Kazakhstan and the ECB: crypto news for the CBDCs

All the latest crypto news concerning CBDCs: Central Bank Digital Currencies, digital currencies issued by a central bank instead of a commercial bank. Apparently, there are two opposing sides. 

On one side is the European Central Bank, which is taking a step backward regarding the use of blockchain technology. On the other hand, there’s the Central Bank of Kazakhstan, which recommends a phased implementation of CBDC between 2023 and 2025. 

A central bank digital currency, or CBDC, is a digital version of a region’s fiat currency issued by the region’s monetary authority. Some countries have acted faster than others toward their own native digital currency. China, for example, has moved quickly toward the prospect of its own CBDC, called a digital yuan.

CBDCs differ from crypto-native stablecoins issued by entities in the cryptocurrency industry. Indeed, such stablecoins aim to track the value of underlying assets, such as the US dollar, although the stablecoins themselves are not official regional currencies and are often supervised by corporations.

Crypto news for CBDCs: ECB unsure about blockchain technology 

The news is also reported on Whale Chart’s Twitter account, which reads: 

BREAKING: The European Central Bank is not sure if they will use blockchain technology for digital Euro.

— whalechart.org 🐳 (@WhaleChart) December 22, 2022

Therefore, the ECB is continuing its investigation into the digital euro with more parts of the potential system being compiled, but no commitment has been made to blockchain technology or the issuance.

The European Central Bank (ECB) has documented its status decisions in a second report, which describes the design and deployment options recently approved by its Governing Council.

The report considers four crucial issues, more or less in line with the timeline the ECB has set for itself. This tentatively culminates in a decision on whether to move from the investigation phase to the construction phase in the third quarter of 2023.

The report outlines the roles of the Eurosystem and intermediaries. In particular, it states that supervised intermediaries would be responsible for all management and user relations roles in the system. 

The central banks that make up the Eurosystem would verify and record transactions, correct errors in that process and take responsibility for their accuracy. However, the digital euro would be designed to minimize the Eurosystem’s involvement in processing user data, according to the report.

Offline peer-to-peer transactions with validated digital euros could be settled in a digital storage device and then verified and recorded through secure elements in hardware devices.

In addition, in January 2023, the ECB will invite new market entrants to participate in research to obtain an overview of options for the technical design of possible CBDC digital euro components and services. 

In any case, the ECB is not currently engaged in blockchain technology, the report states:

“The Eurosystem could rely on traditional technology, distributed ledger technology or a combination of both for settlement activities. The Eurosystem has not yet taken a decision on the most suitable technology for a digital euro.”

Funding and defunding, conversion of money to and from the digital form, should include mechanisms to handle transactions that exceed the limits set on digital currency accounts, with automatic access to holders’ bank accounts.

Fair distribution of the digital euro, the report says, would require a set of pan-euro rules, standards and procedures forming a scheme. Specifically, the goal of the scheme reported in the paper will be: 

“Payment in digital euros should always be an option, regardless of the entity with which end users open euro accounts or digital wallets and their country of origin.”

More news for crypto CBDCs: Kazakhstan’s decisions 

In the latest news, we learn that the central bank of Kazakhstan has recommended making the domestic CBDC available as early as 2023, with a gradual expansion of functionality and introduction into commercial operations until the end of 2025.

Kazakhstan, the world’s third largest Bitcoin mining hub after the United States and China, has found motivation in launching its internal Central Bank Digital Currency (CBDC), a digital tenge. The National Bank of Kazakhstan (NBK) revealed the result after the completion of the second phase of testing. 

In late October, the CEO of Binance, Changpeng “CZ” Zhao, announced that Kazakhstan’s CBDC would be integrated with BNB Chain, a blockchain created by the cryptocurrency exchange. The country’s main motivation for conducting studies on the CBDC was to test its potential to improve financial inclusion, promote competition and innovation in the payments industry, and increase the nation’s global competitiveness.

The pilot research focused on offline payments and programmability, recommending the inclusion of market participants and infrastructure players for different scenarios. It also proposed clarifying language to be used by the country’s regulators. 

The latest research paper cemented Kazakhstan’s intention to implement the digital tenge, as the report cites: 

“Taking into account the need for technological improvements, infrastructure preparation, development of an operating model and regulatory framework, it is recommended to ensure a phased implementation over three years.”

In addition, as many Russians have crossed the border to neighboring countries amid war-related uncertainties, Kazakhstan has announced to legalize a mechanism to convert cryptocurrencies into cash. 

President Kassym-Jomart Tokayev, during a speech at the Digital Bridge 2022 international forum, said on the subject:

“We are ready to go further. If this financial instrument will show its further relevance and safety, it will certainly receive full legal recognition.”

The 2023 forecast for crypto CBDCs

Despite the widespread enthusiasm among governments and central banks, the adoption of existing digital currency projects is not so rapid; quite the contrary, the whole thing seems to be surrounded by great uncertainty. 

In fact, there are several barriers to adoption that work against CBDCs. As the International Monetary Fund (IMF) states in its paper on instant payments, from a consumer perspective, there is little difference between instant payment systems and CBDCs, as both are fast, backed by the central government, and free.

Therefore, CBDCs must provide tangible benefits for users to switch from one already functioning system to another. For example, India’s e-rupee plans to target those without bank accounts, unlike UPI, which allows bank-to-bank transfers. In addition, UPI does not allow cross-border transactions, but CBDCs can potentially address this issue once a global standard is established.

In any case, it seems there will be large-scale incentives and marketing campaigns to increase CBDC adoption. These could range from free money and tax benefits to fee waivers on foreign transactions and public sector salaries paid with CBDCs.

However, in countries with more restrictive financial laws, the incentive could have a very different outcome, sometimes violating basic human rights. For example, Nigeria plans to ban ATM cash withdrawals above $225 per week, with higher amounts carrying a 5% processing fee. 

This is a clear attempt to reinforce Nigeria’s cashless policy and the lackluster adoption of its CBDC, the eNaira, which has an adoption rate of only about 0.5% relative to the country’s population. 

Hence, everything points to the fact that although some experts believe that CBDCs are the future of money, the transition to CBDCs will be slow and, most likely, partial. And that is if CBDCs achieve the necessary success. 

However, according to a report by the Bank for International Settlements (BIS), CBDCs could find a use case in facilitating cross-border payments and improving limited bank opening hours and long transaction chains.