Turkey’s two-tier CBDC to support programmable payments

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Turkey’s central bank digital currency (CBDC) will support programmable payments and be offered through financial intermediaries. It will only support one account per user, which will be accessible through all financial institutions, the central bank has revealed.

The Central Bank of the Republic of Turkey (CBRT) recently published an English version of its report on the first phase of its digital lira research—it issued a Turkish version in December.

The report explores the key elements of the CBDC, which the central bank says will complement the existing payment infrastructure. It delved into the potential features of the digital lira, design and architectural setups, and technological alternatives.

The report reveals that the CBRT is developing a digital currency that focuses on users’ digital privacy and is interoperable with existing and future payment systems. Financial intermediary independence will also be paramount, ensuring users can select any bank to access the CBDC.

On intermediaries, the central bank intends to develop a two-tier CBDC system in which banks and other financial firms act as intermediaries. Users will be entitled to only one CBDC account, accessible through all financial intermediaries. User information and credentials will be controlled individually under a self-sovereign identity system.

The digital lira will enable programmable payments. Programmability has been one of the most contentious facets of CBDC design.

Some, like the U.K., have ruled out programmability altogether, with the Bank of England recommending that legislators enshrine it in law as a condition for launching the digital pound. Others like India are experimenting with programmable CBDCs under which money set aside for a specific use can’t be repurposed.

Turkey is striking a balance, with the central bank proposing programmable payments rather than programmable money.

The CBRT also explored the best technology to underpin its CBDC, with blockchain technology among the top options. The top bank acknowledged that blockchain protects against single points of failure. It also reduces compliance costs for intermediaries and greatly enhances transparency.

However, blockchain systems could be slower as transactions must be approved by the nodes, CBRT pointed out.

“Distributed ledger technologies in their current form appear to be unable to provide the transaction capacity required for the nationwide rollout of the digital Turkish lira,” the bank added.

Contrary to popular belief, the bank says that blockchain wouldn’t make the model
decentralized.

“While the digital currency system provides decentralization of data and applications within itself, it provides a centralized service to other systems,” it said. 

CBRT is in the second phase of its CBDC exploration as it aims to become among the first major economies to launch a digital currency.

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: Building CBDC systems on Bitcoin