4. Evaluating the Issuance of Central Bank Digital Currency (CBDC)
4.1. Monetary Regulator: European Central Bank (ECB)
Participants of Project Stella at ECB firmly believed that the existing banking ecosystem should not be challenged despite the adoption of a CBDC because a state currency was expected to be issued on grounds of the legal compliance. Take a wholesale CBDC for instance. Either the DvP or the payment versus payment (PvP) mechanism of interbank transactions, the framework as well as the regulating process have been well-defined;86 thus, a CBDC is merely regarded as one of the options in the technical selection and tends to be naturally eliminated if not achieving the high requirements of the existing payment system. The interviewees summarized possible issuing motivations as: (i) preparing for the declining use of cash; and (ii) improving the safety and security of transaction mechanism, and pointed out that the single Euro payments area (SEPA) had no urgency to replace current payment systems as roughly 79% of the transactions at points of sale (POS) were cash-based in 2016.87 Meanwhile, several challenges including legal compliance and technical design approaches may demoralize the authorities if no ample research supports the policy. In particular, there is limited experience in the large-scale adoption of the digital tokens and it calls into question whether a large economy such as the US, the EU and Japan, can learn from the prototypes of the small nations.
During the interview, the staff at ECB emphasized that the issuance of a CBDC would never aim at subverting current financial systems and that it made no sense to let central banks take over the banking business. Therefore, internal research on additional measures should be carefully carried out in order to ensure the CBDC circulation. For example, in avoid of a retail CBDC hoard and to encourage positive cashflow, holding fees for a certain amount may be introduced. Simultaneously, privacy and security should be taken into consideration when it comes to the technical design. Moreover, potential pressures from the international competition in an open economy may urge other central banks to issue CBDCs in pursuit of striking a balance. Still, with strong currency such as Euros, the ECB has no plans to substitute the TARGET Instant Payment Settlement (TIPS) at this stage,88 and will keep track of the development of the CBDC. “Such as banknotes,” the team members at Project Stella restated, “A banking system is supposed to, and will, keep similar arrangements even with the issuance of CBDC. ”
4.2. Financial Intermediaries: Commercial Banks
An assistant manager shared his opinion based on his experience in the banking industry, and wondered how the future role of commercial banks would look like once the issuance of CBDC came true. Although CBDC deems to simplify the process and
86 For example, the PFMI.
87 ECB. (2017). The Use of Cash by Households in the Euro Area. Retrieved from https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op201.en.pdf
88 TIPS. Last retrieved from https://www.ecb.europa.eu/paym/target/tips/html/index.en.html (February 25 2020)
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accelerate the liquidity of cash flows, the direct connection between the central banks and the end-users confuses financial intermediaries. The assistant manager presumed securities may decrease because of the reduction of liquidity risk, and intact transaction records seemed beneficial for ensuring the AML and training machine learning (ML) model. However, strong currencies with lower holding costs may dominate the market while the user privacy without proper protection is under threats. An intriguing point mentioned by internal staff was that the digitalization made it harder to scam. Because tellers in Taiwan have formed a strong corporation with police, the removal of tellers in the money transfer process may increase related crimes.
The transformation of the banking system was one of the main arguments. From the organizational perspective, the cost and the efficiency are expected to improve with wholesale CBDC, whereas the unemployment rate of consumer finance may increase when it comes to a retail CBDC. In fact, as online tellers become more popular, the redundancy of tellers seems unavoidable. All evidence shows that current business models of commercial banks are facing challenges with the upcoming CBDC issuance.
Therefore, the position of banking should be further clarified in the policy-making process. In the end of the interview, the assistant manager addressed that educating end-users and operators would be not only costly but also challenging, and concluded, “That would be weird if the Central Bank takes the place of commercial banks, but the transformation of banking is somehow necessary.”
4.3. Academic & Research Institutes
An associate professor from a national university paid much attention on the trust foundation behind CBDC issuance and believed it prior for policy makers to clarify stakeholders as well as motivations. Mostly, weak currencies are regarded as commodities in the currency exchange; yet, once the efficiency of the currency transfer enhances, the equilibrium of strong and weak fiat monies may change with regard to regulating costs, amount of reserves, and mutual interactions.89 If any strong currency turns into the digital form, an export-oriented economy with weaker currency, for example Taiwan, may encounter obstacles due to local companies tending to hold foreign money with reduced costs. Next, to what extent can the policy be viewed as a successful model? For example, a cashless society such as Sweden with only 13% of cash purchase is supposed to have the remaining 87% using digital currency.90 Can current technologies and the organizational structure satisfy such high standard with national scale? Although mobile payments in China are popular,91 cash circulation in countryside or black market is still important.92 Moreover, it calls into questions whether the costs of the trust building are affordable for the government. Current
89 Akihiko Matsui. (1998). Strong Currency and Weak Currency, Journal of the Japanese and International Economies Volume 12, Issue 4, p305-333. Last retrieved from
https://www.sciencedirect.com/science/article/pii/S0889158398904063
90 Rikbank. (2018). Payment Patterns in Sweden 2018. Last retrieved from
https://www.riksbank.se/globalassets/media/statistik/betalningsstatistik/2018/payments-patterns-in-sweden-2018.pdf
91 According to ‘Going cashless in Shanghai,’ it is indicated that in 2016 China’s GDP was $11.19 trillion but with $23 trillion in mobile payment transactions. Last retrieved from
https://www.marketplace.org/2019/01/15/world/going-cashless-shanghai/ (February 25 2020)
92 In 2016 China’s M0 was 6.34547 trillion
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electronic payment systems work because of their abundant collaterals or corporate capital, but a CBDC connects the citizens’ trust with the government’s capacity of the technology selection, the system maintenance and the efficiency performance.
This associate professor described that the trust of a new-type currency does not merely come from ample capital, but instead from the capacity of problem solving of a state, which may not be people’s expectation to the government. In fact, a potential solution was proposed by the IMF in a 2019 report: dividing and outsourcing a couple of steps of issuing CBDC to the private sector in order to reduce risks and costs.93 No matter what final solution is selected, the associate professor concluded that it was urgent to clarify the stakeholders and pain points of CBDC issuance; otherwise, the lacking motivation will definitely cripple the policy. “We need to elaborate the solutions to some irresistible shutdowns, such as regular system upgrades, and ensure the integrity of digital assets; elsewise, people’s trust of a sovereignty crashes easily,” emphasized by the associate professor.
4.4. Technical Providers
For technical providers, there are four interviewees from a blockchain startup, a Fintech startup and the IT industry to share their opinions on the innovative technology. During the talk they are found to be relatively open-minded and sensitive to the innovation, and all of them have directly or indirectly take part in Fintech projects.
4.4.1. Blockchain Startup CEO
A founder of a DLT-infrastructure appliance startup believed digital currency would become future mainstream and be accelerated by the social changes and regional competition from the perspective of digital transformation. To explain the process of institutionalization, standardization and electronization, the startup founder analogized the development of electronic absent note to the tendency of CBDC and described that the completion of 1:1 mapping to digital world would definitely inspire more imaginations of business models, for example the combination with online calendar.94 Although the uncertainties of retail CBDC arose because of enabling transaction traceability, such as the rising conflicts between user privacy and government regulation, an existing model of wholesale CBDC gave a pathway to digitalization.
Moreover, wholesale CBDC may enhance currency liquidity and enable the synchronization of cash flow and information flows. However, either the public mindset or technologies were not well-prepared for a new paradigm of traceable digital footprints. In fact, current compliance approaches are more regulatory and require human intervention. Therefore, more privacy-enhancing technologies (PET) should be introduced to ensure user rights.
Overall, once the issuance of retail CBDC weakens the necessity of intermediaries with better liquidity and regulation, banks should reflect on their original goals of auditing and match-making since the business know-hows will gradually lie in the connection
93 IMF. (2019). Central Bank Digital Currencies, and Cross-Border Payments: A New Look at the International Monetary System.
94 For example, Google Calendar, Ragic, etc. allow users to synchronize activities, events and leave with their schedule.
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currencies, hence the impacts of a digital renminbi (RMB) should be carefully assessed.Still, it is doubtful whether high trust society with high cash dependence has urgency to embrace the coming of CBDC. In the end, the startup founder reaffirmed his stand,
“Blind imitation does not fit Taiwan’s society, so under the premise of financial inclusion, just let the market decide.”
4.4.2. Fintech Startup Scientist
A scientist working at a Fintech startup, based on his past experiences, listed possible reasons for CBDC issuance, including improving regulating, strengthening social control, enhancing currency liquidity, as well as the consideration of efficiency and costs, hence doubted that Taiwan did not clarify the motivation yet. In particular, participants are not only bound to financial ecosystem (central bank, financial intermediaries, and financial regulators), but also to tech providers, consulting industry and economists. The complexity may deteriorate the dilemma of policy-making. Before moving on to a formal discussion, the scientist began with a Fintech experiment which was lately approved by the Financial Supervisory Commission (FSC).95 Constraint to the existing regulations, it is reasonable for experimental pilots to be examined under control and in progression; however, if the authorities fail to define the boundary and release appropriate legal provisions, such as the difference of utility token and payment token,96 that tend to result in the public perplexity. Education is also another key point.
Either IT staff or user habits will be faced with the challenges of the transformation. As the digitalization utilizes the traceability of “Chain of Responsibility (COR),”97 current mindset of IT management may no longer work.
The scientist highlighted, whether 5G, artificial intelligence (AI) or DLTs, the policy makers are expected to create friendly environment for the entire industry, and a well-defined boundary is the very fundamental step, such as types of tokens.98 The clearer the scenarios can be defined, the less confusions the tech providers have. Otherwise, the struggle between technology and policy will discourage further development. As a result, the scientist believed, aside from technology itself, it is essential to have a national organization to propose digital policies, allocate the resources and educating the public when it comes to the idea of CBDC. In the end, the scientist also expressed his concerns whether a country which needs much education got prepared for CBDC issuance. “Anyway, the leader of a state must be open-minded enough to both policy and technology, and find a suited path by including diverse opinions from academics, industry and so on,” concluded by the scientist.
95 Taipei Times. (2019). FSC to allow three new fintech experiments: Koo. Last retrieved from www.taipeitimes.com/News/biz/archives/2019/08/01/2003719687 (February 25 2020)
96 Inside（2019），〈電子支付、電子票證將整併，悠遊卡未來也能電子轉帳了〉。 Last retrieved
from https://www.inside.com.tw/article/17166-easycard-can-also-electronically-transfer-money-in-the-future (February 25 2020)
97 According to National Heavy Vehicle Regulator (NHVR), “The aim of COR is to make sure everyone in the supply chain shares responsibility for ensuring breaches of the HVNL do not occur.” Last retrieved from https://www.nhvr.gov.au/safety-accreditation-compliance/chain-of-responsibility (2020, February 3)
98 金融監督管理委員會（2019），〈我國對證券型代幣發行、交易及平台監理之規劃方向〉。
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4.4.3. Director at Information Technology (IT) Industry
As for possible impacts of CBDC issuance, a director of IT industry provided accurate description of the transformation from the perspective of engineering. The scenario of digital assets will essentially flip the concept of “Create, Read, Update, Delete (CRUD)”
in traditional databases. Once the behavior on ledgers or transaction log is supposed to correspond to legal and financial compliance, the required level of security, efficiency, and trust will present a huge challenge to engineering. In particular, the ideas of immutability and traceability on DLTs are likely to impact the whole “Chain of Responsibility (COR)” in engineering. As all digital footprints in the CBDC world become traceable, current regulations need to re-define “the accountability,” and the guarantee roles of banking deem a bit subtle. Such open technology makes the process equally significant to the final results.99 It is doubtful whether tech providers can support the high standard of trusted computing base (TCB).100 Despite the importance of promoting the social and cultural environment. If only cashless societies, for example Sweden and China,101 get ready for the issuance of CBDC, the cultural environment in Taiwan would still takes some time to adapt to CBDC.
The director emphasized, as the technology turns from supporters into leading roles, the compliance, without a doubt, will be the most critical puzzle piece. Compared to wholesale CBDC, retail CBDC is far from well-defined issues, causing uncertainties to the process of research and development (R&D). Generally, engineering starts from small-scale pilots, through trial and error, the issues can reach convergence; yet, a retail CBDC replacing cash implies the entire economy of a state, which can only work with safety mechanisms, sound Internet, limited fault tolerance, short latency and solutions for missing devices.102 The director wondered if the infrastructure as well as the culture were ready to embrace the change resulting from CBDC. “As a state-level testing, the issue is more than ‘Let market decides,’” the director reiterated his pessimistic view about retail CBDC, “Any slight mistake may pose threats to social trusts to the government and that would make execution even more challenging.”
4.4.4. Blockchain Startup Engineer
Another engineer working at blockchain startup held a different view, considering the idea of CBDC in agitation. The changing user habits accompanying the rising of electronic payment may imply a new type of national currency while the diverse application of tokens can give guidelines for CBDC issuance.103 According to the engineer, the process of liquidity and regulation of CBDC may differ from cash mechanism, such as the calculation of tax or administration fee, but the functions of currency, for example some basic features and the regulating, are supposed to stay the
99 The rising of open-source projects and its commercialization is the evidence, for example Facebook Libra (https://developers.libra.org/docs/libra-open-source-paper).
100 Emerged in 1980s, a trusted computing base (TCB) is defined as the totality of software, firmware, hardware, processes and individuals which ensure the system security with correct operation as well as decision-making.
101 Two well-known retail CBDC projects are e-krona in Sweden and digital RMB of PRC.
102 According to a report regarding mobile payment in China, 52.4% of users had concerns on security and worried about privacy issues of biometric mobile payments.
103 資策會產業情報研究所（MIC）（2017），〈行動支付消費者調查〉。
https://mic.iii.org.tw/news.aspx?id=457
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same despite an innovative form. In other words, the accessibility of CBDC is the major concern for engineering.104 Highly relative to the network coverage as well as the acceptance rate, the issuance of CBDC at least needs to overcome the asynchronous payment in offline condition and enhance user-friendliness.
For the acceptance rate in particular, it might be time consuming to persuade consumers to adopt to digital wallets, not to mention the costs of educating users about cybersecurity and privacy issues.105 The engineer explained, although ledgers on distributed network can be barely altered, the risks of being hacked or losing passwords would be other urgent issues.106 The more secure the system is designed, the longer latency users need to bear. A better approach is to find the equilibrium of the efficiency and the privacy in technology selection. Otherwise, policy-makers should not take risks abandoning cash as CBDC fails to satisfy the existing requirements of currency. “I indeed have some concerns about the scenarios and technologies,” the engineer concluded, “But still, I find the future of CBDC promising based on the observation of current trends...if users are better aware of correct cyber-attack prevention methods, etc.”
4.5. Summary of Field Reports
The seven interviewees can be divided into four groups: monetary regulators, financial intermediaries, academics and tech companies, and apparently, they pay different attention when it comes to CBDC. Monetary regulators put a big spotlight on ensuring financial stability while academics have major concerns on the trust-building costs in the existing ecosystem. Both of them mentioned the necessity of evaluating the impacts on stakeholders as well as international competition in policy-making process.
Independently, financial intermediaries, such as commercial banks, barely focus on the development of CBDC and tend to stay conservative on the discussion. On the other hand, tech groups have a very similar observation of future tendency that the digitalization is inevitable in general; yet, their opinions on technical maturity are quite polarized. Besides, strategy planners or researchers put more attention on domestic social environment as well as policy orientation. In contrast, engineers express their concerns about the safety and security, cost and efficiency, as well as the challenges for the compliance. Interestingly, four interviewees all mentioned the importance of educating and believed the improvement of the integral user quality, whether system operators or consumers, were the premise of the CBDC issuance.
104 Based on a report from MIC, 48.1％ of respondants in Taiwan have concerns on the accessibilty of mobile payments.
105 Fireeye. (2018). Threat Research M-Trends. Last retrieved from https://www.fireeye.com/blog/threat-research/2018/04/m-trends-2018.html (February 25 2020)
106 CNBC. (2019). Hackers Steal Over $40 Million Worth of Bitcoin from one of the World’s Largest Cryptocurrency Exchanges. Last retrieved from https://www.cnbc.com/2019/05/08/binance-bitcoin-hack-over-40-million-of-cryptocurrency-stolen.html (February 25 2020)