Habari za asubuhi,
That’s ‘good morning’ in Swahili
Tanzania’s President Samia Suluhu Hassan recently called
on the country’s central bank to look into the widespread adoption of digital currencies.
Her comments were cheered by the global crypto community and helped bitcoin gain
nearly 10% in 24 hours.
But that excitement seems misguided.
It’s almost unimaginable that Tanzania will dive head-first like El Salvador, where bitcoin is now a legal tender.
The more likely route is for the central bank to first dip its toes by exploring central bank digital currencies (CBDCs), like its counterparts in Nigeria and South Africa in recent months.
What are CBDCs?
CBDC is a digital representation of physical cash.
If you’re familiar with mobile money, you already know that money doesn’t have to exist only in notes, coins and inside of credit and debit cards.
One distinguishing feature of CBCDs is that they utilize a combination of new technology and public infrastructure to solve a number of present-day problems, such as:
Mobile money interoperability: In 2014, Tanzania became the first country in Africa to introduce mobile money interoperability (MMI). Before then, it was nearly impossible for M-PESA users to send money to Tigo Pesa users and vice-versa. While this MMI model works, the advantage of a digital currency legally issued and backed by the government is that it solves the problem of settlements between individual operators.
Transaction costs: It costs money to move money, for instance, in that transfer between M-PESA and Tigo Pesa, the operators will levy a transaction charge. And that charge might be higher if that transaction is cross-border. Transactions done with CBDCs are theoretically cheaper, this has practical applications for driving user adoption and encouraging remittances.
Control: Facebook’s Libra project sparked the global awakening on CBDCs, central banks around the world realized that if they didn’t act, they could lose part of the control and circulation of money in their countries to a private company.
Blockchain: One misconception is that CBDCs is that they are all built on blockchain technology, but this really depends on the specific implementation. For CBDCs that utilize the blockchain, there could be practical applications for creating a publicly accessible audit trail. And for CBDCs that utilize asset tokenization, there are practical applications for asset-based lending. Read more.
Ts & Cs
You’d think with these advantages, African countries would be falling over themselves to adopt CBCDs, but of the continent’s 54 counties, only 9
have taken concrete steps towards digital currency adoption.
One of them is Senegal. It floated the eCFA in 2016, but that experiment was short-lived.
One post-mortem suggests
that the eCFA didn’t gain traction because its users still had to undergo the same strict KYC (know your customer) requirements as they would have to open a traditional bank account, a non-starter in a country where financial inclusion is low.
There’s also the issue of access. Mobile money worked because users didn’t need smartphones or the internet to access it.
There’s yet another issue about legality. Earlier in the year, the IMF put out a report stating that under existing laws, only 5
African countries were allowed to issue digital currencies.
If CBCDs are to reach high levels of adoption, these are just some of the challenges that central banks must identify in the research and pilot stages and make plans to overcome.