Digital National Currencies or CBDC (Central Bank Digital Currency) is an electronic format currency that is issued based on blockchain and centralized registries.

The massive, sustained, approved, recognized and tested penetration of cryptocurrency and blockchain technology into the lives of citizens around the world has created the need for central banks to launch digital currencies. Blockchain technology itself provides opportunities to build similar models, only with a centralized issue of money, creating transparency and capturing the flow of cash. It is important to understand that 80% of non-cash payments in Kazakhstan are P2P transfers, not acquiring in its pure form. Central banks have no other way but to build a digital currency. This is a logical business model for the use of technology, trends and protection of the national currency. But before we talk about the digital tenge, let's take a quick look around the world - what's happening with digital currency out there.

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Digital currency in the world

The first digital money appeared in the Czech Republic. The I LIKE Q project allowed microtransactions online with virtual currency Q. The fixed conversion rate was 100 Q = 1 Czech crown. In 2003 there was an amendment to Czech law and the project was shut down. But in 2021 the same group of developers, led by Pepe Rafage, presented a new project Corrency with Drone Money.

Sweden's attempt to implement CBDC failed as well - in 2020, the Riksbank began testing. The regulator found several critical problems, so the e-crone has not yet been implemented.

The first digital currency to be adopted in a major economy is the Chinese digital yuan. China actively began to develop CBDC in 2014, and launched it safely in June 2021. The digital yuan is now used by 250 million people in 15 Chinese provinces.

Nigeria has become one of the leading countries in the use of bitcoin (despite nuances and resistance from local authorities). On November 25, 2021, the central bank's digital currency eNaira was launched, the first digital currency on the African continent that no one was using. So on January 9, 2023, the Nigerian government restricted ATM cash withdrawals to force the population to use eNaira.

India began using the e-Rupee digital rupee on December 1, 2022 - it is already accepted in retail stores.

To date, four countries in the world have introduced digital currencies - the Eastern Caribbean Islands, Nigeria, the Bahamas and Jamaica. Another 29 central banks, including the Central Bank of Kazakhstan, are in the piloting and development phase.

All countries are developing based on their own characteristics. For example, Kazakhstan has a strong GovTech. And, thanks to this, there are unique banking products: digital mortgages, digital car loans and others. What is important: there are no such products anywhere else in the world. It is quite possible that we will become the first country to effectively implement digital currency, second-tier banks will find new business models, and citizens will receive new convenient means of payment.

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Digital tenge

Digital tenge is based on blockchain technology, but it is not a cryptocurrency. Issue of digital tenge must be centralized - only the National Bank can produce it. Here they use closed blockchain technology - private blockchain, which does not allow other users to emit digital tenge.

In 2021, the National Bank of Kazakhstan together with other financial market participants and international partners created a pilot project "Digital Tenge". As in any pilot, basic functions were tested - issuance, distribution, purchases and transfers. In general, all the same actions that occur with ordinary currency.

The pilot confirmed its validity, and amendments and refinements were issued. And in 2022, a global study of the benefits and costs of implementation began.

They even organized the Digital Tenge Hub, a collaborative platform for all interested parties. Tests and surveys were conducted there, according to the results of which 60% of respondents were ready to put digital tenge into circulation.

The National Bank assures that the implementation of digital tenge will end by 2025 and will be used everywhere - as a legal means of payment. In terms of payment technologies, many familiar options will be available. Of the innovations, offline payment (payment with a cell phone, but without an Internet connection) will be available. Digital currency will be integrated into the existing payment infrastructure. A new icon "digital wallet" will simply appear in the banking application. This is where the conversion will take place.

With the launch of digital tenge cash and non-cash money will remain in circulation.

1 digital tenge = 1 tenge in cash or non-cash. People will be free to convert from digital to non-cash or cash as they wish.

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What does it mean for residents of Kazakhstan

There are several hypotheses of digital tenge usage - from possibility of off-line payments to clean transactions between legal entities. But only combat pilots will show the demand for electronic money. The example of Nigeria, with the restriction of cash withdrawals from ATMs to give impetus to the development of CBDC, is indicative - how not to. The main thing is that we follow the evolutionary path and not chase the figures for the report.

Citizens will be able to keep some of their money under a national bank guarantee, since the issuer will be the NBK. Yes, there will be no interest accrual on balances, but initially it will be possible to keep some of the funds under the umbrella of the state.

For the second-tier banks, too, there are risks - the outflow of liquidity at the expense of state and quasi-state companies. They, in any case, must keep their funds in bank accounts at a zero rate, so it will be easier for them to transfer funds to a first-tier bank, having converted some balances into digital tenge.

Probably, all state duties and payments will also be converted into digital tenge.

How will it affect businessmen? With the introduction of a single QR for merchants, there will be one POS-terminal, and acquiring will take place through the MPS, where the client will pay with digital tenge for a product or service. Thus, the MPS will not be involved in the transaction as an issuer or acquirer. Probably, the commission for such operation will be close to zero. Now the average commission is 2.5-3%.

There should be no difficulties with technical implementation. Now, for example, all banks are practically integrated into SMP (Instant Payments System). A few more banks, and transfers by phone number in BVU (second-tier banks) will work fully. The main thing is that all market players are in the same conditions, and will be integrated. Second-tier banks will be operators of digital currency, mobile applications are often released, so it will not be difficult to add another wallet for currency.

The legal framework for the use of digital tenge is still in the works. There are many questions about limits and restrictions. The same offline payments - is it necessary to synchronize them with the registry as soon as the Internet is available, and to update all balances? How will digital tenge compete with QR payments and P2P transfers? Will there be plastic or digital card coverage? Is there an option for each bank to have a wallet with a single ID and balances? How will funds be transferred through digital wallets between banks? This is not the whole list of questions, which are yet to be answered. And so we still have a decent way to go.