Money plays an important role in the economic life of society. As the economy evolves and technologies advance, so do the forms of money. In recent years, both Turkey and the world have experienced profound changes in the field of money circulation. Today in our country, in addition to cash, more and more non-cash funds are preferred to purchase goods and services and make other payments and money transfers. According to a study by PwC, the use of cash in payment habits appears to be declining rapidly. According to the results of the research, 43% of respondents in Europe preferred to use cash in 2018, compared to 36% in 2020.
Cash (46%) in Turkey is still the preferred payment method in purchase/service payments, but cash usage is expected to decrease in the future. However, Turkey is at the forefront of mobile wallets and payment applications; the use of mobile payment methods in Europe rises to 14%, while in Turkey the rate is 21%.
Why Digital Money?
The use of bank cards and mobile devices in money transactions has now become commonplace. In addition, economic units demand more and more improvements in the speed, convenience and security of these transactions and a reduction in expense items such as commission fees, which are possible with the application of the latest technologies. At the same time, banks, businesses and government authorities are actively expanding the application of digital financial technologies. This makes it critical to assess the rationale for Turkey to introduce a central bank digital currency as an additional form of money that can meet the current demands of the financial system.
The Turkish lira, which is envisaged by the Central Bank of the Republic of Turkey to be issued in digital form in addition to existing forms of money, will represent the full value of our existing money in digital form. Individuals will be able to transfer digital liras to their electronic wallets and use them both online and offline (i.e. without access to the Internet and mobile communications) via their mobile and other devices. The digital lira will be an additional form of money and will be used alongside the cash lira and funds in the commercial bank accounts of individuals and businesses. Individuals and companies will be able to convert and recover their money from one form to another, that is, digital form into cash or non-cash funds in their bank accounts, according to their needs. This requires special-purpose technologies that will enable offline use of a digital lira. A digital lira will combine the advantages of both cash and non-cash money. In addition, possible money laundering and terrorist financing processes can be prevented by registering the circulation of money with the CBDC.
CBDC applications can be divided into two categories. The first of these categories are retail CBDCs that are made available directly to the public by central banks. The other is the wholesale CBDC approach, which represents their assets held as reserves in financial institutions. In both approaches, CBDCs will need security, anonymity, and continuity of service, just like any other digital asset.
Another issue is important in terms of ensuring data security. Central banks are required to choose between token-based or account-based CBDCs to ensure the anonymity of users. In token-based CBDCs, digital coins will be transferred between user wallets, and the ownership exchange information of these CBDCs will be recorded on the blockchain. In account-based CBDCs, central banks will need to create and track accounts on behalf of all users. In this way, in any situation, the movement of money in the market and the trace fall of money can be easily monitored, and the control and control mechanism will be able to establish full authority.
A digital Turkish lira should be an additional form of our national currency. Cash money will be issued in the form of banknotes with unique identifiers, and non-cash money will be found as records in accounts in commercial banks, while digital lira will be represented as unique digital codes stored in special purpose electronic wallets. For digital lira transfer between users, digital codes/tokens will be transferred between their electronic wallets.
On the one hand, a digital lira, it will resemble banknotes in that it has the series and number of a unique banknote and is issued by the central bank. Therefore, it would often be more correct to call a central bank digital currency 'digital cash'. This similarity with cash para continuar, there must be a way to use the digital currency offline (that is, without access to the Internet and mobile communications). This requires the development of private infrastructure, and this is one of the most critical aspects of a CBDC.
On the other hand, due to its digital form, the digital lira must have the characteristics of non-cash money that do not rely on a physical environment and make it possible to develop online payments. Therefore, if implemented, the digital lira will have the combined characteristics and benefits of cash and non-cash money.
Why crypto assets can't be used instead of money
From time to time, the focus of researchers and the general public is drawn to phenomena such as cryptocurrencies and stable coins. Both are not money, because they cannot fully perform all the functions of money (They can't provide fixed value, as I mentioned in heading 6 in the table) and there is no reliable guarantor to ensure the legitimacy and reliability of their export and use.(As I refer to in heading 3 of the table, the issuing or guaranteeing entity is not an MB or an accepted institution.) In particular, these assets are not a medium of exchange, since they cannot be used everywhere as payment for goods and services. (As mentioned in headings 4 and 5 of the table, they cannot be used as payment or exchange systems in many countries, including our country, as a regulation was published in the Official Gazette); they cannot be used as a unit of account and store of value due to the volatility of their prices in official currency. Cryptocurrency prices are subject to significant fluctuations depending on external factors and do not give confidence. The use of these assets is fraught with high risks of material financial losses for households. They are also often used for money laundering, financing terrorism and the proliferation of weapons of mass destruction, so their use is prohibited in many countries. Central bank digital currencies are based on digital technologies. However, unlike cryptocurrencies and stable currencies, a CBDC is the equivalent of the national currency, and its stable operation in the interests of households and businesses is ensured by the state represented by the central bank and their trust in the current national currency.
What are the Prerequisites, Quality & Terms of Use of Digital Lira?
According to the survey of the determinants of cash use conducted by the CMB in December 2021; individuals were asked how influential the factors in their preference for cash are. The results show how effective these factors are. Accordingly, participants who increased the use of contactless cards during the pandemic period indicated that habit is very important when they prefer to pay cash. The increase in contactless card use by people who say they use cash because of habit indicates that the habits that have a decisive influence on payment preferences have changed with the pandemic period. At the same time, it has been observed that the sensitivity of the protection of personal privacy, one of the most important characteristics of cash payment, is less considered during the pandemic period, and with it there has been an increase in various digital technology solutions that ensure security.
According to BKM data in the first six months of 2021, with the increase in card usage, the total amount of payments made with credit cards, debit cards and prepaid cards increased by 42% compared to the same period of the previous year, 709 billion TL.
In the first six months of the year, 588.6 billion TL of card payments were made with credit cards, while 111.5 billion TL were used debit cards and 9.2 billion TL used prepaid cards. The growth rate in payments with credit cards compared to the same period of the previous year was 40%, in payments with debit cards was 47%, while in payments made with prepaid cards, this rate was 236%. Again, the base effect also played a role in these growth rates.
In addition, Turkey is one of the countries with the highest mobile penetration. All of the above is shaping the trend towards greater digitalization of the financial market and retail trade. The fact that new digital financial instruments such as smart contracts are beginning to be used in the financial market makes it convenient to offer convenient payment services based on new solutions that can be implemented on the digital lira platform.
A digital lira can become a common means of payment and can be used with cash and funds in accounts in commercial banks. For this, it has all the necessary characteristics to enable fast and convenient payments for businesses and individuals, so it needs to combine the advantages of both cash and cashless payments with online banking, debit cards and instant payment services.
The main factors that will influence the use of the digital lira to ensure the benefits of cash and cashless payments and the qualities it must have are;
- Ease of use should be able to provide support for typical payment scenarios such as remittances to another person.
- High processing speed with a mobile phone should be ensured and no commission fee should be charged for digital lira payments at points of sale (POS).
- With reliability, the probability of failure close to zero, successful execution of all operations is necessary.
- When carrying out transactions with the digital lira, the costs that it will bring to the paying and receiving parties must be well regulated.
- When using payment cards and other retail means of payment, digital lira payments made in cash should be accepted on the same universal terms as physical banknotes; keeping money in electronic wallets should be secure and consumers should be provided with low risk
- As with payment cards used by individuals, protection must be provided against the risk of losing funds due to hacking or fraud, and rights must be legally protected in Turkey and many other countries.
- Converting digital lira into cash and funds in bank accounts should be easy and simple.
- It should ensure the smooth transfer of digital lira from online to offline e-wallets and back.
- Privacy of consumer information. Information about digital lira transactions will contain less data about the purpose of payment and the creditor than existing payment systems and should limit the risks of misuse of consumers' personal information, for example by retail outlets for the promotion of goods and services, and the risks of disclosure of confidential information.
- The same types of conditions (restrictions) for the conversion of funds in bank accounts into digital lira should be the same as those currently available for cash. (for example, notifying the bank in advance before withdrawing a large amount of cash) or limiting the amount that can be withdrawn without such notice in a single day).
- Transaction data must be available to the bank and financial intermediaries responsible for AML/CFT by TCMB in the public interest.
What is the hybrid money usage model and why is it important?
Offline mode provides an opportunity to pay in a CBDC without Internet access, including remote and hard-to-reach areas of the country. Offline payments are similar to cash payments, as they do not require the participation of intermediaries and are final. To be able to make such payments, the user must transfer a CBDC from their online wallet to a device such as a mobile phone or another device that supports offline CBDC payments via a method such as bluetooth or infrared. If a CBDC needs to be withdrawn from the device where it is stored, the user must connect it to the Internet and transfer a CBDC to their online wallet. Providing offline payments in a CBDC can be an advantage for users compared to existing payment systems, as it does not require users to be connected to the Internet. It is also necessary to assess the demand for offline payments in the medium and long term, taking into account the coverage of the Internet and its availability for each citizen and the high share of cashless payment users in the entire territory of the country. At this point, it was also revealed by the problems experienced in education during the pandemic, especially in our country, when the Internet infrastructure is insufficient and inaccessible blind spots are numerous. At the same time, offline payments are considered as an additional option to the main online CBDC payment system.The ability to carry out offline payments, ensuring that such payments are carried out without access to the Internet, the ability to restore a CBDC in case of loss of the device on which it is stored, and technologies and solutions that will allow such payments to be carried out without access to the Internet are seriously investigated It will require its development and development. a high level of information security should be ensured when making such payments. It is also necessary to consider AML/CFT issues related to offline CBDC transactions. If the possibility of offline digital lira payments and transfers between users is implemented for legal entities, special measures should be considered to ensure the protection of the digital lira and the interests of users. At this point, measures should be put in place such as imposing a limit on the total amount of transactions within a certain period of time as well as a limit on the amount of a single transaction, a limit on the number of transactions/transactions that can be carried out in a given period of time, introducing a limit on the amount of funds to be transferred between the online wallet and the offline device.
What are the Possible Risks and Threats to Digital Currency?
The use of digital lira will increase payment transparency and help reduce the costs of the financial sector in combating AML/CFT risks, as well as illegal actions. One of the advantages of introducing a digital lira is the possibility of conducting a large amount of data-driven analysis on economic assets and their payments. The distribution of AML/CFT control functions between the central bank, MASAK and financial intermediaries in the context of the introduction of the digital lira remains an open question. This will depend, among other things, on the nature of the access of financial intermediaries to data on digital lira transactions. At this point, it is more realistic to implement a model in which financial entities, such as SPK, BDDK, MASAK, TCMB, responsible for the execution of national AML/CFT legislation (SPK, BDDK, MASAK, TCMB), are granted relevant powers and their existing functionality related to AML/CFT is expanded. As part of these measures, financial institutions will have to modernize their existing resources, which are currently used to analyze client activities.
What should be done to spread the use of digital currency?
The use of digital lira refers to the ability to use payment applications on mobile devices, financial control and functionality in all areas of life using ATMs and other automatic payment devices. Therefore, a digital lira should be introduced as a public means of payment and a targeted training program aimed at improving overall digital financial literacy and developing the skills needed to perform digital lira transactions should be carried out. It may be advisable to include training for the use of digital payment instruments in the current educational system. Particular attention should be paid to certain categories of people with potentially low digital and financial literacy, as well as those who are not covered by the education system. Mobile applications that support digital lira transactions should provide users with simple and clear information about balances and transactions in digital lira accounts. At the request of the user, detailed information on transactions must be provided, for example, in the form of an account statement sent by e-mail or other communication channel. It is also important to provide convenient and reliable mechanisms for remote receipt and control of documents confirming the payment of digital lira, which may include documents to be transferred and used by creditors or authorized bodies, for example, as proof of payment of a fee or government tax. When developing interfaces and devices for digital lira payments, it is necessary to take into account the needs of people with disabilities. In particular, it is necessary to provide different information exchange channels and control account balances and provide ways to carry out operations for people with sensory impairments (vision, hearing), enable visually impaired people to use habitual adaptive access programs, and develop simplified interfaces and modes for people with intellectual disabilities. There is potential for using a voice user interface and should definitely be evaluated given the advanced deep learning-based capabilities of today's ASR systems.
To indicate the importance of this issue in our country, we can give an example of the results of the survey conducted by TCMB at the top of the article. In our country, habits and the protection of personal privacy come to the fore as the main reason for using cash. It is important that we can change our current habits and highlight potential safety benefits in order to raise awareness for society, so that usage gains a high momentum.
Author: Uğur Özker
Solution Development Manager at Komtas
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