Central Bank of Kenya (CBK). FILE PHOTO | NMGSummary
- CBDC is a national fiat currency in digital form that is a claim on the central bank.
- CBDC is not to be confused with the many cryptocurrencies that are created by different organisations based on some assets.
- Studies by the International Monetary Fund (IMF) show that there is reason for governments to consider replacing cash with digital currencies.
In early 2012, I met the officials of the United Nations Capital Development Fund (UNCDF) and the United States Agency for International Development (USAid) in their New York offices to discuss a cashless economy concept. They had been fascinated by the impact of M-Pesa in Kenya.
In the sidelines of the United Nations General Assembly (UNGA) in September that year, Better Than Cash Alliance (BTCA) was launched. By the launch date, Bill & Melinda Gates Foundation, Citigroup, the Ford Foundation, the Omidyar Network, and Visa Inc had already become the founding members.
As the launch was going on in New York, the programme was already being rolled out in Peru, Kenya, Colombia, and the Philippines. Its initial objectives were to advocate transition from cash to digital payments in a way that advances financial inclusion and promotes responsible digital finance.
Other objectives were to conduct research and share the experiences of members to inform strategies for making the transition and catalyse the development of inclusive digital payments ecosystems in member countries to reduce costs, increase transparency, advance financial inclusion — particularly for women — and drive inclusive growth.
As one of the senior advisers of UNCDF’s Better than Cash Alliance since inception, I have seen the development of digital money to the current state. Never in that period did I ever think that I would see cash transition once more into a country’s fiat currency. Virtually every country is considering a Central Bank Digital Currency (CBDC).
CBDC is a national fiat currency in digital form that is a claim on the central bank. This means that instead of central banks printing cash, they will issue the electronic equivalent — in other words, an account backed by the full faith and credit of the central bank on behalf of the government.
CBDC is not to be confused with the many cryptocurrencies that are created by different organisations based on some assets. CBDC is a liability of the country’s central bank, meaning that central banks will maintain reserves and deposits to back it up, rather than a private bank.
Studies by the International Monetary Fund (IMF) show that there is reason for governments to consider replacing cash with digital currencies. Some of the IMF studies mirror many other studies done in Kenya (notably by Financial Sector Deepening (FSD) on the benefits of digital currencies.
Key among the findings from these studies is the fact that digital money enhances financial inclusion. In Kenya, for example, the banked population ballooned against the backdrop of mobile money. Digital money is safer and has reduced petty crimes. And due to traceability foot print, digital currency will help curb the problem of money laundering.
Use of digital currency will eliminate the cost of printing cash. Emerging technologies like blockchain will lower the cost incurred to transfer and manage it. Further, central banks will find it easier to implement monetary policy in real time.
Like everything else, there are risks of digital currencies. These include cybersecurity. In this day of the social media, any slight negative information could trigger an instant run on the banks. There could also be other risks like lack of capacity or inability of the regulatory bodies not keeping pace with technological changes.
This is perhaps why many central banks are carefully monitoring the development of CBDC. A recent survey in Europe by the Bank for International Settlements on 66 central banks revealed that more than 80 percent are working on CBDCs. Among those surveyed was the European Central Bank.
It was refreshing to read that Kenya had started talks with international central banks to explore the possibility of entering the CBDCs space. Central Bank of Kenya Governor Patrick Njoroge, while talking to reporters during Georgetown’s DC Fintech week, was quoted as saying that the CBK had “started discussing the introduction of central bank digital currencies with other global players.”
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