Nigeria seems to have set the pace for the introduction of Central Bank Digital Currency (CBDC) in Africa following its introduction of the e-Naira in October 2021 to enhance payment systems.
A chart from the International Monetary Fund (IMF) shows that several Sub-Saharan African countries are currently researching to develop their digital currencies with Ghana and South Africa at the pilot phase of their digital currencies.
What are Central Bank Digital Currencies? According to the IMF, CBDCs are digital versions of cash that are more secure and less volatile than crypto assets because they are issued and regulated by central banks.
What this means is that countries are adopting CBDCs as a way of providing state-backed digital currency considering that cryptocurrencies such as Bitcoin are currently unregulated and are too volatile to be used as money effectively.
According to IMF, ‘’the South African Reserve Bank is experimenting with a wholesale CBDC, which can only be used by financial institutions for interbank transfers, as part of the second phase of its Project Khokha. The country is also participating in a cross-border pilot with the central banks of Australia, Malaysia, and Singapore.
The Bank of Ghana, by contrast, is testing a general-purpose or retail CBDC, the e-Cedi, which can be used by anyone with either a digital wallet app or a contactless smart card that can be used offline’’.
CBDCs can be used in promoting financial inclusion as it has the potential of extending financial services to an excluded populace, particularly in rural areas. IMF stated that ‘’CBDCs could bring financial services to people who previously didn’t have bank accounts, especially if designed for offline use. In remote areas without internet access, digital transactions can be made at little or no cost using simple feature phones’’.
The financial institution also highlighted that CBDCs can be used to distribute targeted welfare payments, especially during crises such as a pandemic or natural disaster.
After acknowledging the progress the continent of Africa is making, the IMF however, emphasized the risks and challenges associated with the issuance and use of CBDC, and implored countries to put in place the necessary structural and operational infrastructure needed for the smooth operation of these digital currencies.
The IMF said ‘’central banks will need to develop the expertise and technical capacity to manage the risks to data privacy, including from potential cyber-attacks, and to financial integrity, which will require countries to strengthen their national identification systems so know-your-customer requirements are more easily enforced. There is also a risk that citizens pull too much money out of banks to purchase CBDCs, affecting banks’ ability to lend. This is especially a problem for countries with unstable financial systems’’.
Other information you need to know
● The first nationwide CBDC in the world is the Sand Dollar which was issued by the Central Bank of the Bahamas in October 2020.
● Nigeria is currently the only African country to launched a state-backed digital currency.
● In Africa, the countries currently in the research phase of their CBDCs are; Uganda, Kenya, Rwanda, Tanzania, Mauritius, Madagascar, Zimbabwe, Zambia, and Namibia.
● According to the World Bank here are almost 100 countries worldwide actively evaluating their Central Bank Digital Currency (CBDC).