On New Year’s Eve the Central Bank of the Republic of Turkey (CBRT) released a report on its first phase of central bank digital currency (CBDC) pilots. The central bank will conduct the second phase this year, after which it will decide whether to launch a digital lira.
Back in 2021, the central bank disclosed its technology partners as defense corporation Aselsan, software tech firm Havelsan, and government Information Security Research Center, Tubitak Bilgem.
The Turkish government considers digitalization a high priority with its young population – around half are under 35.
The paper did not cover financial inclusion in detail, but this is one of four motivations. Around 40% of Turkey’s population is unbanked. Other drivers include creating an alternative payment channel, ensuring the uniformity of digital payments, and enabling innovation through programmable payments.
A hybrid DLT solution is preferred
In 2023 the basic functionality was tested with banks and fintechs. That included developing a permissioned distributed ledger (DLT) based system for digital currency, as well as digital identity and a mobile wallet.
The central bank is keen on DLT and wants to use smart contracts for programmable payments. However, it concluded that DLT is not sufficiently performant for a national payment system, so it will explore a hybrid solution instead.
Turkey’s approach to digital identity is fairly progressive. It is keen to embrace self sovereign identity in which individuals control their own data. This would also ensure that payment data carries no personal information.
However, each person’s decentralized identifier (DID) will be used for all payments. The paper acknowledges that it could be problematic if the DID becomes associated with the person over time. Hence, it might resort to virtual identifiers to be used in different contexts.
While the central bank doesn’t want to view personal transactions, it’s keen to use the payment system to gather data about prices and transaction levels to ‘decrease the need for surveys.’ These are usually questionnaires sent to companies.
Like many other countries, Turkey favors a two-tier system with banks performing distribution and KYC functionality. However, unlike some jurisdictions, it wants users to have a single account across all providers and not depend on the bank or intermediary. In other words, the user can still transact if a bank goes offline.
Second phase plans
Testing will include interoperability with other payment infrastructures and programmable payments in the second phase. Additionally, the central bank wants to explore offline payments, hardware wallets, and performance. It also plans to review both legal and economic issues, such as whether or not to make the CBDC interest-bearing.
The Turkish paper touched briefly on wholesale and cross border payments. Wholesale payments were already explored outside of the Phase 1 process, with ongoing research on both topics. In the future, it will cooperate with international institutions for further cross border CBDC exploration.
