Home Digital Currencies Kazakhstan tests central bank digital currency use in public procurement

Kazakhstan tests central bank digital currency use in public procurement

Kazakhstan: state authorities are using CBDC after its tech platform was ‘put into operation’ in November last year (inset: Global Government Fintech’s coverage) | Credit: Yerzhan Karatay (Pixabay)

Authorities in Kazakhstan are stepping up their use of the country’s nascent central bank digital currency (CBDC) by putting it to use in public procurement.

Four months after the CBDC’s technology platform was ‘put into operation’ during an event marketed as the launch of the digital tenge, government agencies are looking to test its use in combatting corruption.

The Ministry of Finance and Anti-Corruption Agency as well as other ‘key entities’ have signed a ‘roadmap’ to collaborate with the National Bank of Kazakhstan to pilot CBDC use in ‘public procurement and government subsidies’, according to a LinkedIn post by the chief executive of the National Payments Corporation of Kazakhstan – an authority charged with the implementation of digital financial infrastructure and the CBDC itself in the former Soviet nation.

Binur Zhalenov described the signing of the roadmap as a ‘significant milestone in the financial technology landscape of Kazakhstan’

‘This initiative is not just about digital transformation; it’s about enhancing the transparency and targeted use of public funds,’ Zhalenov wrote.

RELATED ARTICLE Kazakhstan CBDC platform ‘put into operation’ in contactless transaction demo – our news story (27 November 2023) on a transaction using contactless card technology being demoed during an event marketed as the launch of digital tenge

‘Powered by smart contracts’

Just a handful of nations – most notably the BahamasJamaica and Nigeria – have to date formally issued a CBDC. China and Russia – which both border Kazakhstan, a country with a population of about 19 million – are both well progressed with the rollout and testing, respectively, of a digital yuan and digital ruble.

Most governments are at least interested in their potential albeit they are typically struggling to find and communicate tangible use-cases. 

‘The digital tenge, powered by smart contracts, promises to ensure that allocated funds are spent precisely for their intended purposes,’ writes Zhalenov. ‘This is made possible through the integration with government databases and registries, maintaining “white lists” and “black lists” of legal entities, goods and service categories.’

Smart contracts are blockchain-based digital contracts that are automatically executed when pre-determined terms and conditions are met.

‘A fascinating aspect of this project is its focus on understanding and eventually eliminating the “special purpose” property of digital tenge at the final stages of the transaction chain,’ writes Zhalenov. ‘This means once the digital tenge serves its targeted purpose, its programmability and traceability are dissolved, allowing it to be seamlessly converted to other forms of money without any strings attached.’

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‘Brink of transformative phase’

Kazakhstan’s authorities are launching ‘at least three’ pilot projects, including public procurement for construction services and government subsidies for agriculture, according to Zhalenov’s update.

‘This endeavor is not just a step towards digital efficiency but a giant leap towards creating one of the most compelling use cases for programmable retail CBDC globally,’ he writes. Retail CBDC is a CBDC for use by the general population, as distinct from lower-profile wholesale CBDC, which is a CBDC for interbank use. 

‘Stay tuned for this exciting journey ahead,’ Zhalenov signs off. ‘We are on the brink of witnessing a transformative phase in the way public funds are managed and utilized, setting a benchmark for transparency and efficiency in public finance.’

The latest annual Corruption Perceptions Index (CPI) (for 2023), released in January 2024, by Transparency International painted a ‘troubling picture’ of Eastern Europe and Central Asia, which is described as a region ‘struggling with dysfunctional rule of law, rising authoritarianism and systemic corruption’. An average rating of 35 out of 100 makes it the second lowest-scoring region in the world. Kazakhstan, which scored 39, is described as ‘making some progress in addressing corruption issues, including through legal reforms and recovering stolen assets’. But ‘these efforts are overshadowed by its autocratic governance alongside lack of transparency and judicial independence’ and that ‘this, together with the enduring influence of powerful political elites, allows corruption to thrive’.

‘To achieve substantial progress, Kazakhstan must make its anti-corruption initiatives comprehensive, transparent and free from political interference, while ensuring wider democratic reform,’ the report states.

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Road construction among focus areas

On 18 March a government announcement referred to a ‘Colouring Money pilot project in the process of developing budget funds using digital tenge’.

‘On 7 February this year, at an expanded meeting of the government, the head of state instructed to scale projects on marking and tracking money using digital tenge,’ the announcement states. ‘In this direction, the introduction of the mechanism of Colouring Money in the processes of budget development was laid down in the concept of anti-corruption policy approved by the Decree of the President of the Republic of Kazakhstan.’

A ‘mechanism’ will be implemented ‘on the basis of’ the digital tenge platform, according to the announcement.

‘To implement the pilot implementation of Colouring Money, one of the most corruption-prone areas has been identified – road construction, the use of allocated SEC [social and entrepreneurial corporations] funds and subsidising the purchase of agricultural machinery and equipment,’ it states.

Pilot testing will begin with ‘individual sections of roads of national importance’, in one of the regional SECs and on investment subsidies allocated by KazAgroFinance JSC. KazAgroFinance JSC describes itself as a ‘leader in the Kazakhstan agro-industrial complex leasing market, [meeting] the needs of industry for modern and hi-tech equipment’.

“The digital tenge is an important, progressive tool to prevent theft. Its fulfilment will ensure effective, targeted use of budget funds. This is our key task,” said Anti-Corruption Agency chairman Askhat Zhumagali.

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Digital tenge’s phased rollout

The digital tenge is due to be rolled out in stages.

The National Bank of Kazakhstan issued a press release on 15 November 2023 describing the technology platform as being ‘launched in pilot mode… in a limited environment and with real users’.

‘It is planned to complete the full introduction of digital tenge by the end of 2025 by expanding its services, usage scenarios and the environment of platform participants,’ the central bank stated at the time. 

Two schools in Almaty would be serving as test-beds for CBDC use, according to an article published on 15 November by the Kazinform News Agency.

The news agency’s article references the use of ‘Onay’ cards, which were introduced in 2015 for people to make transport payments. 

‘Schoolchildren of two schools in Almaty are to use the digital tenge. That is, the digital tenge platform has been implemented into the Onay card. The card can be used to make payments at canteens with the money going to the school’s [digital] wallet,’ said Ainur Kenzhayeva, a project manager at the National Bank of Kazakhstan Payment and Financial Technologies Development Centre, according to the Kazinform report.

RELATED ARTICLE Kazakhstan steps up open banking implementation after pilot project – a news story (8 January 2024) on authorities publishing an update on plans to encourage the use of open banking technology across the financial sector, buoyed by pilot initiative involving five banks and the current accounts of 128 ‘real’ customers

Fintech developments galore

Zhalenov has also recently stated (in a separate update also posted on LinkedIn) that the National Payments Corporation of Kazakhstan has ‘mapped out a broad range of digital tenge-enabled scenarios – from distributing social aid to settling digital assets.’

He states that a ‘comprehensive status report’ is due to be published by the end of May, including a focus on CBDC use-cases.

He also refers to imminent developments related to open banking and anti-fraud public-private collaboration, among other fintech-related achievements. In respect of anti-fraud, for example, he writes that new legislation has enabled the establishment of an ‘Anti-fraud Information Sharing Center’ that will enable ‘real-time fraud incident exchanges among banks, telecom operators and law enforcement, with a production launch expected by July 2024.’

More recently he has posted that a ‘decision had been made to sign a MoU [Memorandum of Understanding] with the Central Bank of the UAE for the development of digital financial infrastructure, with a keen focus on CBDC and Supervisory Technology (SupTech)’; and ‘agreed to pilot cross-border CBDC transactions through [long-running international CBDC initiative] #mBridge, setting the stage for future financial innovations’.

He also highlights an announcement last month (February) that Kazakhstan’s Ministry of Digital Development, sovereign wealth fund Samruk-Kazyna and Presight, an Abu Dhabi-based company, are to develop a ‘state-of-the-art artificial intelligence supercomputer and data-centre cluster to enable the country’s digital transformation initiatives.’