Taiwan’s governor support interest-free CBDCs to avoid fiat deposit outflow

Steps are being taken to launch a Taiwanese Central Bank Digital Currency, but privacy and power abuse worries remain.

Central Bank of the Republic of China (Taiwan) governor Chin-long Yang reportedly advocated a no-interest concept for the CBDC pilot on Wednesday, as published by local news site bnext.com. Yang explained the decision by stating that a CBDC that pays interest on digital asset deposits would likely replace New Taiwan currency (NT$) deposits in banks. “Once the banks’ available deposits decline,” Yang added, “there will be a proportional rise in the cost of financing, which would, in turn, raise the cost of borrowing for consumers.”

Yang also cautioned that even interest-free CBDCs might result in “digital bank runs” during times of financial instability, precipitating a rapid escalation of a liquidity crisis for financial institutions. Nonetheless, the country’s central bank governor saw an increase in demand for electronic payment solutions during the last several years:

“Taiwan’s proportion of electronic payments as a percentage of total payments increased from 40% in 2017 to 60% in Q1 2022. Consequently, there may be an increase in population demand for a CBDC that delivers a secure, trusted, no-commission, no-credit-risk, and no-liquidity-risk digital payment option.”

Taiwan is presently in the second phase of its CBDC pilot program, in which the CBDC is distributed by five chosen Taiwanese banks to customers. Based on the outcomes of the pilot program, the central bank will take the following steps. However, experiments have already shown that the distributed ledger technology underlying the CBDC is unable of handling high-volume, high-frequency customer transactions. In the case of a power outage, the inability of the payment solution to work is a further cause for worry.

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