Dear colleagues and guests,
It is my great honor to welcome you to this conference, which is dedicated to new opportunities that central bank digital currencies offer. I am especially pleased that the NBU will share the stage with central bankers from ten countries and with representatives of international organizations and the Ukrainian payment market.
Dear colleagues from central banks, let me congratulate us separately, because we are the pioneers of central bank digital currencies. Our knowledge of them comes from experience, not theory. Central banks are perceived as rather bureaucratic, conservative institutions that take a cautious approach to new things. But our joint experience in digital currencies proves that central banks are modern institutions that are willing to explore modern technologies and ready to keep up with the times.
The emergence of digital money in addition to paper money comes as a natural step in the evolution of money in the modern world. The use of cash has been declining in many countries, including Ukraine. Thanks to FinTech, there are increasingly more ways to make electronic payments without using payment cards and banking services. And the second wave of cryptocurrency creation by private players – which is the arrival of stablecoins – gives regulators no time to rest.
In these circumstances, central banks have to look for ways to retain their leadership in the payment system in order to ensure that the public has access to central bank money. In so doing, central banks should take care not to interfere with the development of innovations in the financial sector. It comes as no surprise that, every year, central banks are increasingly looking into the possibility of introducing their own digital currencies – some in theory, and some in practice, like we in Ukraine.
According to the Bank of International Settlements, 80% of the world’s central banks today are working on digital currency in some form or shape. And half of them have already gone from research to experiments. One in ten central banks will likely issue its own digital currency for the public to use in the next three years.
Digital currency enthusiasts are saying that it promotes financial inclusion, makes financial services more accessible, and reduces the time and cost of payments.
Digital currency can strengthen public confidence in central banks and financial services, because, unlike bank accounts, central bank money is completely risk-free and 100% guaranteed by the government. In other words, it is both convenient and reliable.
In addition, digital currency can help reduce the amount of paper money in circulation. For many countries, this is an urgent task, since shadow economies often thrive on paper money, not to mention the high cost of printing, servicing, transporting, storing, and recycling it. For Ukraine, these issues are also quite relevant.
On the other hand, pessimistic central bankers are worried about how digital currency can affect the monetary policy transmission mechanism, specifically its ability to influence the value of money in the economy and – ultimately – inflation.
In addition, the use of digital currency comes with inevitable risks:
- Different central banks are thinking of creating digital currencies based on different technologies. However, both blockchain and other types of distributed ledger technology are still far from perfect, as are other platforms that can be used by central banks. And no technology is immune to disruptions, such as a system malfunction or lack of internet access.
- General purpose central bank digital currencies have the potential to revolutionize the banking system landscape. For people, it is actually like having an account directly with a central bank. This means that the banking system may cease to be a major financial intermediary if most people switch to using central bank digital currencies instead of cash and bank accounts. On the one hand, the level of inflation in the country will not be significantly affected, as digital currencies will be issued by central banks, which will control this process.
- That being said, there are certain risks to financial stability, because in adverse scenarios, clients’ funds may flow from their bank accounts into central bank digital currencies. That is to say, it could potentially create liquidity problems for banks or the banking system as a whole.
However, after weighing all pros and cons, we at the NBU decided to get a feel for this technology, so to speak, in order to gain invaluable customer experience.
So, four years ago, we took a proactive stance and started to explore the possibility of issuing our own digital currency – the electronic hryvnia or the e-hryvnia. We launched this pilot project in 2018. It took us six months to prepare, and another six month to conduct the active stage and to process the results.
Within the pilot project, the e-hryvnia was clearly defined and had a specific use. We treated it as a domestic currency that had the same value as cash or cashless money and that served as a means of payment rather than a store of value. We issued a very limited amount of e-hryvnias – just over five thousand. The whole e-hryvnia issue was included in M0, a monetary aggregate that means cash in circulation outside banks.
During the pilot project, we learned everything we wanted to learn about how to launch and operate a central bank digital currency:
- We tested the underlying technology behind the e-hryvnia. As part of that test, we analyzed how distributed ledgers performed in terms of facilitating the issuance and circulation of digital currency.
- We set up a temporary methodological framework for the e-hryvnia that included provisional rules and regulations.
- We built a temporary accounting model for the operation of digital currency.
- We also conducted studies on a number of topics, from the possible impact on macroeconomic stability to the legal aspects of the e-hryvnia’s issuance and circulation.
We proved that we had the ability to implement rather complex technological projects, which surely is no small accomplishment and which brings me great joy. My gratitude goes out to the NBU team and our partners that volunteered to join the project.
In the year 2020, dear colleagues, the existence of digital currency is beyond question. Digital currencies are a fact of life. The only question that remains is who will do it, and when. But first things first. Each of us central bankers has to decide whether to identify themselves as digital currency enthusiasts or digital currency skeptics. Our event today is a platform that will enrich the participants of this dialogue with the knowledge and understanding of all pitfalls and advantages of central bank digital currencies and that will help them decide which side to take.
We want our guests to have a clear understanding of how digital currency is used in the world. It is important that they be able to answer the question, “Does my country need digital currency, and do I need digital currency?”
Speaking of Ukraine, I must say that although we have completed the pilot project, we continue to take active interest in implementing such innovative solutions. We continue to look into the chance of issuing the e-hryvnia, and we will be ready to return to this matter when we are convinced that not only can it be technologically feasible, but also that it will not interfere with the pursuit of our mandate as a central bank, which is to ensure price and financial stability.
Finally, I would also like to thank the co-organizers of this conference: the USAID Financial Sector Transformation Project, the International Financial Corporation, the International Monetary Fund, and the World Bank. Dear colleagues, without your support and cooperation, this event would not have taken place. You are our reliable partners on a path of reform and change.
I wish all of you interesting ideas and wisdom. Let your insights into the future of digital currency pave the way to an innovative future.
Thank you.