The Governor of the Central Bank of the Republic of China (Taiwan) Chin-long Yang, recommended a no-interest design for the country’s central bank digital currency pilot.
In explaining the decision, Yang believed that a CBDC where interest is paid on digital asset deposits would likely become a replacement for fiat New Taiwan dollar 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.
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.
