The economist John Kay once wrote that very little that happens in the finance sector has a genuine need for constant activity. If the stock market halts for a couple of days, so what? Only the most boring part of the financial system (to other people, not to me), which is payments, is “an essential utility on whose continuous functioning the modern economy depends”. So how can we learn from Ukraine make sure it is always there?
Keeping Ukraine’s Financial Services Working
What with recent geopolitical shifts, many people are beginning to think again about how that continuous functioning can be supported at manageable cost and so are looking at ways to add resilience to the payment systems on which the economy is wholly dependent. Sweden and Norway, for example, are rethinking their progress towards cashlessness because of their fears of Russian aggression. They are looking at how to ensure that cash remains in circulation and are telling their citizens to keep cash at home in case of emergencies. But is this the best strategy?
It is worth listening to an actual expert about this. Hans Liwång, a professor of systems science for defense and security at the Swedish Defence University, said there was “a lack of evidence” about whether cash was better than electronic payments in the face of modern threats. The professor cited the natural example of Ukraine, where there are continuous attacks across both virtual and physical realms, to note that digital systems have proved vital to the country’s resilience, saying that: “Ukraine is a very good example of moving into the future when there is war rather than backwards”.
What an interesting comment.
This makes it important to explore the Ukrainian experience to learn about hardening the payment system by moving into the future. Central to the Ukrainian response was the National Bank of Ukraine (NBU) recommending that stores, pharmacies and petrol stations give preference to cashless payments (which was vital because it reduced people’s demand for cash) and ensuring the continued operation of the System of Electronic Payments (SEP), the ISO 20022 Real Time Gross Settlement (RTGS) system for interbank payments that has handling more than 1.5 million payments per business day since the invasion.
The NBU also organised the “power banking” network of more than two thousand bank branches across Ukraine that can operate during a long-term blackouts. These branches have alternative energy sources, backup communication channels, enhanced cash collection capabilities and additional staff.
(Resilience isn’t only about money. Andriy Poddyerogin, Director of Payment Systems and Innovation Development at the NBU, noted also that the need to use tools for remote identification and verification. The largest public system for the remote identification of individuals in Ukraine, the NBU’s BankID system, has been central to giving millions of people uninterrupted access to services under difficult circumstances.)
Ukraine’s largest acquirer is PrivatBank, which has around two-thirds of the market. Since the Russian invasion they have seen their POS estate climb by a third (their merchant service charge was reduced to zero immediately following the invasion to drive up merchant use) and their e-commerce customer base climb by a sixth. But most interesting of all (to me) they have seen their softPOS estate quadruple. When the power goes out, retailers switch to using their own mobile phones to take payments.
(I’ve often wondered why retailers don’t do that in the UK instead of shutting the supermarket doors when the POS network goes down.)
Despite repeated blackouts, the POS network was up for 98% of the time in 2024 and a backup system of QR codes was introduced to continue purchases via customer handsets when the POS network was out. This offline ability has been very important in maintaining the Ukrainian economy and deserves attention.
Electronic Cash Resilience
That point about supporting offline transactions is in my view critical to planning for truly resilient payments infrastructure. The Bank of Canada published a helpful note (Staff Analytical Note 2022-14) on what they called the “archetypes” for a retail central bank digital currency (CBDC) in which they point out that a direct model — in which transacting parties directly provide their own oversight and communicate between themselves to exchange and record settlement information — is the only model that deliver cash-like person-to-person transactions, where counterparties can settle a transaction without involving a third party.
The resilience of an electronic cash alternative is greatly enhanced by this kind of offline device-to-device transfer. There is no central system to take down, no switches to knock out, no network to paralyse and I am very optimistic about the ability of technology to deliver here.
To explain why, let me begin by picking up something that John Kiff pointed out on the International Monetary Fund blog. John observed that almost all CBDC research projects and trials focus on online distributed ledger technology, whether it be Hyperledger Fabric in Nigeria or R3’s Corda in Sweden. He then goes on to ask the obvious question: What will happen when communications go down in a war? What if there is a natural disaster? And what about the three-quarters of the world’s adult low-income population that doesn’t even have internet access?
He concluded, as the Bank of Canada did (and I did long ago), that for a CBDC to be useful, it must work offline. And here, John says, the future of offline CBDCs may lie in the technological past. That’s where his nod to a previous era and a push to develop offline digital payment systems using secure hardware rather than ledgers comes in. Some of the very valuable work done in this space goes back a generation, to that long ago time before smartphones, but it remains valid and it is important that the lessons learned then are not forgotten.
The Ukrainian Lesson: Offline Capabilities
In Europe, the digital euro is on the drawing board and will enter its “second phase” of preparation in October of this year, by which time the ECB will have prepared an outreach plan, procurement standards and technology providers. More than a billion euros worth of contracts have been awarded and I cannot help but note that the budget for developing an offline solution accounts for some €662m out of contacts awarded, so clearly the priority is recognised at the highest levels. Last yeasr the Bank invited experts from across the mobile sector to explore the business and technical aspects of deploying the digital euro’s offline functionality on embedded Secure Elements (eSE) and embedded SIMs (eSIM) in end-user devices.
The key lesson from Ukraine, for me, is that the resilience of European retail payments depends on this offline capability, not using more physical cash but using offline central bank digital currency. In fact, I would go even further and say that there is no point in developing any central bank digital currency that does not work offline.
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