Taiwan’s Central Bank Embarks on CBDC Trials

Taiwan’s Central Bank is developing digital currency activities, particularly in creating a Central Bank Digital Currency (CBDC). President Yang Chin-long has emphasised a systematic approach to ensuring long-term progress rather than a quick start. This strategic step involves investigating the use of special-purpose tokens in government bids to improve openness and efficiency. A prototype platform for digital coupon transactions intends to streamline store payment procedures. These activities demonstrate Taiwan’s commitment to digital transformation to improve operational efficiency and payment innovation.

Special-Purpose Tokens for Government Tenders

The Central Bank of the Republic of China is pioneering special-purpose tokens to streamline government tenders, representing a significant step towards digital transformation in public sector operations. These coins increase transparency and efficiency by utilising innovative contract technology for bids and performance bonds. Smart contracts automate the tendering process by guaranteeing that all contractual terms are completed before payments are made, lowering the risk of fraud and increasing accountability.

The central bank hopes to build a more transparent and dependable method for administering public monies by incorporating special-purpose tokens into government tenders. This project is intended to remove inefficiencies associated with traditional tendering processes, such as handwritten documentation and lengthy approval waits.

Blockchain technology’s openness can drastically minimise corruption and financial mismanagement, ensuring that public projects are completed more successfully and under budget. This measure improves operational efficiency and increases public faith in the government’s financial transactions.

Retail Payment Efficiency

Taiwan’s Central Bank is working to modernise the financial landscape by boosting retail payment efficiency through its CBDC prototype platform. This technology is designed to facilitate digital coupons, with transaction processing speeds of up to 20,000 per second. These high-speed transaction capabilities are critical for improving the efficiency and reliability of retail payments, making daily transactions faster and more convenient for both customers and merchants.

The introduction of digital coupons as a type of CBDC intends to transform the retail payment landscape by providing a convenient and rapid payment option. These digital coupons can be used for various retail transactions, from small purchases to big consumer products, making them a flexible payment alternative.

Taiwan’s Central Bank targets one of the primary areas where digital currencies can make a huge difference, supporting faster, more secure, and more convenient payment options. This project is part of a larger strategy to promote a cashless society by lowering reliance on physical currency and improving the overall efficiency of payment systems.

Proof-of-Concept for Wholesale CBDC

In addition to improving retail payments, Taiwan’s Central Bank is developing a proof-of-concept for wholesale CBDC, which integrates CBDC with bank deposit tokens to create a future digital currency system. The wholesale CBDC is intended to serve as a liquidation asset tokenisation asset, facilitating the digital transition of both central and commercial bank currencies. This effort seeks to improve the efficiency and security of wholesale transactions, which are often larger and more complicated than retail transactions.

The proof-of-concept phase entails creating and testing a system in which tokenised central bank currency and commercial bank currency can be utilised seamlessly for large-scale financial transactions. The central bank hopes to establish a more efficient and safe environment for wholesale financial transactions by utilising tokenisation technology.

This system is expected to lower settlement delays and operational hazards associated with typical wholesale transactions, resulting in a more resilient and scalable solution for financial institutions. Through this programme, Taiwan’s Central Bank is building the framework for a future in which digital currencies play an essential role in the economic ecosystem, boosting innovation and efficiency in wholesale finance.

Collaboration and Testing Scenarios

To advance its CBDC goals, Taiwan’s Central Bank is conducting extensive proof-of-concept tests in collaboration with local banks, focusing on three critical scenarios to improve payment efficiency and innovation:

• Inter-bank transfer of bank deposit tokens
• Concurrent delivery of asset tokens
• Special-purpose digital money

These scenarios are intended to assess the feasibility and effectiveness of CBDC in various financial transactions, offering the central bank significant insights.

The first scenario, inter-bank transfer of bank deposit tokens, seeks to streamline inter-bank settlements by utilising digital tokens representing bank deposits. This method can significantly cut the time and expenses of typical interbank transactions. The second scenario, simultaneous delivery of asset tokens, investigates the application of CBDC for real-time settlement of asset transactions, ensuring that all parties fulfil their obligations simultaneously. This can improve the security and efficiency of asset trading while lowering counterparty risk. The third scenario, special-purpose digital money, focuses on employing CBDC for specific use cases, such as government subsidies or targeted financial aid, thereby offering a controlled and transparent system for fund distribution.

Working with banks and other financial organisations, the central bank may acquire thorough feedback and improve its digital currency system. This collaborative approach guarantees that CBDC development aligns with the financial sector’s demands and expectations, enhancing overall innovation and efficiency. These tests will provide valuable insights into the future of Taiwan’s digital currency ecosystem, paving the path for a more efficient and innovative financial system.

Regulatory Developments

In keeping with its digital currency aspirations, Taiwan’s Financial Supervisory Commission (FSC) plans to propose an updated draft of digital asset legislation in September 2024. This legislation seeks to provide a comprehensive regulatory framework for digital asset markets that protects investors and ensures market integrity. The proposed regulations will handle different aspects of digital assets, including issuance, trading, and custody, resulting in a more secure and transparent environment for digital asset transactions.

The amended legislation underscores the government’s commitment to encouraging innovation in the digital economy while protecting investors’ interests. Taiwan’s goal in adopting clear laws is to build a stable and trustworthy digital asset market, encouraging more participants to engage in digital currency and blockchain-related activities. The regulatory framework will also establish compliance criteria, ensuring that all market players follow the best security and transparency procedures. Taiwan’s proactive approach to regulation reflects its commitment to being a digital economy leader, balancing innovation with solid investor protection measures.

Taiwan’s Central Bank is making substantial progress in the digital currency, emphasising a careful and sustainable approach to CBDC development. The bank is putting itself at the forefront of digital change by researching special-purpose tokens for government tenders, improving retail payment efficiency, and testing proof-of-concept for wholesale CBDC.