The Bank of Russia presented a new concept for the digital ruble, a central bank digital currency the regulator has been contemplating since late last year, at a press conference on Thursday.

A prototype of the digital ruble will be created by this December, said Bank of Russia First Deputy Governor Olga Skorobogatova. The regulator also published a fresh report on the current state and future plans for the project.

The digital ruble will live in a hybrid technological platform combining distributed ledger technology (DLT) and centralized control by the Bank of Russia. The regulator hasn’t picked any particular DLT platform yet, Skorobogatova said, adding that the Bank of Russia will likely use open-source code to build its own proprietary product. 

In 2022, the Bank of Russia will draft the necessary regulatory norms for integrating its version of a central bank digital currency (CBDC) into Russia’s financial system, as well as pilot the prototype with banks and other financial institutions, according to the report.

“We’ve been looking at many projects, and many would like to say they have a ready-to-use product, but [they don't] work for the digital ruble,” Skorobogatova said.

One thing is clear: The Bank of Russia wants smart contracts on its platform to allow users to program settlement of their transactions based on certain conditions, according to the report.   

The updated CBDC concept, following the first analytical report published in October, is based on feedback the Bank of Russia received over the autumn and winter of 2020. Most significantly, the regulator chose to give commercial banks a more important place in the CBDC architecture. 

In a two-tier model similar to the concept of the digital yuan, the Bank of Russia will open digital wallets for commercial banks and give them digital rubles in exchange for the money they keep on their corresponding accounts with the regulator. 

The banks, in turn, will open wallets for their clients. Bank of Russia will provide its own platform for the digital ruble, which the banks will be able to build into their own digital banking apps, the report says. 

Unlike bank deposits, digital ruble accounts will not earn interest but there is a security bonus: If a bank goes bankrupt, all digital ruble accounts it opened will still be available to users via other financial institutions participating in the network, the report says. 

Read also: Bank of Russia Chair: Digital Ruble Is No Threat to Banks

Another notable point is that person-to-person money transfers in digital rubles will be free of commissions while the payments to vendors of goods and services will incur commission fees. The rules and tariffs will be established by the Bank of Russia, Skorobogatova said.  

Previously, the central bank considered a more centralized version of the digital ruble, where the regulator would be managing the entire system itself. That version worried banks that thought they would have to compete against the regulator for people’s deposits. After consultations, the Bank of Russia reconsidered the role of banks in the project.

The Bank of Russia is determined to make digital ruble payments available offline. Although, Skorobogatova claimed, there are currently no known technologies in the world that could support an offline mode for a project like the digital ruble, the Bank of Russia believes a way can be found.

For offline transactions, users will need to open a second digital wallet on their mobile devices and transfer digital rubles from their online wallet to the offline one. Users will be able to transfer funds offline between their devices using technologies like Bluetooth and near-field communication (NFC), the report said. 

The Bank of Russia is also planning to allow the restoration of lost funds in offline wallets in case the device gets lost. It’s not yet clear how such a feature for the CBDC will be implemented technologically. 

Financial institutions that sent their feedback on the digital ruble concept to the Bank of Russia also supported the idea of an offline mode, Skorobogatova said. However, considering the risks of such a novel idea, the respondents suggested limiting offline transactions in size and time of execution.

Read also: Digital Ruble Can Help Track Government Spending, Bank of Russia Says

One of the key risks of the digital ruble that concerned the banks is a potential outflow of liquidity from banks if people start pulling their money from bank accounts and putting them into digital ruble wallets. The Bank of Russia might need to limit the size of such operations to prevent a shock for the market, said Deputy Chairman Alexei Zabotkin during the press conference. 

Skorobogatova said the digital ruble is a “mega-project” for Russia, and the Bank of Russia believes that now is the right time to start the project. The final decision on when the digital ruble will be launched, however, will be made after the piloting work is done.