Results and Analysis - 中央銀行發行法定數位通貨之研究評估

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5. Results and Analysis

In Chapter 5, some results and findings from the interviews are visualized and further analysis is proposed. The results include three subtopics regarding the CBDC issuance:

motivation, impacts and challenges. As for the findings, some insights for a central bank is listed.

5.1. Motivation

For an open question, diverse reasons for CBDC issuance were submitted and the various examples taken by the respondents reflected different imaginations of the form of a CBDC (Figure 5). The most important factors to motivate CBDC issuance are enhancing efficiency and reducing cost, followed by the considerations of payment safety and security as well as improving regulating. Also, a CBDC may aim at supporting monetary policy, enhancing the level of social control and preparing for cashless society. In general, a wholesale CBDC is expected to improve the regulating process because universal principles are well-defined and interbank transactions have no concerns on KYC policy. As for the issuance of retail CBDC, the motivations differ from country to country since social and cultural environments determine the developments of token-based payments.

To some extents, interviewees with financial background first considered the amount of cash flows as well as the cost and efficiency from organizational aspect, whereas the other groups tended to connect currency issuance with political purposes, external trade development and international competition, basically using the framework of retail CBDC and analoging electronic payment ecosystem. For instance, the scientist at the Fintech startup, based on his personal observation, believed better social control and regulating was one of the critical motivations for digital RMB policy in mainland China, and that policy may bring pressure on Taiwan to issue CBDC as response. The associate professor, in contrast, emphasized on foreign exchange market and including currency holding costs and external trade risks under the premise of Taiwan’s export-oriented strategies. Both of the statements came to a conclusion that dynamic international competition may become an implicit factor of CBDC issuance.

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Figure 5 Reasons for issuing a CBDC

5.2. Impacts

Another point in the interviews lies in the impacts of CBDC issuance so the respondents were asked to share their opinions on possible impacts of issuing both wholesale and retail CBDC, along with the level of impacts on financial intermediations with CBDC policy. For the wholesale applications, legal compliance is the first priority because either principles or regulations are already well-defined by international financial regulators (Figure 6). As a result, most interviewees believed a wholesale CBDC was supposed to have no impact on current working mechanisms, except for the improvement of cost and efficiency. However, the director at IT industry expressed his concerns about the side effects of thorough digitalization: once all behavior is recorded on ledgers, the traditional management methods may no longer work because the accountability is sophisticated enough to remove warrant roles, which is one of the major business of banking industry. Detailed effects require more evaluation.

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Figure 6 Impacts of issuing a wholesale CBDC

Conversely, a retail CBDC may lead to a financial revolution, which is likely to extend to social, political, and other aspects (Figure 7). Among them, Facebook Libra and electronic payments in mainland China are two popular examples. Facebook Libra aims at providing “a simple global currency and financial infrastructure”¹⁰⁷ which can benefit billions of users in the ecosystem consisting of Facebook, Whatsapp, Instagram and Messenger. However, the announcement of issuing token-based assets immediately raised global debates. The EU not only expressed their worries about consumer risk in privacy protection and the state monetary sovereignty,¹⁰⁸ but also embarked on the investigation of anti-trust potentials of Libra.¹⁰⁹ As for digital RMB, the China government intends to regulate money laundry, against terrorism financing, avoid counterfeit bank notes and further take over the international discourse with the release of digital currency electronic payment (DC/EP).¹¹⁰ By integrating mobile payment giants such as Wechat, Alipay and Tencent and cooperating with commercial banks, the People’s Bank of China proposed a two-layer structure in order to ensure cryptographic security.¹¹¹ However, some unsolved concerns on regulating, privacy protection, cybersecurity and financial policy making still exist. The scientist of Fintech startup considered the international competition among strong currencies may take

107 Libra official website. Last retrieved from https://libra.org/en-US/ (February 25 2020)

108 The Guardian. (September 12 2019). France to block Facebook's Libra cryptocurrency in Europe. Last retrieved from https://www.theguardian.com/technology/2019/sep/12/france-block-development-facebook-libra-cryptocurrency (February 13 2020)

109 Coinformation. (August 21 2019). Facebook’s Libra Faces Antitrust Scrutiny From EU. Last retrieved from https://coinfomania.com/facebook-libra-eu-antitrust-scrutiny/ (February 13 2020)

110 Boxming. (January 10 2020). DCEP: China’s National Digital Currency Overview. Last retrieved from https://boxmining.com/dcep/ (February 13, 2020)

111 Libra. Last retrieved from

https://m.igetget.com/share/course/pay/detail?id=mlEA1baQN7WKeRBsZyV8L9OgkryvYw (February 25 2020)

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place while the engineer working at blockchain startup believed the CBDC issuance would definitely change user habits and current taxation.

Figure 7 Impacts of issuing a retail CBDC

Furthermore, the interviewees were required to describe to what extent the adoption of a CBDC would do impacts on the existing financial system, in particular the financial intermediations (Figure 8). Most interviewees from academics and [the IT] industry had relatively neutral statement and claimed that the degree of the transformation depended on the policy direction as well as the type of issued CBDC. Only one engineer stated that the intermediaries would not exist anymore once P2P transactions replaced the banking industry. Interestingly, the opinions of the regulators and commercial banks were quite polarized: The ECB firmly declaimed that any innovative policy would be only conducted under the premise of keeping the existing stakeholders, whereas people from commercial banks thought that the issuance of CBDC tended to challenge current banking business. Two responses can be regarded as a question and answer. To some degree, different assumptions determine different possible impacts, but it is found that a retail CBDC has more uncertainties than a wholesale one.

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Figure 8 Level of Impacts with CBDC issuance

5.3. Challenges

The challenges for issuing a CBDC are numerous and can be divided into three phases in policy-making process: (i) Internal evaluation: technology maturity and legal compliance; (ii) External communication and collaboration: the transformation of the existing system and an overall policy to ensure a friendly development environment;

and (iii) End-user and ecosystem: overcoming the inertia of user habits and the obstructions of forming an ecosystem (Figure 9 & 10). First, for policymakers, legal compliance is the essence of financial stability and inclusion while the technology maturity is one of the fundamental elements for any further evaluation. Therefore, concerns related to security level, design complexity, privacy protection and potential impacts accompanying the novel COR concept should be carefully elaborated sequentially from internal PoC to large-scale pilot. Besides, technological uncertainties should be specifically addressed in technology selection phase. However, the digitalization may result in the revolution in management and other aspects, so despite the potentials of a legally-compliant technology, policy direction plays a deterministic role in the innovation process and the transformation.

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Figure 9 Challenges for issuing a CBDC

Figure 10 Specific challenges for issuing a retail CBDC

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communication with external agents will be the second phase. Policymakers have to create a vision for concerned authorities and propose an overall policy to ensure the soundness of the environments; otherwise, either technical providers or financial system has no accordance to innovate or transform. Some concrete examples include the modification of current laws and regulations, the delivery of well-defined guidelines and some measures to encourage innovation. The last phase is about the direct interaction with end-users. A retail CBDC is expected to “widely accessible” and “have more potentials in the retail scenario than cash.” As a result, the acceptance rate explicitly determines the success of CBDC policy, and the educating cost may be costly.

Unless the electronic payment, such as credit cards, mobile applications, and online transactions, are common enough, the education cost of adopting new technologies is likely to be high. In addition, the network effects not merely take place on consumers but also technical providers and developers. In other words, policy makers have to forecast the user’s level of acceptance and manage to create an ecosystem, which are highly relevant to the effects of second phase.

5.4. Findings and Analysis

5.4.1. Compound Issuing Motivations

At first, the uprising of several cryptocurrencies, such as Bitcoin, Ethereum and Ripple, prompts monetary regulators to explore the possibilities of the central bank electronic money in case the monetary sovereignty can be secured. A series of reports were published by the BoE, the MAS, the BoC, the ECB and Sweden. Later on, the issuing motivations, as the ECB clarified in the interview, are derived from research outcomes:

The decreasing use of the cash and the enhancement of the efficiency are two major reasons for a country to consider the CBDC issuance. For the former consideration, an appropriate social and cultural environment is the key factor; as a result, eligible countries tend to feature a cashless trend, such as Sweden, Eastern Caribbean, and mainland China. On the other hand, the latter reason may seem subtly strange. First, current centralized systems are efficient enough, particularly compared to DLT-based platforms. Second, concerning the hidden costs of the complete infrastructure, robust cybersecurity and following maintenance, it is doubtful whether the issuance of a CBDC can reach the goal of improving the efficiency from the economic and financial perspectives.

However, due to the linkage between currency and state sovereignty, the issuance of a new type of fiat money is no longer a domestic macroeconomic policy, but an international political competition. For example, if the digital RMB is issued and widely adopted by the neighbor countries, other strong currencies including US dollar, EU euro and Japanese yen, have no choice but respond with the corresponding policies. With regard to non-strong currencies such as Taiwanese new dollars (NTD), the pressure may likely to be much greater because local export-oriented companies tend to keep US dollars with the reducing costs of holding foreign currencies. To some extents, it is not surprising to find that the US had stayed conservative toward the innovation policy until the release of “FedNow” in 2020.¹¹² Meanwhile, the People's Bank of China has

112 Cryptopolitan. (2020). US Federal Reserve Governor Sees Potential in CBDC. Last retrieved from https://www.cryptopolitan.com/us-federal-reserve-governor-potential-cbdc/ (February 25 2020)

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applied for 84 patents for DC / EP in order to dominate the new market.¹¹³ Therefore, once CBDC issuance is connected to international political struggles, the issuing motivations are admittedly becoming compound while the first priority is not the financial burden, the technology maturity or the social environments anymore (Table 3). Further research may rely on “Game Theory” or “Competitive Dynamics” to investigate potential impacts.

Aside from international competition, the issuance of regional or alliance tokens may also pose threats to monetary regulators. For instance, several major domestic private banks launch an alliance token to replace partial function of cash, or a couple of online payment service providers gradually take over larger proportion of money transferring business, it deems urgent for a central bank to propose regulating approaches and a CBDC may be a solution to against the monopoly the large electronic payment service providers. One representative nation is Sweden. And, despite failing, Facebook’s Libra definitely propelled global central banks to conduct concerned research on digital currencies and its compliance requirements since the monetary regulators have some concerns on the antitrust and financial instability.¹¹⁴ All evidence indicates that the issuance of a CBDC is motivated by multiple and compound factors.

113 聯合報（2020），〈數位貨幣成全球主要央行顯學歐日等 6 央行首開會研究〉。Last retrieved

from https://udn.com/news/story/7239/4343047 (February 25 2020)

114 The Guardian. (2019). France to block Facebook's Libra cryptocurrency in Europe. Last retrieved from

https://www.theguardian.com/technology/2019/sep/12/france-block-development-facebook-libra-cryptocurrency (February 13 2020)

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Table 3 Compound Issuing Motivations Retail

The authorities proposed the idea of e-Krona to face with cashless society and against the

monopoly of the large electronic payment service providers. order to “help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries.”¹¹⁵

PBC DP / EP

(2019) Social Control, Politics,

International Struggles,

Mature economic and social environment allows the authorities to explore the CBDC issuance in consideration of “OBOR” strategy and better social control.¹¹⁶

Facebook

Libra Business,

Economics

The mission of Libra is to empower billions of users by providing a global currency and financial infrastructure.¹¹⁷

5.4.2. Uncertainties and Complexities in Evaluation Process

In general, prior to CBDC issuance, the evaluation process of a central bank consists of three phases: internal evaluation, creating a PoC in collaboration with external agents and releasing the research report for next step assessment (Figure 11). First, a monetary regulator should conduct an internal survey of nowadays technologies which may correspond to possible pain points of current business, and enumerates the requirements for a PoC in next step. Second, due to the lack of domain know-how, a monetary regulator may need to cooperate with qualified technical providers and external experts, whether consultants (e.g. Deloitte, Accenture, etc.) or academics to complete an initial testing. At this stage, advantages as well as technical limits would be revealed.

According to acquired information, a monetary regulator can make policy with more insights.

115 ECCB. (2017). Eastern Caribbean Central Bank Strategy Plan. 2017-2021. Retrieved from

https://www.eccb-centralbank.org/files/documents/Stategic_Plan/ECCB_Stategic_Plan_2017P2.compressed.pdf

116 Big Data Finance（2020），〈中國央行的金融科技 2019 盤點：基本完成央行數位貨幣

（CBDC）頂層設計、行業標準制定等工作〉。Last retrieved from

https://bigdatafinance.tw/index.php/blockchain/1448-2019-cbdc (February 25 2020)

117 Libra official website. Last retrieved from https://libra.org/en-US/ (February 25 2020)

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Figure 11 Evaluation process of issuing a retail CBDC

However, regardless of the early-stage exploration of adopting a CBDC, the analysis so far remains static and ignores the dynamic factors: The “complexities of evaluation and implementation” as well as the “technological uncertainties” may present a challenge in CBDC issuance. First of all, the mutual interactions among participants make impact analysis complicated, not to mention the diversity and heterogeneity of financial intermediaries. Second, the evaluation process encompasses not merely the impact analysis but the technical practices, the decision-makers may not possess relevant know-how, so they are forced to cooperate with outsiders. Either additional agents or unfamiliar collaboration mode could deteriorate the situation. Last but not least, for policy formulation, multiple agents involved in a single but interdisciplinary policy would unavoidably bring the inefficiency and some cross-sector conflicts.

Therefore, the clarified stakeholders in the research framework are the premise of policy making (Figure 12).

Figure 12 Specific challenges for issuing a retail CBDC

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As for the second factor, according to scientific research and experimental development (SR&ED) glossary, technological uncertainty refers to “whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available technological knowledge or experience.”¹¹⁸ Those uncertainties may occur with scientific uncertainty, technological uncertainty and technological obstacle, which are basically the consequences of the immaturity of current technological developments. In fact, all innovations will more or less encounter the uncertainties from technology cycles; yet, the problems of a retail CBDC do not merely consist of the technical selection or design approaches but the technology maturity. In particular, there is essentially no current options to support retail scenario, including platforms,¹¹⁹ zero-knowledge-proof (ZKP) methods,¹²⁰ and algorithms.¹²¹ However, according to the BIS report,¹²² a CBDC is not constraint to DLT-based platforms.

Therefore, the E-peso in Uruguay and DP / EP in mainland China may shed light on the realization of a retail CBDC, but with centralized approaches.¹²³

5.4.3. Evaluating the Issuance of a CBDC

Consequently, a wide range of stakeholders involving in CBDC issuance result in diverse key impacts. To integrate the opinions of interview participants and case study results, a framework for evaluating the CBDC issuance is proposed as below (Figure 13) in combination of participants, key impacts and two significant dynamic factors. In particular, it is found that the traceability is one of the main connections. For example, the role of financial intermediaries would care more about legal aspects, influences on organization and the level of regulating transparency, while the end-users tend to involve in the issues regarding microeconomics, society, law, ethics and the level of government transparency. All dimensions above are extended from the feature of traceability. As for decision-makers, both governments and regulators should take additional responsibilities for examining macroeconomic, environmental and international impacts. To better clarify, the potential impacts which can be addressed as “EPSILON” are listed down as follows (Figure 13).

118 SR&ED Glossary. (July 15, 2015). Last retrieved from

https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#systmnv (February 25 2020)

119 The DLT-based platforms include Quorum from JP Morgan, Corda from R3 and Hyperledger from IBM.

120 For example, ZSL (zk-SNARKs) and Zether are well-known zero-knowledge proofs.

121 Basically, there are alternative consensus mechanisms, such as raft-based consensus, Istanbul Byzantine Fault Tolerance (Istanbul BFT) and Clique PoA with security concerns.

122 World Economic Forum (2019). Central Banks and Distributed Ledger Technology: How are Central Banks Exploring Blockchain Today?

123 E-peso in Uruguay was using telecommunication infrastructure instead of creating a DLT-based platform.

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Figure 13 Evaluation framework of issuing a CBDC

1. Economics: Some reports, such as by BoE and by the Federal Reserve Bank of St.

Louis, indicate that digital currency can grow economy by reducing monetary transaction costs and lowering real interest rates.¹²⁴ Furthermore, considering such specific field, the economic impact, in particular, is divided into three aspects, including the influences on macroeconomics, microeconomics and financial system.

(1) Macroeconomics: Almost every interviewee agreed that the digitalization of fiat currencies may change current monetary policy, fiscal policy, interest rate policy with the availability of real-time information on transaction activities.¹²⁵ Take the normalization of interest rates for instance. Financial and monetary regulators are forced to pay interest on reserve because of the enormous amount of liquidity since the 2008 financial crisis, and a CBDC seems likely to be a solution by allowing the entire population to get access to the interest payment. ¹²⁶ In addition, with the traceability feature of a CBDC, the government is utilized to immediately analyze the currency in circulation,

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