On Monday, January 6, the Ukrainian Ministry of Digital Transformation signed an agreement with the Stellar Development Foundation. This agreement, signed with the non-profit organization that supports the creation of the Stellar network, aims to create a “virtual asset ecosystem and Ukrainian national digital currency”. Stellar and the Ukrainian government should work hand in hand to define a strategy for issuing and developing digital currencies. In addition, we now know that the digital version of the hryvnia, the national currency of Ukraine, will be based on the Stellar blockchain, with many advantages for central banks.
At the beginning of December, Stellar, founded in 2014 by the co-founder of Ripple, was selected by the German bank Bankhaus von der Heydt (BVDH) as a means of issuing a euro-backed stable coin, the first of its kind. The German supervisory authority BaFIN has issued symbol bonds to Stellar Already approved. The latter is attracting more and more cryptocurrencies, as the USDC stablecoin from Coinbase and Circle was also used there last October. Assets that strengthen the project so much that it attracts central banks like Ukraine.
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The executive director of the Stellar Development Foundation, Denelle Dixon, has argued that the partnership with the Ukrainian government and other stakeholders to digitize the hryvnia will officially start in January 2021. However, Ukraine has been calm so far. Working on digital currency without attracting the light of the international media.
A land before blockchain technologies
It must be said that cryptocurrencies, assets that are different from a central bank digital currency, are relatively common there. The Global Crypto Adoption Index, a ranking compiled by Chainanalysis that shows trends in the adoption of cryptocurrencies, came in first ahead of Russia, Venezuela and even China. The population of 42 million is highly technophile and is leading young people to consider alternatives given the current unstable economy. Against the backdrop of endemic corruption and oligarchy, Ukraine is therefore the perfect ground for cryptocurrencies to flourish. A situation that, like many countries interested in MNBC, is synonymous with a threat to the monetary sovereignty of the state.
The country’s attraction to cryptocurrency has many common causes for the government’s work on central bank money. The presence of a large community of blockchain developers and technology experts, rather strict regulation of foreign currencies that complicates and increases the cost of import / export, but also the lack of a stock market and the instability of the national currency: the hryvnia. In terms of this instability, it could be one of the main reasons behind the development of an official Ukrainian digital currency.
Indeed, the national situation is tense. Between the health crisis, the political crisis and the economic crisis, the country finds itself in a strange indolence. It is often said of him that the need for reform is blocked by the basic problem of corruption in a country led by a former president. Without forgetting that the conflict in Donbass is still active and that the economy is highly dependent on the help of the International Monetary Fund (IMF). Technology, one of the sectors in which young Ukrainians are increasingly being trained, would therefore be a good way to counteract this inertia in several sectors. In addition, a digital currency could make it possible to update the current currency, which is very unstable and is increasingly falling victim to a task for cryptocurrencies.
Ukrainian MNBC ready to go
Remember that central bank digital currency (MNBC) is currency that is issued by a central bank, but in digital form. It has the same value as fiat currency (in the form of coins and banknotes) but doesn’t look like it physically. Just as it is to be distinguished from coins and banknotes, the MNBC is to be distinguished from cryptocurrencies. In contrast to them, the MNBC uses “Centralized Ledger Technologies”. This means that the blockchain is centralized and allows a specific entity to control transactions.
We first recognize a blockchain by the fact that it operates without a central control point, but MNBCs have messed up the paradigm a bit. Centrally or decentrally, it consists of cryptographically secured blocks that are structured by links with one another at regular time intervals. Each block in this chain is a transaction that is executed, recorded, and dated. We recognize an MNBC by the fact that it does not allow any user to review and control these blocks. He gives this role to the entity that issues him: the central bank or an entity delegated by it.
In the case of Ukraine, the country’s national bank mentioned the use of a “private version of the Stellar blockchain” in 2019, which would amount to privatizing and centralizing the respective technology. According to Stellar COO, Jason Chlipala, Stellar’s consensus mechanism would give issuers unique certainties that they would not have with other public blockchains (like issuer-imposed finality). He writes to Coindesk: “Stellar would serve a central bank well, reflecting the trusting relationships it would maintain and ultimately giving it a meaningful vote in consensus minutes.”
Now that the foundation of the Ukrainian MNBC is established, its shape has yet to be defined. Some raise the possibility of a token based on the stablecoin model recently introduced by one of the oldest banks in Europe, Bankhaus von der Heydt (BVDH).
Like Ukraine, many countries around the world are working on their central bank digital currencies. We often talk about China’s digital yuan project, which shows its progress and ambitions for digitalizing its economy on a daily basis. Europe itself is working on its digital euro and launched a three-month consultation phase in October that should lead to a resumption of research and experiments in 2021.