Incredible adventures of Ukrainian CBDC

Ukraine is a country of the most amazing possibilities, including three blockchain versions of the national currency being created at once. It’s time for an absolutely amazing story of how, as it turns out, not in every country national banks control local currency.

On December 14, we learned that Tascombank – one of the oldest Ukrainian commercial banks – together with the fintech company Bitt, launched a pilot digital hryvnia project based on the Stellar blockchain. It was reportedly backed by the Ministry of Digital Transformation of Ukraine and the Stellar Development Foundation (SDF) – a non-profit organization that works on connecting the global financial infrastructure through the Stellar network.

According to the press release, the project’s goal is to issue Ukrainian e-money on an open blockchain with the ability to manage assets. E-hryvnia has already been promised to get tested when paying salaries to Diia state service employees, as well as on peer-to-peer and retail payments. The results are expected to come in as early as 2022 – that is, very soon.

“The project will allow the Ministry of Digital Transformation and the National Bank to analyze the effectiveness of technological solutions that can be used for developing the e-hryvnia. The pilot will become an important driver of payment innovations in the country’s banking sector.” – Deputy Minister of Digital Transformation Oleksandr Borniakov told reporters.

There is a reason why the Ministry of Digital Development of Ukraine is taking part in the project: back in January of 2021, they signed a Memorandum of Understanding and Cooperation with the Stellar Development Foundation, within which they work on the development of a strategy for virtual assets and infrastructure for the CBDC. In July 2021, the SDF joined the Association of Ukrainian Banks.

Chairman of the Board of Tascombank Vladimir Dubei stated that the project would allow the banking system to be combined with blockchain-based infrastructure. It will also provide an opportunity to create the Stellar blockchain ecosystem with a full range of banking products and digital currency transactions.

The main goal now is the trial issuance of e-money on an open blockchain. Taskombank is responsible for creating and testing the electronic hryvnia on Stellar, but in the future, the e-hryvnia will be deployed in the Bitt transactional network, known as the Digital Currency Management System.

SDF CEO Denelle Dixon says that testing has already begun. “The regulated e-hryvnia will be issued privately using the blockchain technology created in accordance with the current legislation of Ukraine on electronic money “, – added Dixon.

Brian Popelka, CEO of Bitt, also made a comment on the joint project to create a Ukrainian CBDC. According to him, “The Bitt Digital Currency Management System will provide Tascombank with all the technologies necessary for the safe issuance, storage, distribution, and redemption of electronic hryvnia.”

And everything would be fine if not for one big “but”: the National Bank of Ukraine (NBU) said that this is not actually a digital hryvnia. Moreover, their reaction was quite harsh: just an hour after information about the initiative had surfaced, the central bank released its statement. It welcomed the pilot project to test the issuance of blockchain-based electronic money but said it had nothing to do with the e-hryvnia, the NBU digital currency.

“According to the new legislation, only the National Bank can issue the e-hryvnia”, said Olexeii Shaban, deputy chairman of the NBU. He claimed that the National Bank would be informed about the pilot project results. “This will help us explore the potential of using blockchain technology with programming functionality while forming the e-hryvnia concept”, Shaban declared.

The NBU deputy chair added that the bank, along with other state institutions, is actively creating the e-hryvnia concept. It will define the best ways to use e-hryvnia, its features, the issuance system, the technological platform, etc. The creation process should be completed by the end of 2022.

Only then will the National Bank be able to develop a regulatory framework and form requirements for its digital currency technology, as well as select a technology provider for the trial issuance of e-hryvnia. The choice of the provider was promised to be made through transparent competitive selection at some point in 2023.

And by the way, back in 2019, the NBU actually already implemented the e-hryvnia pilot project.

What we got at the end was one Ukrainian government agency (the Ministry of Digital Transformation) took part in the issuance of e-hryvnia without coordinating it with another government agency (the National Bank). The result was a not particularly aggressive but still showdown in the media between the two departments.

And now comes the best part. There is also a third initiative – the UAX stablecoin, launched in February 2020 by the Ukrainian cryptocurrency exchange Kuna. The project called “crypto hryvnia” is based on the Ethereum blockchain.

UAX supports ERC20 and ERC865 standards, and its first issue was 1,000,000 tokens. Crypto hryvnia is pegged to the Ukrainian national currency at a 1:1 ratio. To maintain the stability and security of the UAX token, Kuna uses the Proof-of-Reserve method, which allows the company to keep a single reserve indicator between the UAX cryptocurrency token and the associated fiat currency resource.

So there are now three crypto hryvnias created in Ukraine. One project is entirely state-run (by the NBU), one is completely private (by Kuna), and one is a public-private partnership (by Tascombank and the Ministry of Digital Development).