Does Ukrainian economy need NBU's digital currency E-hryvnia?

On November 28, the National Bank of Ukraine once again presented the concept of its CBDC E-hryvnia. Why again? Because this is the third or fourth attempt to implement the CBDC project in Ukraine.

The first attempt took place right before the start of the E-hryvnia pilot in 2018, and the second - after pilot completion in 2019. At that time the project was put off until a more favorable period for implementation. The announcement of another pilot took place in 2021 when the Ministry of Digital decided to "revive" the forgotten E-hryvnia project and announced its testing on the Stellar blockchain. For some reason, the testing took place at the network of Taskombank, not the NBU. Then, the Ministry of Digital Affairs and the National Bank of Ukraine argued over which of them would be the regulator of the emerging field. Then the NBU won. And here we have another CBDC presentation.

NBU believes that the key purpose of the E-hryvnia is to effectively perform all the functions of money, supplementing already issued fiat hryvnia. Using E-hryvnia should be convenient and accessible for all segments of society, legal entities, state bodies, banks, and non-banking financial institutions.

As we know, “should be” does not mean “will be”. After all, all segments of society and legal entities have not yet been asked whether they need such a "convenient" tool. NBU also has not objectively explained what real advantages users will receive compared to using the same cashless hryvnia.

The National Bank of Ukraine is currently considering and developing the following possible options for using the E-hryvnia, which will depend on its structure and main characteristics:

1. E-hryvnia for retail non-cash payments with the possible functionality of "programmed" money. This option is suitable for the implementation of targeted social payments, the reduction of state expenses for administration, as well as the usage of smart contract technology for programming various calculation logic;

2. E-hryvnia for virtual asset circulation field. For example, for exchange, to back the assets, and for other operations with virtual assets. E-hryvnia may become one of the key elements of infrastructure development for the virtual assets market in Ukraine;

3.E-hryvnia for cross-border payments. It will allow making cross-border payments faster, cheaper, and more transparent.

The question regarding the first option is - why should we invest such a huge amount of money into building new infrastructure when MasterCard and Visa have been functioning perfectly for over twenty years?

For decades, commercial banks of Ukraine have invested billions of hryvnias in this infrastructure development. It consists of mobile POS terminals, ATMs, self-service kiosks, mobile applications, and eCommerce platforms that have passed expensive certification for compliance with the PCI DSS standard, etc. Imagine that in the post-war period, banks will again face the prospect of creating a new infrastructure from scratch. It is very unlikely that NBU will give money for such modernization. This will once again put the burden on commercial banks and merchants. Currently, nothing is supporting the E-hryvnia. There are no wallets for users, no terminal equipment or adapted ATMs from banks, and no adapted cash register systems from merchants or retailers.

Regarding smart contract technology, there were a lot of smart contract hacks over the last five years. Using such a solution would be very risky due to holes in the code. It is a good idea, but, given all the vulnerabilities of smart contracts on any blockchain, it is also very dangerous.

The virtual asset market has existed since the creation of Bitcoin (already 13 years). It is decentralized, self-sufficient, and self-regulating, so it does not need a CBDC. The role of CBDC has been successfully performed by stablecoins, which are tied to certain fiat currencies in a 1:1 ratio. Users are already used to choosing the tool they like from more than 100 different stablecoins or tens of thousands of other cryptocurrencies. Imposing one digital currency will not lead to anything.

Regarding E-hryvnia usage for cross-border payments, this does sound like a joke. What is the point of transferring E-hryvnia to other countries, which do not have the infrastructure for its use? Who would need a digital format of a non-convertible currency of a developing country with a crazy rate of devaluation? Maybe nostalgic emigrants will keep it in their wallets to remember the Motherland.

What will E-hryvnia users get? Only total control over all their transactions by the National Bank and the tax office. Each transaction will go to a private blockchain, which will be controlled only by the NBU. Cash retains certain features of anonymity, while CBDC is an anti-cash tool. At the same time, it encroaches on the freedoms of citizens and reduces the level of privacy of transfers to zero.

In addition, technically any wallet can be blocked by the NBU in a matter of seconds for any reason. This can become a very convenient option for various corruption schemes and abuse of power by government officials.

Some countries, the Netherlands in particular, already had mass protests against the implementation of CBDC, perceived by the population as a violation of their civil liberties and right to privacy.

In the UK, the Bank of England's plans to implement CBDC BritCoin in 2025 also lack public support.

What will merchants get? They will be forced to accept E-hryvnia along with its cash and non-cash form. To do that, merchants have to get another terminal or at least a wallet application in smartphones that are integrated with the cash register system. Finalization of the software, accounting recording, cashier retraining and much more will be necessary to launch the project. It is very unlikely that the Cabinet of Ministers or the NBU will allocate funds for all this.

E-hryvnia also creates risks for the banking system, distrust of which has always been high among Ukrainian citizens throughout the years of Independence. The monopoly issue of the digital hryvnia will enable the NBU to introduce ad-hoc lending and to accept deposits in E-hryvnia directly, bypassing commercial banks. This will significantly reduce interest income and the flow of cheap resources for the latter. This might not happen, but NBU might receive such a tool and might be able to use it at any time. Due to a higher level of trust in the National Bank of Ukraine than in commercial banks, citizens will begin to invest their savings in the E-hryvnia instead of traditional bank deposits. Such a scenario creates additional risks for commercial banks, which may face falling revenue, liquidity deficit, and lack of working capital.

It is worth mentioning that there are some appropriate use cases for digital hryvnia. 

First of all, it is an efficient tool for targeted social payments, subsidies, or assistance to the poor (G2P). Non-targeted use of funds received with E-hryvnia would be impossible.

Secondly, e-hryvnia is an effective tool for fighting corruption inside state bodies. It is necessary to make all payments to state officials in E-hryvnia and monitor all transactions. The public nature of blockchain would make the transactional reporting of government officials truly transparent, and would greatly simplify the work of law enforcement agencies.

Third use case - e-hryvnia is a tool for corporate payments of legal entities (B2B) related to government tenders. E-hryvnia would then be an ideal addition to the ProZorro public procurement system. After winning a state tender, Contractors would be able to spend the received funds transparently. This would be another blow to corruption and to the practice of kickbacks.

All other use cases have much fewer prospects to be implemented. NBU should listen to people and comprehensively take into account the interests and needs of market participants and potential users so that E-hryvnia does not become another stillborn project like the national payment system "Prostir".