Hungary has a new approach to blockchain testing

Blockchain represents a new phenomenon for central banks. It is a completely new methodology for how transactions are validated and how value is transferred between parties.

It is still unclear what role blockchain will play in the central bank’s digital currency development. But while CBDCs eschew blockchain technology once minted, there is a growing ecosystem of digital assets and tokenized values ​​operating on distributed ledgers and permissionless blockchains that central banks cannot ignore.

To better understand blockchain technology, the Magyar Nemzeti Bank has developed an innovative program that allows them to use and experiment with blockchain technology in a live field environment.

Through non-fungible tokens, MNB issues its own digital instrument on a private blockchain to utilize practical experience around the technology and set value parameters in the tokens themselves. By successfully participating in financial literacy quizzes, coin collectors and NFT enthusiasts in Hungary are awarded tokens issued by central banks and then exchange and trade the NFTs on the Money Museum’s mobile application. This is part of a competition 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, exchange and record their ownership of the coins, this type of activity – even if gamified – has the advantage over creating a proof of concept environment, as the central bank’s “assets” exist in the real world within an existing ecosystem.

Such an approach can 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 of public digital money more broadly.

Until recently, a “waterfall” approach has been favored by several central banks, where they consider the policy implications of a CBDC, invite private sector partners and advisors to develop the concept, commit to testing a CBDC and then select a technology provider to run a CBDC proof of concept. Such an incremental approach may seem logical, but often results in a block of circular policy discussions, and proof of concept may miss the end-user value proposition entirely.

A pilot-test-and-deploy approach allows central banks to safely access existing ecosystems and assess how blockchain technology can operate within the central bank’s infrastructure. By having a private blockchain on the Hyperledger fabric platform and issuing tokens to the public, MNB brings users in from the beginning of the process.

Chris Ostrowski is the CEO and co-founder of Sovereign Official Digital Association and Anikó Szombati is the Chief Digital Officer of the Magyar Nemzeti Bank.