Today Stellar announced that it’s working on a pilot with Ukraine’s commercial bank TASCOMBANK to use electronic hryvnia. Employees of government organization Diia will receive their salaries with the programmable money, which will also be used for peer-to-peer and retail payments.
The National Bank of Ukraine is supervising the project and has an existing contract to use the Stellar blockchain to explore electronic money and central bank digital currency (CBDC).
The regulated e-money will be issued on the open Stellar blockchain and deployed using Bitt’s Digital Currency Management System (DCMS), which includes minting money, a transactions network and the ability to manage all operations. The key is the connection with existing banking systems. Bitt has a track record with CBDC (Nigeria, Eastern Caribbean) and stablecoins (Belize).
“Cooperation with Bitt to build on Stellar allows us to connect our core banking system with blockchain-based infrastructure, creating an ecosystem that includes a full range of banking products and operations with electronic currency on the Stellar blockchain,” said Volodymyr Dubey, Chairman of TASCOMBANK.
The digital money is being developed under current e-money legislation. While e-money regulations differ around the world, they usually require the money to be backed one for one by bank balances or similar. New digital currency legislation is expected to come into force in the Ukrain in 2022.
There was no mention of Stellar’s work on Ukraine’s CBDC in today’s announcement. However, it makes sense that a commercial bank would be keen to use the same network for e-money, making the e-money and a future CBDC compatible. It will already have done much of the integration once the CBDC becomes available.
Ukraine has strong motivations for developing digital currency solutions. As digital currency becomes available around the world, there’s a risk of accelerated dollarization for countries that are vulnerable in that direction. In 2016 in Ukraine, foreign currency balances held represented close to 100% of the country’s GDP. The same paper co-written by the National Bank of Ukraine highlights the reasons for Ukraine’s dollarization risks, which boil down to a lack of trust. “Unfortunately, Ukraine had it all: banking crises, a history of inflation, devaluation and depreciation have repeatedly occurred since independence,” said the authors.
Meanwhile, this month’s CBDC news has been mainly about wholesale rather than retail CBDC. France and Switzerland published the results of Project Jura for cross border payments. Australia ran a novel wholesale CBDC trial that enabled access to non-banks. And in Austria, Raiffeisen and Erste Bank were involved in wholesale CBDC simulations.