The Central Bank of the Republic of Türkiye (CBRT) initiated its Central Bank Digital Currency (CBDC) efforts back in 2020, with proof-of-concept[1] (PoC) studies. Following the successful completion of the PoC, the Central Bank Digital Turkish Lira R&D Project was launched. As part of the first phase, the work on setting up the required environments started in 2022, and the first payment transactions on the Digital Turkish Lira System were executed successfully in the pilot tests at the end of the same year. In 2023, pilot tests continued, leading to the completion of the first phase.
The CBRT released the Phase-1 evaluation report in December 2023. In the report, the current design choices and approaches adopted in this stage of the project were shared with the public in detail. During Phase-2, beyond the ongoing R&D activities, the legal, economic and security dimensions of the digital Turkish lira are comprehensively addressed.
Benefits and Opportunities of CBDC in the Türkiye Context
Once circulated, the digital Turkish lira is expected to make various contributions such as developing a complementary payment channel, enhancing financial inclusion, forming a base for emerging innovative uses and reducing fragmentation in payments.
(1) Currently, the CBRT has payment systems available to citizens through financial institutions. In addition to circulation of bank money that is used in existing digital payments, with the CBDC system, the instant and 24/7 digital circulation of central bank money will be ensured as well.
(2) In Türkiye, the banking system is easily accessible and widely participated. Therefore, financial inclusion is not among the primary objectives of the digital Turkish lira. However, the digital Turkish lira will serve as a significant opportunity to ensure that every citizen can access digital payment services. In terms of payment operations, citizens will not be dependent on the financial institutions that they use to access the digital currency services.
(3) Innovative use cases in the digital Turkish lira can be a substantial opportunity for the fintech sector which has a significant growth potential in Türkiye. Thus, digital currency is expected to be a foundational element of financial innovation infrastructure for Türkiye. With platforms that can be built around digital currency, this goal will be more attainable.
(4) As stated in the Phase-1 Evaluation Report, the CBRT envisions the CBDC also serving as a uniform medium of exchange usable across all forms of digital commerce flows or fund transfers. The goal here is to ensure that the nation’s fiat currency remains seamlessly functional in digital transactions, leaving the choice of usage to the citizens.
CBRT's Benefit and Opportunity-Oriented Design Preferences
(1) The CBRT has designed the CBDC platform as a separate solution in parallel to its instant payment system FAST. A complementary payment channel with central bank money offered to the public may serve to sustain monetary sovereignty and provide both diversity for user preferences and redundancy for disaster recovery. Although it is possible to establish an additional payment channel that builds on existing payment systems infrastructures and offers central bank money to the user, such a solution cannot provide the desired redundancy due to direct dependence on existing systems. In this context, while a separate system is formulated for CBDC, its integration with the existing CBRT payment systems is ensured to enable conversions between digital money and bank money.
(2) Despite broad participation in the banking system, there is still room to enhance digital payments and access. As a form of money with cash-like features, the digital Turkish lira will be usable by everyone. For this reason, a model that does not require a bank account for digital Turkish lira use becomes essential. The aim is to avoid dependence on a certain financial intermediary for payments and transfers, while maintaining the two-tier model.[2] Once the digital Turkish lira accounts are available to all citizens, digital payments and transfers are expected to increase. Digital inclusion, which will increase with the use of the digital Turkish lira, is expected to contribute to the expansion of existing services and the emergence of new ones, thereby positively impacting financial inclusion.
(3) The digital Turkish lira will enable smart payments on a separate layer of programmability. In this layer, public institutions and different licensed actors will be able to take part in the development and utilization of programmable payments. To elaborate further, assigning the responsibility to create smart payment flows solely to central banks may hinder innovation capacity. Instead, platforms integrating collaborative development environments and enabling standardized communication can be established, and thereby help foster innovation. This suggests designing an incentive model within the programmability layer in terms of developing and utilizing the components of programmable payments.
(4) Various applications for transportation, food, rewards, or children are examples of existing fragmented digital payment solutions. Digital currency as a legal tender that can also be used offline can offer uniformity in payments. The key point here is that the use of CBDC will be optional rather than mandatory.
Considering the rapid advancement and transformation of technologies underlying the digital Turkish lira, a dynamic approach is required in its development. Factors such as the continuous increase in the computing power, novel approaches in distributed ledger technologies, and new cybersecurity challenges and solutions may be critical to the viability of the digital Turkish lira in the near and distant future. To ensure adaptability to the dynamic technology landscape including quantum computing, R&D activities are expected to continue after the launch of digital Turkish lira.
[1] Proof-of-Concept: Implementation and execution in a test environment to investigate and demonstrate the feasibility of a new concept, idea, or method.
[2] The model in which the central bank is responsible for issuance of money while financial intermediaries are responsible for the distribution.