Taiwan's central bank governor is considering an interest-free CBDC

30-Jun-2022 By: Rohit Khandelwal

Taiwan's central bank governor is considering an interest-free CBDC

According to a local media report published on Wednesday, Chin-long Yang, governor of the Central Bank of the Republic of China (Taiwan), reportedly suggested a no-interest design for the nation's central bank digital currency, or CBDC, pilot. Yang provided an explanation for the choice, stating that a CBDC that offers interest on digital asset deposits will probably take the place of fiat New Taiwan dollar (NT$) deposits in banks. Yang said that as soon as the banks' potential deposits drop, the cost of financing will rise in tandem, raising the cost of borrowing for customers.

Yang also cautioned that, in times of financial instability, even interest-free CBDCs might trigger "digital bank runs" and swiftly turn into a liquidity crisis for financial institutions. But even so, the country's central bank governor saw a rise in demand for electronic payment methods recently:

“In Taiwan, the percentage of electronic payments increased from 40% in 2017 to 60% in the first quarter of 2022. As a result, there may be an increase in demand among the general public for a CBDC that offers a secure, reliable, no-commission, no-credit-risk, and no-liquidity-risk type of digital payment solution.”

The second phase of Taiwan's CBDC pilot program is presently underway, and five selected Taiwanese banks are receiving the CBDC for distribution to customers. The central bank will go on to the following phases based on the outcomes of the pilot program. The CBDC's distributed ledger technology, however, has already been shown in experiments to be unable to manage high frequency, high volume customer transactions. The payment solution's lost functioning in the case of power outages is another serious concern.

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