The Central Bank of Hungary’s executive director for digitalisation and fintech support Anikó Szombati discusses the authority’s financial innovation agenda with Global Government Fintech editor Ian Hall
Hungary is a country located at the geographic heart of Europe and has a population of just shy of 10 million – almost exactly a mid-size European Union (EU) member state.
The country will reach 20 years’ EU membership next year, albeit it has moved towards the 27-member bloc’s political margins via the policies and outspoken approach of right-wing populist prime minister Viktor Orbán. It is not in the 20-member Eurozone, with the country retaining its national currency – the forint.
When it comes to exploring the potential of different forms of the future of money, however, its central bank – located in Hungary’s River Danube-straddling capital city, Budapest, always one of Europe’s grandest capitals – wants to be at the forefront.
“We are relatively small but can be a sandbox in Europe,” says Anikó Szombati, as we kick off an interview exploring Magyar Nemzeti Bank (MNB)’s fintech-related agenda (sandboxes are test-spaces that allow regulators to keep a close watch on early-stage private-sector technology projects).
Topics on the agenda include non-fungible tokens (NFTs) and blockchain, as well as a central bank digital currency (CBDC) project described as the first CBDC pilot project in the EU for retail (general population) users.
Policy and technical teams
MNB is a supervisory authority (as well as a central bank), having absorbed Hungary’s financial regulator almost a decade ago. “I was heavily involved in the whole process,” recalls Szombati.
She has been executive director for digitalisation and fintech support, as well as chief digital officer, for the past four years, having joined the central bank more than two decades ago.
Her team – the executive directorate for digitalisation and fintech support – numbers “about 15 to 20” colleagues (the MNB overall employs about 1,500 people). They are split into a digitalisation policy department, which is responsible for a regulatory sandbox, innovation hub and the CBDC pilot; and a technical unit focused on the possibilities and challenges rapidly emerging in fields such as artificial intelligence (AI) and data analytics.
The innovation hub, designed to facilitate private-sector interactions with the central bank, and sandbox were set up in 2018. They have engaged with about 150 projects.
The technical unit’s current projects include work on natural-language processing to help with inflation prediction based on real-time data from the tax authority.
Other achievements have included the launch, almost three years ago, of a machine learning-based chatbot (‘Pallas Athéné – named after the Greek goddess of wisdom), as a conduit for interactions with the MNB (for example, for people raising complaints about banks’ behaviour). Its activity has been broadened to statistics-related interactions.
NFT issuance platform
One set-piece project of which Szombati is particularly proud is a multi-pronged initiative based around a smart-phone app for the Hungarian Money Museum and Visitor Centre – a space that opened in March 2022 within the MNB’s renovated headquarters (a previous version closed in 2014).
The app, launched in May 2022, provides ‘fun and professional’ content but also functions as a ‘digital coin register’. This latter function is where the fintech creative juices sit. An MNB press release has described the initiative as a blockchain-based NFT issuance platform, ‘which can be considered as a novelty among central banks’.
BLOCKCHAIN & NFTs EXPLAINED: Blockchain is a list of records, known as blocks, securely linked together using cryptography as an immutable ledger | NFTs are ‘one-of-a-kind’ digital assets whose uniqueness is guaranteed by blockchain technology.
The first series of NFTs available through the app was based on six ‘collector’ versions of a five forint coin (five forints is worth about £0.01). Users could obtain the NFTs by solving quizzes. By collecting NFTs containing all six letters of the word ‘forint’, users were able to participate in a prize game in which they could win special physical coin sets. Using unique QR (quick response) codes on the packaging, people could register their (physical) coins on the MNB’s private blockchain (a private blockchain is one controlled by a single organisation that permits only verified members to join).
As a next step in the project the MNB is considering experimenting with “building a bridging operation” between the current private (permissioned) blockchain and a “permissionless environment” (a public blockchain). In this regard it is collaborating with SODA (Sovereign Official Digital Association), a company that aims ‘to drive digital money adoption’.
“Under the current operation, we have collected quite a lot of first-hand experience on how blockchain can be run in a central banking environment. As one of the main issues around CBDC operation would be interoperability, the next obvious step for us is to extend our research towards how to connect our blockchain with others in a safe and transparent manner. SODA is helping us exploring these avenues,” Szombati explains.
Central banks ‘have to be really careful’
Has the Money Museum app project so far been a success? “When we launched the project, we didn’t have any KPIs [key performance indicators] in the form of desired number of active users – we hoped that maybe it would be a one-time experiment,” Szombati says. “But the first batch of, say, 60,000 NFTs were collected within two months and therefore we had to launch a new series, and we already surpassed 500,000 NFTs. There’s a group of around 10,000 people actively using the platform, participating in different rounds of issuances. They find it very attractive.”
But the above statistics don’t capture the broader goal: improving understanding (within the central bank, as well as for users) about blockchain, which is among the technologies prominent in the context of CBDC development (more on this later), as well as “how to operate direct customer interaction” (again, more later).
The decision to experiment with NFTs will interest public officials beyond Hungary. Earlier this year the UK government shelved a plan for the release of an NFT, leading the opposition Labour Party to dismiss the original plan as a ‘crypto gimmick’.
Are NFTs a fad? “Crypto-assets and NFTs are sometimes linked to financial bubbles, where a lot of small investors can be harmed at the end,” Szombati acknowledges. “Therefore central banks have to be really careful when they are discussing or even promoting NFTs. And, on top of that, right now there is no proper regulation behind NFT issuance, and even MiCA [EU Markets in Crypto-Assets Regulation – approved by European Parliamentarians in April] will not cover an issuance, per se.”
“Therefore the central bank had to find a really proper and safe way when we decided to experiment with NFTs,” she says, adding that users cannot lose out financially.
Retail CBDC pilot programme
In terms of CBDCs more explicitly, the MNB has been running a multi-stage project (which also involves the development of a smart-phone app) called ‘Digital Student Safe’ since 2020. The project is detailed in a chapter (authored by Szombati and two colleagues) of a 214-page Bank for International Settlements (BIS) publication (‘CBDCs in emerging market economies’) published in April 2022.
The overall initiative is described as a retail CBDC pilot to gain ‘hands-on experience on a potential operational model of a future CBDC system’ and ‘support digital financial inclusion of students’ (with the ‘students’ being eight- to 14-year-old schoolchildren).
By completing quizzes (on financial, digitalisation and sustainability topics) on the app, children can collect so-called ‘student dollars’. These can be redeemed for webshop vouchers on eMAG, a Romania-headquartered e-commerce platform. Children can also initiate transfers to bank accounts, save (money) and make purchases using SimplePay Instant Transfer QR code payments (SimplePay is a Hungarian online payments firm). Parents can send digital pocket-money.
Digital Student Safe is described in the BIS publication as ‘the first and so far only central bank to design its CBDC pilot programme around a specific social group not based on geographical location’.
In May this year, the project moved to a second stage (‘Digital Student Safe 2.0’): the app was updated; commercial banking and fintech partners (a Hungarian fintech company called Perfinal) became involved; and it is now able to handle ‘real’ electronic money. The progress has led the MNB to describe the Student Safe initiative as the first CBDC pilot project in the EU available to retail users (‘retail users’ being a reference to a retail CBDC, sometimes referred to as a ‘general purpose’ CBDC, as distinct from a wholesale CBDC, which would be for interbank use).
‘Plans to expand functionalities’
Over the past three years, ‘thousands’ of children have used the app and answered ‘more than one million quizzes’, according to an MNB press release published four months ago. Szombati described the ‘Digital Student Safe’ project at the time as a ‘learning process, where central banks not only have to co-operate with fintechs [companies], but also, feel and act like fintechs, exploring and serving client needs with the help of agility and technology.’
“We have to follow the rhythm of school years,” Szombati tells Global Government Fintech, asked about the project’s current focus. “In July and August we were a little bit ‘calm’ but from September we will become active again, marketing this tool in more schools and seeking more adoption.”
The MNB’s plans to broaden the app’s functionalities will interest fintech-interested officials at the coalface of CBDC explorations worldwide.
“Since we have this platform, we have further plans to expand its functionalities into logical directions, for example, into offering offline payments, because students are usually used to having limited access to internet. And so therefore, it would be quite logical [to] set up any programmable payment function also here in the future,” Szombati says, hitting two sweetspots – offline payments and programmability – that are among the hot topics in global CBDC discourse.
“Actually, there are already programmability elements in the app in the form of conditional payments upon the children completing the tasks given by their parents,” she continues. “However, new schemes could also be elaborated, for example related to sustainability-enhancing activities, such as incentivising use or public transport or collecting garbage. We do not have anything concrete in mind, but we definitely would like to collect ideas from our young customers directly.
‘Direct customer interaction’ experience
Only a handful of nations – including the Bahamas, Jamaica and Nigeria – have to date actually issued a CBDC. But most central banks are stepping up their explorations around the opportunities and challenges of doing so.
The European Central Bank (ECB)’s two-year investigation phase into a potential eurozone CBDC (a digital euro) is concluding around now (autumn). The ECB Governing Council is due to decide whether to dig more deeply into the possibilities with effect from October.
“A lot of central banks are doing pilots only to experiment with the technology itself,” reflects Szombati. “This is partly because in the retail realm, they don’t want to have a direct customer relationship. They are ‘outsourcing’ customer interaction to PSPs [payment service providers] and commercial banks, because they don’t have experience with it and they don’t feel like they would like to build capacity for that. In their mind, central banks are not about to start something commercial banks are already good at. The question here, then, is how their CBDC could be differentiated then from existing forms of money.”
The MNB is at least considering an alternative approach. “Even though we haven’t made our mind up yet on what model to follow, we definitely want to gain experience in direct customer interaction,” Szombati says.
In terms of the ‘other’ (lower profile) form of CBDC – wholesale – the MNB has been, Szombati says, an observer of the cross-border CBDC platform ‘Dunbar’ project. The MNB is also “running other internal developments” in wholesale CBDC with the Budapest University of Technology and Economics.
“This is quite an obvious way forward, to embrace commercial banks, commonly develop blockchain-based DvP [delivery-versus-payment] or PvP [payment-versus-payment] platforms and set up a pilot in this field as well,” she says, adding that the benefits of CBDC are “probably more easily realised” in the wholesale arena.
MNB ‘not in a rush’
Hungary’s central bank may be hungry to push ahead with in-the-field experimentation but there is no impulse to launch a digital forint “right now” and the MNB is “not in a rush”, she says. The focus, she emphasises, is “to ideate what can be the most beneficial or influential for society”.
About 13 per cent of Hungary’s adults (a relatively high figure by European standards) are unbanked. A CBDC could, in theory, present tangible benefits here. But declining use of cash – a well-documented driver towards CBDC in some nations – is less of a factor in Hungary.
“A CBDC has to offer something special compared to existing forms of money,” Szombati says. “As we see with the motivations behind the digital euro, like having monetary sovereignty against a digital dollar or other global digital currencies, or having a single integrated instant payment system and things like that, these are all ‘defensive’ motivations.”
“On the other hand, the proposed form of digital euro as stated in the EU Commission’s draft regulation [proposed on 28 June 2023] doesn’t really differ from existing commercial bank money except for one factor: offline payments.”
The MNB launched an instant payments system in March 2020, “which is fully obligatory to all participants,” says Szombati. “So, the network effect can really work and people can have the alternative to cash in the form of digital payments in almost all situations.”
“Also, a further motivating factor [for a CBDC] could be to provide the platform for new innovative payment products, such as smart contracts [self-executing contracts that have terms of agreement between buyer and seller written into lines of code] and things like that. That could probably lead us to a blockchain-based system. But that’s not sure either,” she reflects.
‘Shortening time to market’
CBDC issuance requires a legal framework. According to a BIS survey (whose results were released on 10 July) of 86 central banks, 27 per cent have such a legal authority; about eight per cent of jurisdictions are currently changing their laws or clarifying legal authority to allow for CBDC issuance; one quarter of central banks say they lack the required legal foundation for CBDC issuance; and about 40 per cent are ‘unsure’.
Where does Hungary sit? “Actually, this is the other factor that makes our approach very special – that we have found a form of e-money issuance, as probably the single possible way that allows us to issue a CBDC under the current legal framework,” she says. “Of course, it depends on what kind of CBDC we would like to issue in the future – either account-based or token-based – but, by definition, account-holding for retail customers is banned at present in the central bank law. So, if we are about to move into this direction, that would definitely require early a legal change, with a two-thirds majority at the parliament and so on.”
Overall her key message is ultimately similar to most central banks’ thinking on (retail) CBDC, which she describes as “a society-wide project in the long-term”.
“We haven’t identified yet such a strong motivation factor that would drive us to launch a ‘Big Bang’ project,” Szombati concludes on CBDC. “But still we wanted to make a step forward from desktop research. And we have identified use-cases where we can implement complete systems at a smaller scale, in an agile way, just to be a very useful step on this journey. Having all these pilots, we are just shortening time to market whenever a decision is made because we will have already the market knowledge, skills and capacities about how to design and how to implement such a system.”
‘Pushing’ for central bank law reform
Legal considerations are naturally also to the fore when it comes to the innovation hub and regulatory sandbox.
Szombati describes the central bank law as “restraining us” in two ways in relation to the sandbox’s operations.
“First, there is the limited room for manoeuvre in giving temporary waivers,” she says. “A logical step forward could be that if the law would give us more flexibility in creating space for innovation while still protecting the system’s integrity and customers. Second, we can only give waivers from central bank-level regulation, but not regulatory requirements stipulated in law. More flexibility here could also be a great help.”
Is the law likely to change? “We have been pushing but it’s in the government’s hands and they are always busy with something. But hopefully, since they are also quite keen on embracing financial innovation and digitalisation, we do hope that this will be on the agenda very soon. The central bank law could be open to modifications for any different reason.”
Expecting ‘results of meaningful scale’
The thread underlying much of Szombati’s team’s work is – as you could expect – experimentation, which back to her vision of Hungary as a European fintech ‘sandbox’.
An observation related to blockchain serves both as an example and explanation. “In some countries, due to the [larger] country size and potential number of users, they see some limitations for blockchain to be involved in real payment transactions,” she says. “But in Hungary, since we have about 9.5 million inhabitants, we don’t seem to have these kinds of constraints.”
She has great expectations for the MNB’s experimentation. “We already have quite a few projects running from which we expect learnings and results of meaningful scale,” she says.
Reflecting the quick-moving nature of fintech, the central bank’s fintech-related agenda is forever a work in progress.
“What keeps us up at night at the moment are the risks and opportunities around generative artificial intelligence,” she says. “We definitely have to give some guidance to our banks and fintechs on how to use it to the benefits of their customers without causing any unintended harms.”