Papua New Guinea progresses CBDC explorations

The Bank of Papua New Guinea has presented the results of proof-of-concept experimentation as it explores the potential launch of a central bank digital currency (CBDC). 

Development to date of the ‘digital kina’ has been a collaborative effort involving the central bank and Japan-headquartered companies Soramitsu and Mitsubishi, supported by funding and input from the Japanese government.

The results of the most recent explorations – technical tests conducted ‘in the field’ over the past couple of months – were presented at an event (28 January) at a hotel in the nation’s capital, Port Moresby.

The work was described by the central bank’s governor, Elizabeth Genia, as an “important first step but only the beginning” of CBDC efforts in Papua New Guinea and “an exploratory step to evaluating the feasibility of introducing a CBDC.”

Those involved were “able to simulate the core functions of a digital currency system”, with central bank employees, as well as staff from the Japan International Cooperation Agency (JICA) and Japanese Embassy, testing “digital payments and transaction security under controlled conditions.”

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‘Transformative potential’

Papua New Guinea is an island country in the south-western Pacific with a predominantly rural and geographically scattered population. It is described by the World Bank as one of the most culturally diverse countries in the world and home to more than 1,000 distinct ethnic groups.

Genia described the CBDC collaboration to date as illustrating the “importance of leveraging the global expertise that is available to address local challenges.”

“The rationale for the proof-of-concept study stems from the rapid advancements in digital financial technologies globally, which have opened up opportunities to enhance payment systems and improve financial inclusion,” she said in a speech.

“Here in Papua New Guinea [PNG], we recognise the transformative potential of these innovations,” Genia – who was appointed as governor just over a year ago, after acting in the top role for the previous 12 months and a 40-year career at the authority – continued.

“With an increasing number of PNG’s banks and financial institutions adopting new platforms to meet customer demand, our economy is already undergoing a significant digital transformation,” she said. “This progress, however, also comes with the responsibility of ensuring our financial infrastructure is capable of accommodating these changes.”

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Tackling ‘key challenges’

The focus, Genia said, is on exploring how a CBDC could be integrated into the country’s existing payments system to “address some of the key challenges facing our financial sector”.

She referenced the potential of a CBDC to “enhance efficiency” – more explicitly, having the potential to cut reliance on physical cash, reduce cash-handling and distribution costs while improving “transaction efficiency”; bolster security because “the blockchain technology underpinning CBDCs provides a secure platform for transactions, greatly reducing the risk of counterfeiting and fraud”; and promote financial inclusion “by offering a digital payment option accessible to individuals and businesses, in both urban and remote areas.”

Work to date had, she said, allowed the central bank to identify the potential benefits of a CBDC “tailored to [Papua New Guinea’s] specific economic and financial landscape”; gain feedback from users and merchants; and “assess the operational and infrastructural requirements for scaling up to a broader pilot phase.”

She pointed out that the central bank had first discussed the potential of blockchain and distributed-ledger technologies more than a decade ago and co-sponsored ‘London Blockchain Week’ in 2018. “Since then, we have developed and tested digital identity solutions, fostered partnerships with private-sector innovators and established a regulatory sandbox [in 2021] to trial innovative financial technologies,” she said.

“The proof-of-concept study represents a continuation of this journey, building on years of research and investment in understanding how digital technologies can transform our financial system,” she added.

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Looking ahead

“As with any transformative innovation, a central bank digital currency presents its own unique challenges,” she continued.

“We are mindful of the significant legal and regulatory gaps that currently exist, the need for robust ICT [information and communication technology] infrastructure, and the importance of a well-defined policy framework to underpin innovation in this sector.”

Further studies would, she said, “need to broaden the scope to engage more financial institutions, and explore cross-border payments with neighbouring countries.”

“These efforts would have to be guided by a clear roadmap that balances the significant technological advances with the necessary legal, regulatory and infrastructure considerations,” she added.

Soramitsu said in a press release (28 January) that the central bank would ‘expand testing with a broader user base to refine the system and gather additional feedback’.

Such further experimentation, the company said, ‘will pave the way for a broader rollout in the near future’, explaining that ‘this next phase will optimise the platform’s speed, security and regulatory compliance features.’

RELATED ARTICLE Pacific island nation partners Japanese fintech for blockchain bond issuances – a news story (18 July 2024) focused on Soramitsu’s work in Palau (Soramitsu’s work in Palau was also covered on 9 October 2024)

Hyperledger Iroha platform

Soramitsu first announced its involvement with the Bank of Papua New Guinea in a press release in July 2024. This press release was partly focused on the company’s engagement to develop a system to issue, manage and operate savings bonds using blockchain in the tiny Asia-Pacific island country of Palau – also a Japanese government-supported initiative.

‘As the Pacific Island nations each have relatively small populations and economies, the burden of introducing and maintaining infrastructure for IT systems is significant,’ Soramitsu stated. ‘Therefore, Soramitsu is aiming to develop an architecture that allows for a more cost-effective and efficient introduction of financial instruments like CBDCs and savings bonds by constructing a common platform using secure, permissionless blockchain technology, powered by Hyperledger Iroha [Hyperledger Iroha is distributed ledger software from the Hyperledger Foundation, part of the Linux Foundation].’

In respect of Papua New Guinea, Soramitsu also stated that ‘financial inclusion remains a significant challenge in the country, where some areas are plagued by instability, violence and frequent occurrences of robberies and muggings’. The company was, it said, ‘exploring digital technologies that will allow recovery of funds after such incidents using blockchain technology to address these issues.’

The fintech company worked with the National Bank of Cambodia to develop the Bakong payment system, which has been operational since 2020. Bakong is being used for both wholesale transactions among major banks and retail payments for daily transfers and payments by citizens and businesses. ‘Cash that was dormant in rural areas has been turned into bank deposits through Bakong, revitalising the economy by being utilised for infrastructure and financing for small and medium-sized enterprises,’ the company states.

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‘QR pay’ button

Soramitsu states in its 28 January press release that the ‘breakthrough initiative demonstrates how blockchain can address Papua New Guinea’s most urgent financial challenges, including limited banking access, security vulnerabilities, and underdeveloped financial infrastructure’.

A video on Soramitsu’s YouTube channel (‘Bank of Papua New Guinea, Japan’s METI and Soramitsu Complete CBDC Proof of Concept in Port Moresby’ – 2min7sec) shows how, during the proof-of-concept testing, people selected a ‘QR [Quick Response] pay’ button option in a digital wallet on their smart-phone to make a payment in a shop; and could also request payments by generating a QR code. METI is Japan’s Ministry of Economy, Trade and Industry.

In its press release, the company adds that ‘security features, such as an ability to recover funds in cases of theft or loss, were also tested successfully’.

The digital kina has run on Hyperledger Iroha 2 – an updated version of the platform powering Bakong – according to Soramitsu’s YouTube video.

At the event in Port Moresby, perspectives on the project were also provided by figures including Bank of Papua New Guinea assistant governor George Awap; Soramitsu group chief executive Dr Makoto Takemiya and Mitsubishi Research Institute’s Takayuki Himeno.