Turkey CBDC trials focus on interoperability

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The Central Bank of Turkey is proceeding with the second round of studies for its retail central bank digital currency (CBDC) following the conclusion of the first phase.

According to an official disclosure, the second round of tests will focus on the interoperability of the proposed CBDC system with the existing payment infrastructure. The plans suggest that the Turkish central bank may onboard more participants to the pilot, including commercial banks and payment service providers.

Set to begin in 2024, Turkey’s central bank revealed that it will explore the prospects of offline functionality for its CBDC system in a valiant attempt to improve financial inclusivity. The announcement did not mention technical details for the offline feature, but there is wide speculation that the regulator may adopt pre-loaded cards as a strategy.

Turkey’s central bank says it will stress test the digital lira in real-world scenarios outside of interoperability and offline functionality to spot any potential performance issues. The second round of experiments is expected to probe the legal and economic implications of rolling out a retail CBDC.

The next stage of CBDC experiments will attempt to settle the questions of interest for the digital lira while testing strategies for a smooth rollout.

Turkey’s central bank is keen on exploring the concept of cross-border payments in the second iteration, hinting at increased cooperation with international institutions like the International Monetary Fund (IMF) and the Bank for International Settlements (BIS).

Despite the extensive plans, Turkish authorities have yet to decide whether they will launch a digital lira, but the central bank revealed that it will take a definite stand before the end of the year.

Several motivations for the Turkish banking regulator to roll out a CBDC for retail use include encouraging payment uniformity, offering residents an alternative system, and promoting financial inclusivity. With nearly 40% of the Turkish population unbanked, experts have pointed to a retail CBDC as a veritable solution to achieve higher financial inclusivity metrics.

Phase one shows significant promise

In phase one of the digital lira pilot, the central bank settled for a hybrid approach involving blockchain technology. The hybrid approach focused on developing a digital representation of the lira, a mobile wallet for the offering, and creating a digital identity system for residents.

Per the results, the central bank favors an increased role for commercial banks, leaving Know Your Customer (KYC) and distribution functionalities for licensed financial institutions. At the top of concerns for the banking regulator is the need to ensure privacy and prevent a disruption to its financial system.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies