E-hryvnia: what prospects for a new form of Ukrainian money?
At the official level, the issue of the electronic hryvnia is discussed at least since the spring of 2021. The National Bank presented a development strategy for the next 4 years, where the formation of digital finance and digitalization of the economy is one of the strategic directions. There are several reasons for prioritizing the direction: reducing the cost of maintaining the system, reliability and low transaction fees, the speed of payment, and so on.
E- hryvnia is a digital currency based on blockchain technology, pegged to the current hryvnia exchange rate at a ratio of 1:1. For Ukrainian e-money, the decentralized platform Stellar is expected to be used. At the same time, transactions will be carried out using a digital currency management system Bitt. The pilot project with the analog of the Ukrainian electronic currency was launched under the supervision of the National Bank and the Ministry of Digital Transformation.
As part of the trial, it is planned to test the mechanism for paying salaries to some employees of ministries and the efficiency of money transfers within the system. In the course of the experiment, the analog of e-hryvnia is used, as only the NBU has the right to emit the national currency. If launched, the digital hryvnia will be in use along with cash and non-cash money. According to the monetary policy of the NBU, the production of Ukrainian CBDC will be controlled to avoid unplanned devaluation of the hryvnia.
Director of the Department of Payment Systems and Innovative Development of the NBU announced several options for the use of digital currency in Ukraine:
- As a method of payment for retail goods. In this case, it refers to transactions for goods and services between users or users and individuals. But on the other hand, the sphere of contactless payments and transfers is expanding year by year. The feasibility of digital currency is being questioned. But electronic money or a wallet can be programmed for certain payments. For example, only to pay for certain services or goods, as was done with the state program “e-aid”.
- The purchase of virtual goods and services. This is a huge market, which amounts to at least $950 billion. For the same reason, central banks in many countries are now actively engaged in the creation of their electronic currencies. It should also be clarified that CBDC is not considered a virtual asset, but another form of fiat money.
- Making cross-border payments. This method provides lower commissions due to the reduction of intermediaries in the transfer of money. This scenario is mainly used to transfer funds from one user to another. In Ukraine, it may be quite a demand, as our citizens make frequent transfers from abroad to their homes.
In addition to the obvious benefits of digital currency introduction, there is another point of view. Josh Younger, a strategist at JP Morgan, believes that the release of digital money could lead to a 20–30% reduction in financial flows to commercial banks. He attributes this to the fact that users will prefer to keep their money in digital currency. Thus, some banks will not have enough currency in circulation for lending and granting mortgages. The way out could be to limit the amount of money that can be held in the form of CBDC. In this way, a balance in the banking system can be achieved while introducing digital currency.
Keep in mind that a “pilot project” does not mean a 100 percent launch. The government still has time until 2024 to decide whether launching its own digital currency will be relevant. This year, Ukraine has been consulting on the implementation of CBDC, as the Lithuanian central bank already has experience in issuing LBCOIN.