KYIV, Ukraine — Central bank digital currencies (CBDCs) have been a hot topic in blockchain circles recently, but central banks are lukewarm about blockchains.
Representatives of a number of the world’s central banks discussed their CBDC projects last week in Kyiv, Ukraine. The one-day conference was arranged by the National Bank of Ukraine, or NBU, which itself is a CBDC pioneer, having run its own digital currency pilot in 2018.
The central bank wanted to test its ideas and conclusions with the banking community and stimulate the discussion, the head of its innovative development department, Roman Hartinger, told CoinDesk. The speakers included representatives of NBU’s peers from Canada, Japan, Lithuania, Finland, Netherlands, Belarus, Uruguay and South Africa.
The discussion comes at a time when the world’s two largest economies are each seriously exploring the possibility of issuing a CBDC, although China appears to be much further down the road than the U.S.
According to a report issued in September, NBU started exploring the idea of a digital currency, named e-hryvnia after Ukraine’s national currency, as early as 2016. In 2018, the central bank tested a digital token running on a fork, or modified copy, of the Stellar blockchain.
The pilot was run with the tech startup AtticLab, fintech companies Uapay and OMP 2013 and with “Big Four” professional-services firm Deloitte as an auditor, the report says. From September to December 2018, the NBU tested the software with a limited set of participants.
The tests showed that “there are no fundamental advantages in using specifically the DLT [distributed ledger technology] to build a centralized e-hryvnia issuance system” in which NBU is the only issuer, the report says. However, the central bank does not rule out an alternative “decentralized” model, in which multiple trusted payment processors would issue e-hryvnia.
The experiment is on hold, awaiting more input from the banking community and legislation regulating digital assets in Ukraine. While there are some drafts and concepts circulated by the country’s authorities, formal laws are yet to be passed.
Cool on crypto
The skepticism about distributed ledgers was shared by Hartinger’s colleagues from the Netherlands and Canada at the Kyiv conference.
“The essence of the DLT infrastructure is that no single party should be trusted enough, but don’t we just trust a central bank to maintain the integrity of the global ledger?” said Harro Boven, policy adviser in the payments policy department of the Dutch central bank.
Scott Hendry, senior special director of fintech at Bank of Canada, which piloted its Jasper project (built on R3’s Corda DLT platform) last year, agreed that “you don’t need a DLT to make a central bank digital currency.”
“There doesn’t seem to be a lot of benefits if you look at a DLT system and the current efficient centralized system for the sole purpose of interbank payments,” Hendry said, adding that in the back office he leads, “they wouldn’t change anything” in the technology stack currently in use.
No speaker ruled out using DLT for a CBDC in principle, but none showed much enthusiasm about the tech.
A wake-up call
Then why even bother to create central bank digital currencies – the concept that initially was pitched as a trusted, government-blessed kind of cryptocurrency? The reason is Facebook’s Libra, says Jamiel Sheikh, the CEO of consulting firm Chainhaus.
While the project met strong pushback from the governments across the globe, the thought of a big private company issuing its own digital currency sent waves all around financial circles.
“The era of private money is here, and it’s something they have to pay attention to. It’s a response to a threat that can stimulate innovation,” Sheikh told CoinDesk.
Hartinger also pointed at the atypical competitive situation central banks found themselves in:
“Central banks see Big Tech issuing stablecoins, like Libra, they see this niche of digital money and now it’s the matter of who will have a money issuance prerogative, governments or the private tech companies?” Hartinger told CoinDesk.
“Libra was a wake-up call for us. Central banks have been challenged to innovate,” Harro Boven said on stage, echoing recent comments by none other than U.S. Federal Reserve chairman Jerome Powell.
A representative of one of the central banks present at the conference, who shared his thoughts with CoinDesk off stage and asked not to be identified, said Libra catalyzed a process of exploration that has been long overdue. However, he said he’s not worried about the competition from Facebook.
“People would want to use Libra if our monetary system screwed up. Our best defense is to do our job,” he said.
Dirtying their hands
Still, not all the central banks have given up on blockchains yet.
Sveriges Riksbank, the central bank of Sweden, which recently announced a pilot for a digital krona, or e-krona, together with consulting firm Accenture, is going to use R3’s Corda blockchain.
The e-krona is a kind of electronic cash for everyday use, a tool for payments between households, denominated in the national currency and accessible 24/7, Riksbank’s senior policy adviser to the payments department Bjorn Segendorf said on stage.
Segendorf told CoinDesk the Riksbank will try out the Corda technology not because the central bank has its mind set on a blockchain-based solution – you just need to try different things to learn.
“We need to get our hands dirty,” he explained. Now it’s trying Corda; later, it can try something else.
The main point of the exercise is to be ready for the cashless future, Segendorf said, as young adults rely less and less on cash, to see what such a world looks like and how a central bank can deal with it, so that “if we need to issue a CBDC we don’t have to start from scratch.”