Blockchain represents a new phenomenon for central banks. It is an entirely novel methodology for how transactions are validated and how value is transferred between parties.
It is still unclear what role blockchain will play in central bank digital currency development. However, even if CBDCs eschew blockchain technology when they are first minted, there is a growing ecosystem of digital assets and tokenised value operating on distributed ledgers and permissionless blockchains that central banks cannot ignore.
To better understand blockchain technology, Magyar Nemzeti Bank has developed an innovative programme which allows them to use and experiment with blockchain technology in a live field environment.
Through non-fungible tokens, the MNB is issuing its own digital instrument on a private blockchain to exploit hands-on experience around the technology and set value parameters in the tokens themselves. By successfully participating in quizzes in the field of financial literacy, coin collectors and NFT enthusiasts in Hungary are being awarded central bank-issued tokens and then swapping and trading the NFTs on the Money Museum mobile application. This is part of a contest to win a set of limited edition commemorative coins. The successful participants can then register their ownership of the limited edition coins on the blockchain using a unique QR code that each product has on its packaging.
As any member of the public can use the blockchain to collect, swap and register their ownership of the coins, this type of activity – though gamified – has the advantage over creating a proof of concept environment, as the central bank’s ‘asset’ exists in the real world within an existing ecosystem.
Such an approach may well be described as a pilot ‘test and deploy’ approach. This is being copied by other central banks as user adoption becomes more important when considering CBDCs and the value proposition for public digital money more broadly.
Until recently, a ‘waterfall’ approach has been preferred by several central banks, where they consider the policy implications of a CBDC, invite private sector partners and advisers to help develop the concept, commit to testing a CBDC and then choose a technology provider to run a CBDC proof of concept. Such an incremental approach may seem logical, but often results in a logjam of circular policy discussions, and proofs of concept can miss entirely the end user value proposition.
A pilot test-and-deploy approach allows central banks to access existing ecosystems safely and assess how blockchain technology can operate within the central bank’s infrastructure. By having a private blockchain on Hyperledger fabric platform and issuing tokens to the public, the MNB is bringing users in from the beginning of the process.
Chris Ostrowski is Chief Executive Officer and Co-founder of Sovereign Official Digital Association and Anikó Szombati is Chief Digital Officer at Magyar Nemzeti Bank.