CBDC Initiative: Central Bank of Hungary

Pioneering live retail central bank digital currency (CBDC) in Europe is generating insights for central banks globally

The Central Bank of Hungary’s (MNB’s) Student Safe initiative is the first CBDC pilot project in the European Union available to retail users, and supports financial inclusion. As one of the few retail pilot CBDCs in the world, the central bank is often consulted by peers to learn about its findings.

In May 2023, the MNB and its non-profit partner, the Money Compass Foundation, launched the improved Digital Student Safe mobile application, designed to increase financial awareness among 8- to 14-year-olds in the digital banking world, and is used by students in around 300 schools. The mobile app’s user experience and interface were developed in close co-operation with a design agency. Two Hungarian fintechs worked on the software development.

“Under the concept of digital financial inclusion of primary school students and their families, MNB was able to develop a use case for CBDC deployment which is, on the one hand, valid and justified and, on the other, ensures the scale and flexibility for experimenting in a controllable way,” Anikó Szombati, chief digital officer and executive director for digitalisation and fintech support, tells Central Banking.

The CBDC is account-based, and the Student Safe app is run on the MNB’s centralised architecture. Three penetration tests were conducted before the initiative was launched to ensure “unusually high standards” are met by the central bank and its partners, says Szombati, and trust is maintained in central bank money.

In terms of the legal structure, e-money issued by the central bank is a direct claim on the liability side of its balance sheet. Commercial banks are custodial partners. Card-based top-ups are immediately available for transactions initiated from the app. The custodian bank and the central bank’s accounting department create a reconciliation bridge to overcome the two-day difference between card payment and settlement, Szombati says.

Another unique element of the project is that the central bank covers the whole value chain for the CBDC issuance and redemption, including know-your-customer (KYC) and anti-money laundering (AML) processes. The MNB established specialised legal and customer relation teams, and is learning from the experience of providing a 24/7 service to users, while gaining their trust. To promote the pilot, representatives from the central bank and the Money Compass Foundation visited schools during several campaigns.

On deciding which limits to establish, Szombati says that, although “the central bank, as it is out of scope of AML/CFT [combatting the financing of terroism] regulation” regarding opening an e-wallet and “is not obliged to keep regulatory limits or processes that are otherwise mandatory for commercial banks or PSPs [payment service providers]”, the team wanted to gain experience and insights into the process. They worked with supervisory colleagues to establish a comparable framework and self-imposed restrictions to avoid any AML/CFT risks.

For the basic e-money account before AML/KYC checks, there is a monthly top-up and account balance limit of HUF 45,000 ($120), and a transaction limit of HUF 15,000. The balance can only be spent in Hungary for goods and services and is non-transferable. For the extended e-money account available to users after AML/KYC checks, top-ups and transactions are unlimited, but the account balance limit is HUF 300,000.

A key objective is to offer the first digital wallet to children for free. The mobile app allows users to try out the Hungarian forint in a digital form, initiate transfers to bank accounts, save money by setting goals, and make purchases using QR code payments. Since its launch in May 2023, the Student Safe app has used an instant transfer QR code framework developed by several banks. The MNB developed a QR code standard in September 2024 that can be used by all banks.

Apart from offering mobile banking functionalities, the mobile app’s aim is also to improve students’ financial literacy. It allows children to learn through play by answering quiz questions on financial, digitalisation and sustainability topics. By successfully completing the quizzes, students can collect ‘student coins’ that can be redeemed for digital vouchers. Additional digital assets can be earned from parents as a gift.

To address individuals setting up numerous accounts or trying to circumvent controls in other ways, Ádám Nyikes, head of the digitalisation policy and regulatory department at the MNB, says the central bank monitors activity and can issue warnings or shut down accounts.

Szombati adds: “It’s very important that, at the final stage, when the vouchers for the e-commerce company are distributed, we have the final check and validation of the person using the system.”  There are also tiered layers of security to unlock different features within the app. For the basic functionality of the app, users only need a phone number and an email address. But, for the e-money account to be opened, KYC requirements include selfies, an identity card and a one-time password.

The central bank is continuously working to improve the Student Safe system. New features being considered for piloting include offline payment functionality. “We are about to investigate which solutions from those offered on the market are already capable of serving such needs in real-life situations,” says Szombati. Assessing offline functionality includes assessing which phones and software would be compatible, as well as evaluating how to address the issues of double spending.

Currently, erroneous or misplaced transactions can be resolved via contact with the customer support team. Roland Bódi, senior legal expert on Nyikes’s team says that, in the framework of researching the feasibility of offline payments, the central bank is also examining ways to halt offline transactions for periods of time should circumstances require.

The central bank can also move to piloting a hybrid CBDC model, as a software development kit can be developed for commercial banks to include Student Safe in their own mobile apps. Another option is to increase the number of available payment options within the app – for example, implementing virtual card-payment solutions.

The central bank does not have adoption targets and is keen to harbour a community of users through continued engagement with the app, as well as supporting the fintech community through their involvement.

“The real objective is to provide different payment options to the general public, and it is the public’s choice,” Szombati says. Both through direct involvement in the app and a healthy fintech ecosystem, Szombati adds the MNB “wants the commercial banks, the fintechs, to be as successful and productive as possible”.