Ukraine creates its own CBDC base

Though there is still no final decision on launching state digital currency, even with all the necessary legislation, a model project and a seemingly an already determined blockchain.

On June 30, Ukrainian parliament, the Verkhovna Rada of Ukraine, on second reading passed the law “On Payment Services”, which, among other things, spelled out the general principles of issuing digital currency (CBDC) of the National Bank of Ukraine (NBU). The law defines the national digital currency (digital hryvnia, e-hryvnia) as “an electronic form of the monetary unit of Ukraine, the issuer of which is the National Bank.” Such CBDC, thus, is legal tender on the country’s territory.

At the same time, the new legislation clearly distinguishes between the concepts of CBDC (digital currency) and electronic money. According to the law, going further the NBU must use its regulations to determine the specifics of performing payment transactions and the procedure for issuing, storing and redeeming digital currency.

It is notable that shortly before the adoption of the law, on May 21, the National Bank itself added the introduction of the electronic hryvnia to its new 2025 strategy. That, among other things, was announced by the Deputy Head of the NBU Oleksii Shaban during the strategy presentation. It suggests a change in attitude towards CBDC by the leadership of the National Bank of Ukraine. Only a year ago, their views were rather skeptical.

The whole story goes back to 2016, when the NBU launched a research project to study the possibility of introducing e-hryvnia. From the very beginning, it was clear that the Ukrainian national CBDC should be created on the basis of blockchain technology – it would allow to minimize transaction costs in the process of transferring money from one subject of financial relations to another.

The cryptocurrency boom of 2017 only accelerated this process – the Ukrainian public began to ask the management of the National Bank more and more questions like “When will we see the crypto hryvnia?” In addition, there was a growing number of reports about projects to create CBDCs in other countries.

In summer of 2019, the National Bank issued a limited amount of e-hryvnia for closed testing. Operations with its use were carried out by the in-house specialists of the NBU itself, volunteer companies, as well as the World Bank – its experts advised the National Bank within the framework of technical assistance.

Commenting on the test results, the Deputy Head of the NBU Serhii Kholod said: “The study not only provided us with practical experience, but also raised some new questions. What will be the impact of this tool on the payment market ecosystem? Will there be sufficient demand for e-hryvnia from users, traders and other market participants? What technology should be used? What level of anonymity should the e-hryvnia transactions enjoy? We, along with others central banks across the world, must give precise answers to all those questions.”

According to him, the National Bank will continue to study the possibility of issuing its own cryptocurrency, modern market demands and its potential impact on the economy.

When discussing the results of the experiment, the NBU also mentioned ease in use, accessibility, security (repayment and settlements are guaranteed by the regulator) and the quickness of settlements among the advantages of e-hryvnia. However, it is still difficult to predict how many Ukrainians will become users of e-hryvnia if it is introduced.

Additionally, the NBU noted that its own CBDC can be considered a so-called “disruptive technology”, since it can potentially significantly change the ecosystem of the payment market and redistribute the existing roles of market participants.

In any case, even back in 2019, it was clearly stated: the electronic hryvnia is a fiat currency in electronic form, which will be exchanged for cash or non-cash funds in a 1:1 ratio. Transactions with e-hryvnia can be carried out via the Internet using computers, smartphones, tablets etc.

There was a new development to the story in early January 2021, when the Ministry of Digital Transformation of Ukraine and the Stellar Development Foundation signed a memorandum of understanding and cooperation to create a strategy for the development of the virtual assets market in Ukraine. In simple terms, this means that e-hryvnia will most likely be created on the Stellar blockchain.

The memorandum provides for cooperation between the Ministry and Stellar in the following areas:

– development of the virtual assets market in Ukraine;

– support for projects related to virtual assets;

– introduction and regulation of the stablecoin circulation in Ukraine;

– development of the NBU digital currency.

The document specifically emphasizes that issuing of the NBU digital currency is the exclusive prerogative of the National Bank of Ukraine, and the contractor must be chosen based on a public tender.

“We look forward to working with the Ministry and other stakeholders involved in the development of virtual assets and new financial tools based on the Stellar platform for both the public and business, and providing new partnership opportunities for entrepreneurship in Ukraine within the Stellar ecosystem,” said at the time Denelle Dixon, executive director and CEO of Stellar Development Foundation.

The National Bank of Ukraine indicates that the introduction of e-hryvnia (after the decision is finalized, of course) can be done in one of two ways, either centralized or decentralized. Within the framework of the centralized model, the NBU is the sole issuer of electronic hryvnia, while other market participants perform only agency functions. If the decentralized model is applied, then banks and non-bank financial institutions will be able to issue e-hryvnia on equal terms under the control of the NBU.

But so far the strategic decision hasn’t been made. And most likely it won’t happen until European countries begin switching to CBDC.