“Neither of the current CBDCs in circulation, such as the Sand Dollar and the digital yuan, accrue interest on deposits,” said Yang.
As reported by local news outlet bnext.com on Wednesday, Chin-long Yang, governor of the Central Bank of the Republic of China (Taiwan), recommended a no-interest design for the country’s central bank digital currency, or CBDC, pilot. In explaining the decision, Yang said that a CBDC where interest is paid on digital asset deposits would likely become a replacement for fiat New Taiwan dollar (NT$) deposits in banks. “Once the banks’ available deposits decrease,” Yang explained, “it would lead to a corresponding increase in the cost of financing and thereby increase the cost of borrowing for consumers.”
Yang further warned that even interest-free CBDCs could lead to “digital bank runs” during times of financial instability and quickly spiral into a liquidity crisis for financial institutions. But nevertheless, the country’s central bank governor recognized a surge in demand for electronic payment solutions in recent years:
“The ratio of electronic payments as a % of all payments in Taiwan has risen from 40% in 2017 to 60% in Q1 2022. Therefore, there is the possibility of greater demand in the populace for a CBDC that provides a safe, trusted, no-commission, no credit risk and no liquidity risk form of digital payment solution.”
Taiwan is currently in the second stage of its CBDC pilot program, where its central bank provides the CBDC to five selected Taiwanese banks for distribution among consumers. Based on the pilot program results, the central bank will proceed to the next steps. However, it has already been identified in trials that the distributed ledger technology within the CBDC could not handle high frequency, high volume consumer transactions. Another point of concern is the lost functionality of the payment solution in the event of power outages.