• Sun. Aug 14th, 2022

Society

The pros and cons of digital currency


The central banks of Nigeria and Ghana have partnered with foreign fintech companies to create digital versions of their currencies. PICTURES | SHUTTER

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Summary

  • The main motivation for the proposed introduction is to take advantage of technological advances that support the implementation of digital currency.
  • A central bank digital currency (CBDC) is a new type of currency issued by a central bank – such as the Central Bank of Kenya – and which is intended to serve as legal tender.
  • Kenya is in discussions on the possible introduction of a CBDC, the Sand Dollar, which has already been launched in the Bahamas.

The global Covid-19 outbreak has driven many digital transformations across many industries. Central banks have since been in discussion on the feasibility of introducing central bank-based digital currencies.

The main motivation for the proposed introduction is to take advantage of technological advances that support the implementation of digital currency.

A central bank digital currency (CBDC) is a new type of currency issued by a central bank – such as the Central Bank of Kenya – and which is intended to serve as legal tender. Since CBDCs will likely use the same technology as cryptocurrencies, they differ in terms of legal bank.

A CBDC will be regulated and will be based on the value of the Kenyan shilling. A cryptocurrency, however, is largely unregulated and its value is not tied to any asset. Its value largely depends on investor speculation. Also, cryptocurrencies are not centralized, unlike the CBDC which is centralized.

Some countries like El Salvador recognize cryptocurrencies as legal tender. In Kenya, however, the Central Bank has warned against the use of cryptocurrency. However, a large number of Kenyans continue to trade cryptocurrencies.

Kenya is in discussions on the possible introduction of a CBDC, the Sand Dollar, which has already been launched in the Bahamas.

Nigeria is the first African country and one of the few in the world to introduce a CBDC known as eNaira.

The eNaira is a digital wallet whose implementation is facilitated by a smartphone. Kenya is in the discussion stage, especially since the country already has some form of mobile money.

Kenya was the global pioneer of mobile money through the M-Pesa platform. M-Pesa’s market penetration is nearly 70%.

A South African professor questioned the need for a CBDC in Kenya given the high market penetration of mobile money platforms.

CBDCs have many benefits and risks. According to a study, CBDCs have yet to establish that the benefits of introduction outweigh the risks. One of the advantages is that the CBDC will eliminate intermediaries like banks in commercial transactions.

This is a double edged sword as the banking sector could be negatively affected by the introduction of the CBDC. The consumer can be protected from adverse effects such as the collapse of banks.

However, the negative effect of the CBDC on the banking sector could have a negative impact on the economy. The CBDC is open to cyberattacks and data privacy breaches. The use of the CBDC will, however, support business transactions such as smart contracts and the like.

The motivations for introducing CBDCs can guide the benefits it will bring in any country. In the Bahamas for example, the CBDC is very beneficial due to the high percentage of unbanked population. The introduction of digital currency will have the effect of sealing off the unbanked population.

In Kenya, the situation is not the same due to the high market penetration of mobile money and financial services. Therefore, the impact of the CBDC may not be so high. However, according to the CBK working paper, the main objective of launching the CBDC in Kenya is to facilitate cross-border transactions.

If CBDC is introduced in Kenya, many legal reforms need to be undertaken. For example, the Central Bank Act defines legal tender as banknotes and coins. The law may need to be changed to support the introduction of the CBDC. I assume that the CBDC will be backed by regulations to accompany its deployment.

The CBK is currently inviting public comment.


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