– Active in the introduction of digital tenge due to increased demand for cash alternatives and digitalization of the financial system –
– Preparing and preparing a test project plan for the introduction of digital tenge –
As the COVID-1919 situation has been prolonged and the digital transformation has accelerated worldwide, interest in the transition to a cashless society and virtual currency has increased more than ever. Digital currency (CBDC, Central Bank Digital Currency) is a form of currency issued by a central bank that implements real currency in digital form and can be exchanged on a one-to-one basis with the country's legal tender. While private cryptocurrencies such as Bitcoin have large value fluctuations and are difficult to use as a means of payment or unit of account, digital currency is managed directly by the central bank, so it has little value fluctuation like cash and is recognized as legal tender.
Recently, central banks of major countries, including the US, China, and the EU, have been active in introducing digital currencies. China, at the forefront of digital currency commercialization, is the first in the world to experiment with digital yuan circulation, and 80% of central banks around the world, including the US and EU, are participating in research and development for the introduction of digital currency or are considering issuance.
Kazakhstan is also very active in introducing digital currencies as demand for cash alternatives is increasing and digitization of the financial system is developing rapidly. Kazakhstan has already entered the era of cashless payments. As of November 2020, 4540 million payment cards are in circulation, with 3790 million card holders (including duplicates) (Kazakhstan's total population is 1894 million). In the 2020 months from January 1, the amount of non-cash payments increased 10 times year-on-year to 2.5 trillion tenge (approximately $26 billion). Over the past five years, the volume of non-cash payments has doubled on average every year.
Non-cash payment volume by year (2015-2020)
(Unit: trillion tenge)
Recent Trends in Digital Tenge (the monetary unit of Kazakhstan)
The Central Bank of Kazakhstan is participating in research work related to the introduction of CBDCs with 28 central banks of major countries, and is also studying approaches to digital currency regulation with the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). In addition, it is participating as an observer in pilot projects for the introduction of digital currencies in China, Canada, Singapore, and the EU.
The Central Bank of Kazakhstan is preparing a research report on various scenarios and visions for the introduction of digital tenge considering the current technology infrastructure situation and regulatory improvement methods, and the report is scheduled to be published in the second half of this year. Based on this report, the Central Bank of Kazakhstan announced that it will also promote a pilot project for the phased introduction of digital Tenge.
In addition, at the same time as the research work on the introduction of digital tenge, financial authorities and stakeholders are continuously discussing the test project. About 3 people attended the test project briefing held in the first half of this year, including the central bank, three commercial banks, the Kazakhstan Financial Technology Development Center, Accenture, a global technology consulting company, and R3 CEV, a platform provider. After that, three commercial banks officially decided to participate in the test project.
Plan a test project for the introduction of digital tenge
The Kazakh government plans to conduct sufficient prior research such as a test project before introducing digital tenge, and also announced specific standards and goals. Digital Tenge is not intended to replace cash or card payments, but will be used in parallel, and will focus on improving payment efficiency by improving the payment system and reducing the cash payment ratio without affecting financial soundness.
The Central Bank of Kazakhstan has revealed specific plans, including the development of a platform for a test project. While adhering to the digital tenge introduction principles and technology requirements, we decided on consumer accessibility, access design, and how the technology infrastructure was structured. We plan to develop a digital token for the test project, set '1 token = 1 tenge', and use the client-server model payment system.
Criteria for selecting options for each item for designing a digital tenge test project
Evaluation of the use of blockchain technology (token control – distribution of tokens through payment interfaces – anti-money laundering – token refund), evaluation of technical feasibility, and recommendations for settlement of digital tenge (online/offline payment – digital currency for payment) Developing various business scenario modeling) for using Therefore, during the test project, we will pay attention to cyber security, confidentiality of transactions, and anti-money laundering mechanisms, and plan to approach it in the form of discovering technical risk factors for real digital currency platform implementation and developing alternatives.
The impact of digital tenge on the market
The competitiveness of Kazakhstan's financial market will increase and competition in developing new payment services will increase. Central banks have no intention of offering payment services to end users or competing with existing market players, even if digital tenge is introduced. However, it is possible to ensure the development of a new payment service by utilizing a new mechanism. Through this, the payment service market can be expanded, giving opportunities to the fintech market, and the contactless payment service market can be expanded.
In addition, experts believe that non-cash payment methods will expand significantly. Although the non-cash payment ratio surged to 2020% in 67.4, there is still a large difference in the penetration rate by region due to population density, regional economic conditions, and differences in Internet access depending on whether or not communication lines are established. The government said that digital tenge, which allows payments without an internet connection, will be one of the key factors in bridging the digital divide between regions.
In addition, digital tengeization can serve as an opportunity to establish continuity in the national payment system that can cover all payment methods currently used, such as POS terminals, QR codes, and biometric technologies. Even if the payment method operated by private companies is not stable, digital tengeization will work smoothly as a national payment system.
The potential of digital tenge is clear in improving government payment and settlement efficiency. The 'smart contract' technology will increase the efficiency of the government procurement system, and it will be possible to control and monitor the beneficiaries receiving government compensation and pensions through a digital social wallet, which is one of the digital tenge usage scenarios. In addition, it is judged that the transparency of budget expenditure can be greatly improved.
The government of Kazakhstan believes that public trust in the issuing central bank is essential for the introduction of digital tenge. Currently, public interest in the digital tenge project is rather low, and the central bank plans to publicly share its progress and develop standards, rules and guidelines for risk management in order to gain public trust. The central bank also announced that it will pay particular attention to the protection of users' information when using digital tenge. As a result of the test project, detailed technical mechanisms and regulatory approaches will also be proposed to ensure the security of user data and maintain the confidentiality of payment information.
However, there are not only positive effects. In the international community, concerns are raised that digital currencies may cause an outflow of funds from commercial banks. It is predicted that a 'digital runaway' phenomenon may occur, judging that digital currency is safer than savings accounts at commercial banks during the economic crisis.
Implications and Prospects
Kazakhstan has undergone a new transformation in the past cash payment society with the introduction of a new online payment method by Kaspi Bank in 2020. Payment via QR code and one-click remittance between individuals was a revolution for the people of Kazakhstan. If digital currency that combines the efficiency and safety of digital payment methods is introduced in earnest, Kazakhstan's financial system will take another step forward.
According to the Bank for International Settlements (BIS), from 2017 to 18, central banks around the world were very negative about digital currencies, but these days, central banks around the world have changed their stance on the introduction of digital currencies. As of 2020, more than 80% of central banks worldwide are actively participating in CBDC research.
Experts predicted that Kazakhstan's digital tengeization would take at least three to four years from the completion of the test project to the actual introduction, including the establishment of a legal basis. In the future, when the introduction of digital currency in each country starts in earnest, currency barriers between countries will disappear and new changes will occur in transaction methods, which are expected to cause major changes in the global financial environment.
Source: kapital.kz, forbes.kz, Central Bank of Kazakhstan, KOTRA Almaty Trade Center