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Turkish Central Bank releases phase-1 findings of digital Turkish lira studies

The Central Bank of the Republic of Türkiye (CBRT) has published a report to show findings from the first phase studies of the digital Turkish lira project.

According to the Digital Turkish Lira First Phase Evaluation Report, with its English version released on Monday, the bank continues its work on the feasibility of introducing a digital Turkish lira complementary to the existing payments infrastructure.

Digital Turkish lira is the digital form of the Turkish lira, its unit is the Turkish lira as in the current form of fiat money, the bank explained.

“With the Central Bank Digital Turkish Lira Research and Development (R&D) Project, the CBRT aims to determine the potential features of the digital Turkish lira, test different architectural setups and technological alternatives, and conduct pilot tests,” the report stated.

The bank’s research and development work for the digital currency began in 2020 with proof-of-concept studies.

Following the successful completion of the proof-of-concept study, which included tests of the applicability of various distributed ledger technologies to the digital currency, the Central Bank Digital Turkish Lira Research and Development Project was launched.

Under the responsibility of the Digital Currency R&D team established within the bank, the research, development, and testing of the project are being carried out in addition to the proof-of-concept studies in related fields.

The report read: “The CBRT has a well-established technical capacity for developing and operating its own Real Time Gross Settlement payment systems.

“However, to build an operating capacity for digital currency including cryptography, specialized hardware and various advanced technologies, which are considered essential but do not fall within the expertise of a central bank, the CBRT decided to collaborate with leading technology stakeholders.”

Accordingly, in 2021, the bank has signed bilateral memorandums of understanding with the Scientific and Technological Research Council of Türkiye (TUBITAK) and technology companies Aselsan and Havelsan.

The Digital Turkish Lira Collaboration Platform was established with the participation of these stakeholders, the report recalled.

The report also noted that technological research, development, and testing processes were carried out in close cooperation with the stakeholders during the first phase.

“While wholesale and retail payments are mainly differentiated depending on the audience to which they are given access, retail payments formed the framework for the first phase,” it said.

As part of the first phase, the work on setting up the required environments began in 2022 and the first payment transactions on the Digital Turkish Lira System were executed successfully in the pilot tests conducted at the end of the same year, it noted.

In the first half of the last year, pilot tests continued, leading to the completion of the first phase, it added.

“In line with the findings, it is planned to move on to advanced phases where more widespread pilot tests will be carried out,” it said.

The bank now plans to expand the platform with the involvement of new participants.

Phase-1 studies

In the first phase, the “Phase-1 Digital Turkish Lira System” was developed with the platform participants, pilot tests were carried out, and preliminary tests of strategic technologies were conducted.

In the pilot test studies in this phase, the aim was to conduct tests at specific locations and to measure the user experience and system performance.

The platform also tested the preparation of the technical working environment and the infrastructure, established a distributed ledger platform, designed the system and developed smart contracts and applications, integrated a prototype digital identity system, designed and developed a digital wallet application, simulated and tested the issuance, distribution, online payment/transfer, and redemption scenarios, conducted cyber security operations and pilot test processes, and measured system performance and user experience, the report explained.

The CBRT was among the first institutions to conduct studies on electronic money, and began such work in 1998, and has been pioneering economic digitalization for years through its theoretical studies.

Key requirements

The bank said it worked on technical capacity for transactions, safe and ease conditions of system for end users, scalability for high traffic, security for internal and external attacks, resilience for possible failures, convertibility between digital and other forms of lira, and compliance with legal acts.

Privacy, technological and architectural flexibility, interoperability, not harming economic and financial processes, and financial intermediary independence are among the design principles of the bank, it noted.

The digital lira will be accessed through financial intermediaries, including commercial banks, and banks and licensed participants will be in charge of the distribution.

Digital lira accounts will not require a bank account, the accounts will not be dependent on operator infrastructure, and account identifiers will not require financial intermediary information.

There will be a single and specific account for each user, and it will be accessible through all intermediary institutions.

Credentials containing user information will be stored under the control of the user, and verification flows will be processed over a common network.

Conventional and new technologies will be used together in the system.

“In the design of the Digital Turkish Lira System, modularity and the replaceability of technologies in all components are essential,” the bank also said.

Following phases

The bank said R&D activities will continue on conversions between forms of the Turkish lira, smart payments, offline payments, as well as legal and economic dimensions in the following phases.

The phase-2 targeted requirements are intermediary integrations, smart payments, offline payments, hardware wallets, interoperability, high performance, and legal and economic aspects.

At phase-3, circulation decision and common use are targeted, while regulations will be prepared if circulation is approved, and gradual common use will begin after certification and licensing processes.

It added: “The Central Bank Digital Currency has already entered the agenda of many countries as a natural consequence of digitalization.

“There will likely be a need and a suitable ground for digital currencies to enter circulation in the future.”