Cashless Ukraine: The National Bank Considers Blockchain Technology

News and Analysis

Recent statements from the National Bank of Ukraine signify the regulator’s intent to use blockchain technology in their Cashless Economy project.

Today Ukraine boasts one of the most active blockchain communities in Europe, which thanks to both positive attitude of local authorities and several initiatives. There are several reformation projects seeking to implement blockchain in public services, with Auction 3.0 created by Distributed Lab and Innovation and Development Foundation being the most notable expample. Another successful initiative is e-Vox:NaRada, a blockchain service that had recently won the e-democracy contest EGAP Challenge held by Ukraine’s State Agency for Electronic Governance.

Local banks also get on board of cryptotechnologies: last year PrivatBank added bitcoin option for online payments, and later on Sender messenger complete with message encryption and bitcoin payments option was launched.

Last month Ukrainian banker Sergey Fedotov has announced a blockchain-based payment platform. According to Fedotov, the system would be integrated in the National Bank’s Prostir system in full compliance with the national laws. The platform’s open source code is being developed by Attic Lab.

And it looks like the National Bank of Ukraine tries to keep up with the industry’s development trends. Whereas a year ago the regulator discussed theoretical possibility of bitcoin integration, this last September the National Bank has officially declared that it would support fintech development in Ukraine.

What Happened?

The news that the NBU intends to use distributed technologies came as a surprise. Furthermore, recently it was announced that blockchain could be a part of a major project titled Cashless Economy, according to Serhii Shatskyi, the NBU’s director for payments and innovations, who spoke at the roundtable September 16th.

Serhii Shatskyi, the NBU's director for payments and innovations

Serhii Shatskyi, the NBU’s director for payments and innovations

“The National Bank aspires to help the Ukrainian payments market to become mostly cashless. Modern-day financial technologies may be of help here. On our side, we study the solutions capable of facilitating settlements for citizens, and small and medium businesses. Those may be cloud technologies, mobile payments and QR codes to pay for goods and services, and blockchain-based solutions that has every chance to prove viable in payments,” the official said.

Additionally, the NBU has voiced its support to the parliamentary initiative of facilitating cash settlements for entrepreneurs. Commenting the relevant draft bill, Shatskyi noted:

“Passing this bill will enable entrepreneurs to cut their expenses and facilitate acceptance of online payments. A new type of registrars, namely distributed computer cashier systems, would maintain continuity of fiscal data at a central fiscal server thus allowing businesses to use regular distributed devices like tablets, smartphones, laptops and desktops as terminals. Digital signature of each receipt would maintain immutability of data.”

What NBU says

ForkLog contacted the regulator’s press office to find out more how exactly the National Bank intends to use blockchain technology.

“The NBU, like other central banks, concedes the hypothetical possibility of creating its own issuance/turnover/servicing system for a blockchain-based national monetary unit. Currently we are analyzing the possibility of building a well-protected efficient and flexible system meeting the requirements of the national payments market and solving the issues in local cashless turnover. The NBU is also studying a software suite that would enable us to set up a centralized issuance and distribution of a national cryptocurrency. Such a solution would allow us to build a centralized, transparent and highly efficient retail payment system controlled by the NBU, with close to zero transaction fees for counterparties and almost instant remittances for the system’s participants,” the regulator responded.

The NBU’s press office has also pointed to the recent comment of Valeria Gontareva, the head of the Central Bank, regarding possible options of using distributed technologies.

“There’s that revolutionary idea of using blockchain technology in order to use e-money instead of real money to pay out subsidies currently transacted between ministries. There are plenty of progressive ideas we are working on. The banking community is one step ahead, and it supports us. As for other authorities, hopefully, they’ll support us as well,” said Valeria Gontareva.

According to Sergey Vasilchiuk, CEO of Kyiv-based blockchain startup Attic Lab, all of this indicates the regulator is indeed considering implementing blockchain technology. However, the authorities are not ready to reveal their plans.

“It’s absolutely clear the NBU realizes the HR potential of Ukraine’s blockchain community, and uses its support to get ready for the inevitable: creating value on the blockchain, or even a national cryptocurrency,” the expert said.

Anyhow, the roadmap for development of cashless payments will soon go public. The regulator’s press office commented:

“The NBU’s board plans to discuss the conceptual vision and possible complex solutions for blockchain implementation with representatives for Ukrainian payments market and blockchain community.”

Legal opinion

ForkLog asked Vladislav Likhuta, the lawyer at Axon Partners and the editorial board’s legal expert, to analyze the underlying reasons for such a trend.

Vladislav Likhuta, lawyer at Axon Partners

“September 2, hryvnia [Ukraine’s national currency – ForkLog] turned twenty. Its appearance changed several times over those years, while the currency itself had had numerous ups and downs. It merely recovered from the recent events when the NBU announced new trials: this time, not a floating exchange rate or pricing stability, but blockchain.

The NBU’s first statement in regard of cryptocurrency came out November 2014. Therein, the regulator defined bitcoin as a money surrogate and recommended using only those services listed on the relevant register. Having announced possible creation of a centralized blockchain-based system, the NBU has apparently gone ex contrario and decided to provide an alternative for distributed systems.

Using decentralized technologies to build a centralized system is a hackneyed yet burning issue. At this stage, it looks more like cryptographically protected e-money David Chome spoke of back in the eighties, rather than a revolutionary solution.

Anyway, it’s hard to speak of any particular moves towards legal establishment of blockchain technology’s nationwide acceptance. The draft bill 4117 “On Introduction of Amendments to Some Laws of Ukraine as to Liberalization of Cash Settlements” does not directly imply such a thing.

One may be sure, however, that the NBU is actively engaged in studying the potential of decentralized technologies. Its stance has dramatically changed over those two years. Hopefully, it’s not a promotion campaign of some kind, and there will be actual deeds afterwards.”

What to Expect?

Nobody knows for sure what will be eventually presented, and when. However, the regulator’s response gives room to assumptions that it could be a blockchain-based payment system. And since it is the state that has originated the idea, one may assume that the system will have some properties similar to the those below:

  1. Centralized Issuance. The system is most likely to have its own tokens pegged to the national currency. The NBU will be the sole issuer of those, and the issuance itself will be “manual.”
  2. Transactions recorded by accredited nodes. Obviously, the anonymity issue is not on the table, however, complete centralization is equally unlikely. The National Bank could do all the job, but then the system would have lost all its flexibility rendering while blockchain would be futile in this regard. Most likely, there will be a limited number of nodes meeting the NBU’s requirements. In particular, it could be government entities, like tax service or state treasury, and banks entitled to receive a fee for their services. The resulting infrastructure would then somehow resemble the existing notariate system where private notaries work on par with the government-backed lawyers.
  3. Partial pseudonymity. Only those having a digital signature or a Bank ID (both of which imply prior identification) will be eligible to create a wallet. For that reason, anonymity is not on the table at all. However, one may assume that the true identities of users will be available only to the government entities. Thus, the system will be pseudonymous, meaning that public access to the participants’ details will be restricted.
  4. Verifiability of transactions. Will the information on transactions themselves be available to the public? There’s no definite answer to this. Anyway, the system will have an option of verifying a transaction with its number.
  5. Multisig consensus. Certainly, there is not too much need in PoW or PoS if the validators have to be licensed. In the simplest case, confirmation of a payment would require just a multisig from the validator and the transaction’s originator. There is a risk, however, that there might be some variation on PoS with a “security” of some sort from those willing to act as validators. This may result in raising the entry threshold. Another possible problem is artificial narrowing of possible participants. For instance, if only banks are entitled to validate transactions, any other player will have no such option. The National Bank would have to attract as much potential validators as possible to maintain competition, otherwise the chances of the system’s misusing would skyrocket, the quality will drop, and the prices will rise. Finally, there is a Lightning Network’s project for bitcoin which allows counterparties to use validators only from time to time while mostly transacting in a p2p manner.

The National Bank believes that implementing modern-day forms of cashless settlements on a massive scale would enable people to save their money. However, according to the regulator’s statements, the transition will be voluntary. This would cause honest players to join the system in the first place, as it would imply the possibility of inspections by relevant authorities.

Notably, transparency of transactions and anonymity of users entails the issues of contradiction between bureaucracy and regular people. The latter are concerned with privacy issues and want to know how the taxes they pay are used. The former, on the other hand, tends to violate the privacy and conceal its corruption. Both approaches have their disadvantages. Full transparency would destroy privacy, while complete closedness of data makes corruption way more likely.

Still, massive adoption of a blockchain-based national payments system may usher both total surveillance and removal of unnecessary control. Technically, the system could rearrange taxation in an anonymous manner: the state, knowing one’s profits, doesn’t have to know their origin in order to calculate the tax. Thus, a tax service would be engaged only in tax issues leaving AML problems to law enforcement.

Eugene Muratov

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