind.
Inclusive financing:
Since CBDC is not a bank deposit, as long as you want to try digital payment, you can open a CBDC wallet, so that disadvantaged groups who have not yet been covered by bank accounts can also obtain CBDC digital services by opening a CBDC wallet in the future. The beneficiaries are very broad. Take the Youtube subscription plan as an example, if you want to join a paid membership, you have to bind a credit card for regular debits. Many students have to borrow their parents’ credit cards to pay, but if there is a CBDC in the future, even elementary school students without credit cards may be able to become members with pocket money in their wallets, which is like paying with cash, lowering the threshold for everyone to use financial services. Therefore, among the many payment tools, CBDC gives you one more option, hoping to provide the general public with more inclusive use.
Possibilities for improving cross-border settlements:
CBDC will help solve the problems of poor cross-border payment efficiency and high costs, but issues such as specifications, infrastructure, and legal framework still require international coordination.
--------------------------------------------------------------------However, there may also be some challenges and doubts in the process of promotion
Challenges and Solutions
Financial intermediary function: CBDC adopts a two-tier structure, enabling banks to continue to act as financial intermediaries.
Financial stability: CBDC sets transaction and holding caps to avoid a large loss of bank deposits and affect financial stability。
Monetary policy implementation: CBDC interest calculation has a broad impact on the implementation of monetary policy. To avoid the impact, the initial CBDC will choose an “interest-free design”
Privacy protection and financial crime prevention: protect privacy and comply with anti-money laundering, anti-financial terrorism, and other norms through the current mechanism of intermediaries.
Security and resilience of system operations: Strengthen information security protection measures and continue to study the feasibility of offline payment options.
Doubts
Digital cash
The point of CBDC is that it is as convenient for people to use as cash and has the feature of being anonymous. It can be used without providing any information or applying to anyone in advance. However, the central bank hired a bank to build a CBDC wallet and put the wallet in its bank app. These moves make CBDC less like cash by requiring users to provide their ID numbers or mobile phone numbers to open an account.
operating system
There is always an “operating system” behind any operation. For cryptocurrencies, this operating system is the blockchain. Blockchain or distributed ledger technology does have its own special features, including decentralization mechanism, incorruptibility, trackability, etc., but if used in payment systems, the technology still has many challenges. So far, the transaction processing performance and efficiency of DLT are not better than the centralized operating system, and its design logic may have a negative impact on security and efficiency. So the benefits of switching to DLT are limited. It may have to wait until a breakthrough in blockchain technology, such as the upgrade of the expansion plan related to Layer 2 or the improvement of the efficiency of the existing blockchain, and the current international research on wholesale CBDC can achieve further results.
In the end, if the central bank decides to issue a CBDC, in addition to formulating a series of plans and steps to proceed in an orderly manner, it can also adhere to the three basic principles of “harmless”, “coexistence” and “innovation and efficiency” jointly formulated by BIS and major national central banks. The most important thing is to cooperate with financial institutions to jointly build a complete CBDC ecosystem.
【Taiwan CBDC SWOT analysis】
【Summary】
Doing it right is more important than being first. The development of central bank digital currency is not a competition, but to ensure that the issuance of CBDC meets local needs. Late movers may have an advantage because they can build a more extensive CBDC ecosystem.
As we’ve learned in recent years, we shouldn’t belittle an emerging trend just because it started small, we should continue to pay attention to the new technology and look forward to its future possibilities.
【Reference】
Central Bank
Central Bank(2020), 9/17
Central Bank(2020), 6/18
BIS Innovation Hub
BIS Central bank digital currencies: foundational principles and core features
