In Conversation with Binur Zhalenov of the National Payments Corporation of Kazakhstan

Posted on Oct 27, 2023 by Binur Zhalenov, Chief Executive Officer, Member of the Board, National Payments Corporation of Kazakhstan

On 15 November 1993, Kazakhstan introduced its national currency, the tenge. Thirty years later, the National Bank of Kazakhstan stands poised to begin implementing a new form of the national currency — the Digital Tenge — an innovation at the heart of Kazakhstan’s financial sector transformation. 

At this momentous juncture for the nation, Central Bank Payments News spoke to Binur Zhalenov, Chief Executive Officer of the National Payments Corporation of Kazakhstan, about the evolution and future of the Digital Tenge, its place within a broader digital revolution, and lessons Kazakhstan’s experience can offer other jurisdictions as they proceed with their own CBDC explorations.

CBPN: If you would, can you reflect a bit on the process to date of conceiving, developing, and implementing a Digital Tenge?

Binur Zhalenov: The journey of the Digital Tenge has been a meticulous and insightful one. The National Bank of Kazakhstan (NBK) began its exploration into central bank digital currency (CBDC) with the release of the “Digital Tenge” green paper in 2021. This initial step paved the way by laying down our core vision and the policy considerations, closely mirroring the global sentiment towards CBDCs — the goal of enhancing financial inclusion, upholding innovation, ensuring privacy, and setting the stage for tokenized asset settlements.

Following this foundational work, our 2021 Pilot Project played a pivotal role. It was designed to validate the feasibility of the Digital Tenge concept, especially through experimental verification of its retail platform built on distributed ledger technology. Through this endeavor, we delved deep into understanding the primary scenarios for the Digital Tenge, from issuance to utilization for purchases and transfers. The outcomes were promising, as not only was the technological feasibility of the Digital Tenge validated, but a roadmap for subsequent development and regulatory considerations was also laid out.

2022 was a year of rigorous research and strategic decision-making, wherein we benefited from globally recognized frameworks recommended by institutions like the IMF, WEF, and BIS. We devised a robust decision-making framework for the Digital Tenge. This holistic framework encompassed evaluations from various lenses — technological feasibility, economic implications, regulatory capabilities, and ecosystem development potential. The use of diverse tools, from pilot projects to economic modeling and stakeholder discussions, ensured a well-rounded and logical structure for decision-making.

One of the remarkable achievements was the real-world testing of the Digital Tenge platform with actual consumers and merchants. This comprehensive testing process, which included checking programmability and offline transactions, reaffirmed our confidence in the system. The broader community's response was also encouraging, with 60% of survey respondents showing a willingness to embrace the Digital Tenge.

The collaborative platform, Digital Tenge Hub, facilitated meaningful interactions, fostering design sessions and discussions with all stakeholders. We also leveraged the Digital Tenge Ideathon to crowdsource innovative ideas, reinforcing our commitment to inclusive development.

Finally, as we approached the end of 2022, our cumulative efforts, thorough research and intensive stakeholder engagements, culminated in a strategic decision to roll out the Digital Tenge in three deliberate phases by 2025.

In reflection, this process underscores the importance of comprehensive research, stakeholder engagement, and iterative testing in the development and implementation of a transformative financial tool like the Digital Tenge.

CBPN: We understand that very soon you’ll be heading into the first production phase of the Digital Tenge. Elaborate on what this phase is going to look like and who’s to be involved?

Binur Zhalenov: In 2023, we are indeed on the brink of a significant milestone, as we inaugurate the first phase of the Digital Tenge's implementation. This phase has been conceptualized with a vision to provide a streamlined platform for the issuance and distribution of the CBDC. For this ambitious venture, we've collaborated closely with second-tier banks to ensure that the Digital Tenge is not just another digital currency, but one that offers consumers an intuitive transaction experience.

Our dedication to offering a seamless user experience is evident in our partnership with global payment networks. This alliance is poised to bring forth an interoperability solution that will soon make Digital Tenge transactions feasible across diverse platforms. This means that consumers will be able to transact using Digital Tenge both online and at physical point-of-sale locations, extending its reach even to merchants who haven't onboarded with a Digital Tenge account yet. To further enhance transactional ease, we are integrating the Digital Tenge with our local fast payment schemes.

A standout feature of the Digital Tenge is its capability for programmable payments. By automating transactions triggered by external conditions, we envisage revolutionizing government budgetary expenditures, particularly for social welfare – reducing costs, simplifying reporting, and bolstering transparency. For instance, in cooperation with municipal authorities, we’re launching “digital voucher” schemes, allowing us to streamline targeted government subsidies such as nutrition in schools.

As part of our continuous research and development endeavors, we've forged partnerships on the international front. Teaming up with the Hong Kong Monetary Authority (HKMA), we are venturing into cross-border CBDC payments, facilitated by the SWIFT CBDC connector. This year, we also took a step forward on the global stage by joining the BIS mBridge initiative as an observer state. Our cooperative efforts with digital asset providers are also noteworthy. We're currently in the testing phase of stablecoin issuance backed by Digital Tenge and are exploring the potential of Digital Tenge in the settlement infrastructure for tokenized assets like bonds and stocks. Furthermore, in a dedicated sandbox environment, market participants are harnessing the potential of the Digital Tenge's smart contracts to develop innovative products and services.

Lastly, to keep everyone informed and to mark this historic phase, we will be presenting detailed specifics of this launch on 15 November, celebrating the 30-year anniversary of our national currency. This will be followed by a comprehensive status report set to be published in December 2023.

We're enthusiastic about this new chapter and believe that with the involvement of all our partners and stakeholders, the Digital Tenge's first phase will set a benchmark in the world of digital currencies.

By 2024–2025, we will roll out newer functionalities that resonate with the needs of our market. This will encompass CBDC offline transactions to enhance inclusivity, streamlined cross-border payments to mitigate present challenges, robust settlement mechanisms for digital assets like stablecoins and tokenized stocks, and an SDK to facilitate market participants in crafting smart contracts, among other innovations.

CBPN: You mentioned Project mBridge a moment ago. What is the extent of the National Bank of Kazakhstan’s current involvement with the project, and how do you anticipate this participation — and the other collaborations you alluded to — impacting the development of the cross-border dimension of a Digital Tenge?

Binur Zhalenov: The National Bank of Kazakhstan (NBK) recognizes the immense value brought forth by the BIS Innovation Hub, especially in the domain of CBDCs. In fact, insights and guidelines from the BIS Innovation Hub have been pivotal in shaping the foundational principles and technological blueprint of our Digital Tenge project.

Our recent association with the mBridge initiative stands as a testament to our commitment to understanding and possibly harnessing the potential of cross-border CBDC payments. While we've initiated our involvement as observers, we are optimistic about deepening our cooperation. Our objective is to gradually progress to the phase where we can actively partake in technological testing pertaining to our integration with the mBridge project. However, it's important to understand that this is a phased and methodical journey.

In our pursuit of achieving seamless cross-border transactions, we've also extended our collaborative efforts to another international initiative, spearheaded by SWIFT. Taking pride in being among the pioneering central banks, we're actively involved in testing cross-border payment mechanisms. Our collaborations also extend to the HKMA, with whom we are conducting intricate technological tests. We anticipate releasing detailed insights on our progress post the completion of these tests.

The allure of CBDCs, especially in the realm of cross-border transactions, lies in their potential to address and rectify the existing frictions and challenges in payment flows. We're particularly excited about the prospects of Automated Market Makers (AMMs) and other groundbreaking tools. These tools not only promise efficient liquidity management but also streamline compliance checks, offering a robust and efficient mechanism.

In summary, our association with the BIS Innovation Hub's mBridge project and other international initiatives signifies our dedication to enhancing the cross-border capabilities of the Digital Tenge. We believe that these collaborations and our continued research will pave the way for a future where transactions are seamless, efficient, and borderless.

CBPN: As you mentioned, the tenge turns 30 on 15 November. What does it mean to be developing a third form of Kazakhstan’s national currency in conjunction with the tenge’s 30-year milestone? That is quite an extraordinary evolution for Kazakhstan and its currency.

Binur Zhalenov: The upcoming 30th anniversary of the tenge on 15 November is indeed a momentous occasion for Kazakhstan. As we reflect on the journey of our national currency, introducing the third form, the Digital Tenge, at this juncture is symbolic of Kazakhstan's commitment to innovation and progress. It underscores our vision to evolve and adapt to the changing dynamics of the global financial landscape.

From its inception, the tenge has been a symbol of our nation's sovereignty, economic resilience, and aspirations. As we step into this milestone, the development of the Digital Tenge epitomizes our continuous quest for excellence and our desire to position Kazakhstan at the forefront of financial technology.

Our collaborations with global entities, be it through the BIS Innovation Hub or with international initiatives like SWIFT, not only reflect our ambition but also the strategic partnerships we're forging to ensure the success of this endeavor. These collaborations are indicative of our holistic approach, considering both domestic advancements and the broader international perspective.

Moreover, launching the details of the Digital Tenge's first phase during the tenge's 30-year anniversary celebration exemplifies the merging of our rich legacy with our future aspirations. This digital evolution showcases our commitment to fostering financial inclusion, driving innovation, and ensuring that Kazakhstan remains competitive in an increasingly digitalized global economy.

In essence, as the tenge celebrates its 30th year, the introduction of the Digital Tenge is not just the next step but a leap into the future. It is a testament to Kazakhstan's extraordinary journey of growth, resilience, and vision for a future that seamlessly integrates tradition with innovation.

CBPN: Throughout the entire Digital Tenge process, NBK and the National Payments Corporation of Kazakhstan have stressed that CBDC is one component of a holistic approach to reshaping Kazakhstan’s financial system. Open banking is another aspect of this. How do both developments intersect and inform your vision for this future financial system?

Binur Zhalenov: The ongoing transformation of Kazakhstan's financial system is a holistic endeavor, aimed at positioning the country at the forefront of the digital financial revolution while ensuring stability, resilience, and inclusiveness. Two critical components of this transformation are open banking and CBDC.

Open banking is pivotal to our strategy, representing a shift towards consumer-centric financial services. By empowering consumers with control over their personal data, open banking facilitates reduced switching costs between platforms, enhancing competition and placing the consumer's interests at the heart of our financial ecosystem. Biometric-enabled electronic signatures further bolster this by allowing consumers to seamlessly manage and grant access to their data, reaffirming our commitment to protecting their digital rights.

The Digital Tenge, our proposed CBDC, intersects with open banking in multiple ways. Notably, Digital Tenge accounts will adhere to Open API standards, which ensures their integration within the broader financial ecosystem. This means they can be incorporated into account aggregation schemes, enabling third-party Personal Financial Management (PFM) services and allowing non-bank Payment Service Providers to offer competitive solutions, thus broadening the CBDC ecosystem.

The true potential lies in the convergence of these two components. By harmonizing open banking and Digital Tenge infrastructures, financial institutions can pioneer novel services. Picture a world where smart contracts, powered by the Digital Tenge, can be activated based on specific consumer data — such as a programmable payment triggered when an account reaches a predetermined threshold. This synergy between open banking and the digital tenge allows for the hyper-personalization of financial services, all the while ensuring that consumers retain full control over their personal data.

Our vision for Kazakhstan's future financial system is one of innovation, consumer empowerment, and sustainable growth. Both open banking and the Digital Tenge play central roles in this vision. By creating an environment that promotes convergence between various payment schemes and encourages the reuse of services across components, we aim to nurture a resilient and dynamic financial ecosystem. And, as we move forward, we plan to launch a dedicated sandbox that focuses on the intersection of open banking and the Digital Tenge. This will serve as a platform for market participants to harness the potential of this synergy, driving Kazakhstan's financial future into a new era of digital excellence.

CBPN: Every jurisdiction is, naturally, very different and each has its own rationale and objectives when pursuing a CBDC. Despite this, and speaking only for yourself, Binur, is there any advice that you would offer the world’s central banks as they continue to research and develop CBDCs in the months and years to come?

Binur Zhalenov: In the dynamic landscape of central bank digital currencies, each nation indeed embarks on this journey with its own set of rationales and goals, shaped by its unique socioeconomic, technological, and regulatory landscape. Reflecting on Kazakhstan's experience with the Digital Tenge, there are a few insights I'd like to share with fellow central banks around the world.

First and foremost, it's essential to anchor the development of a CBDC to a clear value proposition. A CBDC should not be developed as an end in itself, but rather as a means to address specific challenges or leverage opportunities within the financial ecosystem. Identify the core problems or opportunities within your jurisdiction and then tailor the CBDC as a solution or an enabler.

Second, CBDCs can be a powerful tool, but their impact is amplified when they are integrated seamlessly into a broader digital financial framework. This holistic approach not only ensures better service delivery but also fosters innovation and competition within the financial sector.

Moreover, continuous engagement with stakeholders is paramount. Whether it's through ideathons, sandboxes, or collaborative platforms, ensure that you're not only taking into account the perspectives of financial institutions but also of the consumers and merchants who will be the end-users of the CBDC. Their feedback can provide invaluable insights into refining the CBDC's design and functionality.

Lastly, while it's tempting to fast-track development in the face of rapid technological advancements and evolving consumer expectations, it's crucial to proceed with caution. Research, pilot projects, and phased implementations are critical to anticipate challenges, understand potential impacts, and refine the CBDC accordingly.

In conclusion, as central banks worldwide explore the realm of CBDCs, I'd emphasize the importance of clarity in purpose, integrated approaches, stakeholder engagement, and a measured pace. The future of money is digital, and while the journey may be fraught with challenges, the potential benefits for our economies and societies are immense.

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