Taiwan’s robust manufacturing industry, combined with its strength in semiconductor development, has made it crucial to hardware supply chains around the world. Despite the island’s relatively small size, it has become recognized as one of the most (if not the most) prevalent manufacturers of semiconductors in the world. However, while Taiwan’s strength in semiconductor and hardware manufacturing is well-known, the fact remains that Taiwan’s public and private enterprises remain heavily reliant on foreign-developed software. This dependency on software developed internationally has highlighted a clear vulnerability for Taiwan, particularly in the realm of digital infrastructure sovereignty. This issue has become particularly prevalent due to the need to ensure continuous software development for Taiwan in order to keep pace with the ever-growing “Web3” movement—with Web3 focusing on the growth of decentralized software, systems, and protocols to ensure increased access to digital resources for individuals located around the globe. [1]
Central bank digital currencies (CBDCs), digital versions of existing fiat currencies, offer an opportunity for Taiwan to bridge the gap between Web2 and Web3 technologies. In this context, the widespread implementation of a Taiwanese CBDC could kickstart a national-level effort by domestic Taiwanese public and private enterprises to develop a new financial services ecosystem—one capable of transitioning effectively into the Web3 universe, enabling better financial inclusion, interoperability, and digital asset accessibility. While the Central Bank of the Republic of China (CBC, 中央銀行) did recently complete two pilot trials of a CBDC, the bank must hasten its rollout of a Taiwanese digital currency to maintain its digital infrastructure sovereignty.
Defining Digital Infrastructure Sovereignty and CBDCs
Digital infrastructure sovereignty is defined as a country achieving domestic autonomy in the creation, support, and use of its critical digital infrastructure systems. This contrasts with digital sovereignty and data sovereignty: with the former focusing on digital autonomy across entire end-to-end ecosystems and infrastructure, and the latter being the legal control and authority of data within a nation’s borders. For Taiwan, digital infrastructure sovereignty is particularly critical due to the People’s Republic of China’s (PRC) robust development of key digital infrastructure like the Blockchain Service Network (BSN) and the digital yuan (e-CNY)—with the potential cross-border usage of these critical infrastructure tools being a significant threat to Taiwanese physical and digital sovereignty as a whole.
Global interest in CBDCs has boomed in recent years, with 105 countries—comprising over 95 percent of global GDP—being involved in some sort of CBDC project as of September 2022. Taiwan has taken steps to test its own CBDC, with an initial pilot launched in 2020 and another pilot concluding in mid-2022. However, Taiwan’s slow pace of research and development into launching a CBDC is something that must be changed, particularly if Taiwan seeks to ensure its own digital infrastructure sovereignty in the payments space. CBC Governor Yang Chin-long (楊金龍) highlighted in June 2022 that Taiwan needs at least two years, if not more, to implement a CBDC. This is especially concerning due to the ever-growing usage of the e-CNY in China, with over $100 billion in digital yuan spent as of late August 2022, building on the already robust digital payment rails offered by apps like WeChat and AliPay.
Additionally, Taiwan’s CBDC design has not even been finalized, with Governor Yang talking about exploring a no-interest design for a CBDC as of June 2022. Additionally, Taiwan’s CBDC pilot that occurred in the last two years has been plagued not only by design issues, but by implementation challenges as well. The blockchain technology underlying the CBDC pilot in Taiwan was identified as not being capable of handling high frequency and volume consumer transactions. Additionally, the CBDC pilot had functionality challenges due to power outages, further compounding potential implementation challenges to a full-scale rollout.
In short, Taiwan must hasten its development of a CBDC and provide more transparency in its product roadmap to ensure protection of its critical digital infrastructure in the payments realm. Failure to do so will result in foreign actors’ ability to violate digital infrastructure sovereignty in Taiwan, a problematic concern given the digitally exclusive nature of the Web3 future.
Digital Payments Infrastructure in Taiwan
Taiwan is unique in its payments infrastructure. Unlike in many other countries around the world, credit cards have achieved significant penetration in Taiwan, with this form of payment being Taiwan’s most used in-store payment method. However, the definition of “in-store” predominantly revolves around institutions like department stores, with small-and-medium businesses (SMBs) and Taiwanese citizens more broadly still preferring cash for transactions. Additionally, Taiwan tends to rely heavily on domestic credit cards, with a sub-organization of Taiwan’s National Development Council (NDC, 國家發展委員會) even stating in October 2022 that foreign credit cards are not universally accepted in Taiwan. This emphasis on prioritizing domestic credit cards has resulted in interoperability challenges for Taiwanese payments as a whole, with limited usage of domestic credit cards for everyday transactions while simultaneously sidelining international cards for usage within Taiwan.
Correspondingly, while adopted by many in the Taiwanese population, cashless payment applications are not as widespread in Taiwan compared to other parts of Asia. Popular services like WeChat Pay and AliPay are used by over 90 percent of those living in large Chinese cities, but have not gained as much traction in Taiwan, owing to these apps catering specifically to mainland Chinese users, data privacy concerns, and other factors. According to a survey conducted in September 2022, Taiwan’s top five mobile payment applications include LINE Pay (used by 57.9 percent of respondents), Apple Pay (31.6 percent), JKOPay (17.5 percent), Google Pay (9.4 percent), and TaiwanPay (9.1 percent). This has resulted in a very crowded and unprofitable market for these payment applications—particularly as apps continue to use promotions, discounts, and special rates for tying credit card and bank usage to their applications. Most notably, LINE Pay, Apple Pay, and Google Pay’s international nature highlight the lack of domestic digital payment infrastructure in Taiwan. In light of these concerns, a Taiwanese CBDC could potentially enable a more robust digital payments economy in Taiwan by establishing a domestic payments rail for developers and institutions to build upon.
More alarming is the lack of innovation within Taiwan’s traditional banking industry, upon which the majority of digital payment applications have developed. Many Taiwanese banking services still need to be carried out in-person, even as banking services in other nations around the world have become almost entirely digital in nature. This outdated approach to banking infrastructure is one that is particularly concerning given the extremely fast saturation of payment applications like WeChat Pay and AliPay—with WeChat Pay’s parent app WeChat boasting over 1.2 billion users globally in early-2022, and AliPay claiming over 1.3 billion users in mid-2022.
Therefore, the Taiwanese government must focus on facilitating innovation within its digital payments industry while also incentivizing modernization of its traditional banking infrastructure. The unveiling of a Taiwanese CBDC—or at the very least, a clear “go-to-market” strategy for a Taiwanese CBDC—would accomplish both of these goals. Specifically, this could help ensure better protection of digital infrastructure sovereignty, through domestically developed applications and banking infrastructure for domestic and international participants within Taiwan’s financial ecosystem.
Establishing Digital Infrastructure Sovereignty
Taiwan’s unveiling of its Ministry of Digital Affairs (MODA, 數位發展部) in August 2022, and the MODA’s use of Web3 decentralized file sharing tools like the InterPlanetary File System (IPFS), is a positive step forward for ensuring digital infrastructure sovereignty. However, more steps need to be taken to establish a robust domestic program to incentivize homegrown digital development, including incentivizing the improvement of digital financial services in Taiwan. A Taiwanese CBDC would help to establish digital infrastructure sovereignty, with CBDCs potentially providing significant opportunities to increase everyday usage of domestically developed technologies.
A parallel example can be seen in the Indian government’s establishment of the Unified Payments Interface (UPI) by the National Payments Corporation of India. The UPI is an instant, real-time payment system that forms the payment rail for India, including supporting many of India’s current fintech applications. Apps like BharatPe (which offers cross-app QR code functionality, small loans, and more) are built on top of the UPI. Interestingly enough, India recently removed China-based Xiaomi from its approved list of UPI-based apps in October 2022, highlighting the increasing concern that India is taking to ensuring digital infrastructure sovereignty in the payments space.
Additionally, a Taiwanese CBDC could also help to establish digital infrastructure sovereignty by counteracting the influence of the digital yuan. The e-CNY was rolled out for retail customers en masse during January 2022, timed to coincide with the Winter Olympics in China that began in February 2022. Additionally, a cross-border wholesale pilot involving the e-CNY occurred in September 2022 as part of the Bank of International Settlement’s m-Bridge project, a pilot study in cross-border digital currency transfers between the central banks of China, Hong Kong, Thailand, and the United Arab Emirates. This is particularly worrisome given the existing use of the physical yuan by non-state and state actors external to China’s borders: one example of this can be found in the Wa State in Myanmar, where the yuan is used as a daily transaction currency. The spread of the digital yuan would result in further usage of the e-CNY beyond Chinese borders, potentially contributing to the erosion of Taiwan’s digital infrastructure sovereignty. In turn, this could drastically affect an already fragmented and stagnant financial services industry in Taiwan.
Conclusion
Hastening the development of a Taiwanese CBDC would entail more than just developing a digital version of the New Taiwan Dollar. Instead, a Taiwanese CBDC could help to ensure digital infrastructure sovereignty and encourage growth in Taiwan’s slow-paced financial services industry by forcing competition and innovation within the realm of digital payments. Both of these salient points will remain critical as Taiwan and the rest of the world increasingly move towards full implementation of Web3, with digital assets and services replacing traditional ones in the near-future.
The main point: Taiwan must hasten its development of its own digital currency, with a domestic CBDC providing a clear signal to other countries that Taiwan can compete at the global level, while also protecting its digital infrastructure sovereignty.
[1] “Web3”—also called “Web 3.0”—is a rubric term for the concept of a new developmental stage of the internet, which incorporates evolutionary elements such as a greater role for blockchain technologies, cryptocurrencies, and decentralized decision-making. See: Scott Rosenberg, “Battle for the Soul of a New Web,” Axios, November 29, 2021, https://www.axios.com/2021/11/29/web3-blockchain-battle-soul-new-web.
