According to a story that was published on Wednesday by a local news site called bnext.com, Chin-long Yang, the governor of the Central Bank of the Republic of China (Taiwan), advocated a no-interest design for the pilot of the country’s central bank digital currency, also known as CBDC.

When asked to justify the decision, Yang said that a CBDC that offers interest payments on deposits of digital assets is likely to become an alternative for deposits of fiat currencies like the New Taiwan Dollar (NT$) held in banks.

According to Yang’s explanation, once the banks’ available deposits begin to diminish, this will lead to a matching rise in the cost of financing, which will, in turn, lead to an increase in the cost of borrowing money for customers.

Yang cautioned further that even interest-free CBDCs might lead to “digital bank runs” during times of financial instability, which could swiftly snowball into a liquidity crisis for financial institutions. 

Yang cautioned further that even interest-free CBDCs might lead to “digital bank runs” during times of financial instability, which could swiftly snowball into a liquidity crisis for financial institutions.  Nevertheless, the governor of the country’s central bank acknowledged in recent years a significant increase in the demand for electronic payment solutions:

In Taiwan, the percentage of electronic payments as a proportion of total payments is expected to reach 60 percent in the first quarter of 2022, up from 40 percent in 2017. 

As a result, there is a likelihood that there will be a growing demand among the general public for a CBDC that offers a secure and trustworthy kind of digital payment solution that has no commission, no credit risk, and no liquidity risk associated with it.

In the present phase of its CBDC pilot program, Taiwan is in the second stage, during which the country’s central bank is supplying the CBDC to five chosen Taiwanese banks for distribution among customers of those institutions. Next an analysis of the outcomes of the pilot program, the central bank will go on to the following phases. 

However, it was previously determined via experiments that the distributed ledger technology that is a part of the CBDC is incapable of handling high-frequency consumer transactions in large volumes. In the case that the power goes out, another issue that raises concerns is the fact that the payment system would lose its functioning.

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