Bridgewater Advisors | The Rise Of Digital Money - Central Bank Digital Currency (CBDC) In Africa

The brainwave for major central banks around the world today seems to be flowing towards the exploration of a digital version of cash, issued by the central banks, and made publicly accessible through financial institutions in order to enhance payment systems. This has come to be known as the Central Bank Digital Currency (CBDC), stirring several discussions both for and against it globally.

The paradigm shift in how transactions and payments are done in almost every country can be attributed to the insurgence of the global pandemic coupled with the influx of private innovative digital payment systems. The World Bank Global Findex 2021 finding reveals that mobile money is driving growth in account ownership, particularly in Sub-Saharan Africa, where 33% of adults have a mobile money account. The gender gap in account ownership across developing economies has fallen to 6% points from 9% points, showing progress and increasing interest by both male and female adults in account ownership. Despite these areas of progress, there continue to be gaps in financial access by many unbanked adults.

All of this is attracting the attention of many central banks across the world, including 13 Sub-Saharan African nations who are currently exploring, researching, piloting, and adopting the option of using a Central Bank Digital Currency (CBDC) to enhance their electronic payment system.

Looking at this within the Sub-Saharan context requires unclouded vision lenses and motive adjustment. It is without a doubt that the adoption of CBDC comes with its potential benefits and potential risks, creating dilemmas in the minds of all players in the financial ecosystem.

The success of the CBDC is fundamentally dependent on public acceptance, which means that it must provide real benefits for the users. There are therefore questions that beg for answers - Are we ready for this? Do we really need it? or we intend to follow the bandwagon in our bid to test the waters of the Rubicon?

Innovations in financial technology (fintech), stretching from early coins and banknotes to card payments, e-money, mobile payments, and, more recently, cryptocurrencies, signifies the transformative changes to the financial and monetary systems. Bitcoin and cryptocurrencies bear a significant resemblance to base money or central bank money but are volatile in nature and since it has no central regulation it is therefore considered unsafe, unsecure, untrustworthy, and highly risky form of digital currency or virtual asset.

CBDC in Sub-Saharan Africa

According to BIS survey in 2021 on CBDC, 86% of central banks were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Leading among Sub- Saharan African countries is Nigeria which launched its CBDC dubbed e-Naira in October 2021 and occupies the second position globally after Bahamas in the adoption of CBDC. South Africa and Ghana are in the pilot phase of implementing their wholesale and retail CBDCs respectively. Zambia, Kenya, Tanzania, Mauritius, Madagascar, Eswatini, Zimbabwe, and Rwanda are among countries researching on the possibility of CBDC implementation in their countries.

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A perfect substitute of current cash?

CBDC as a digital version of cash or fiat money can be stored and transferred electronically and has the full backing of the central bank which issues it for either wholesale or retail transacting purposes.

Wholesale digital currencies are restricted to financial market payments and only available to financial institutions, whereas the retail digital currency is broadly available and serves a general-purpose digital payment. It can be cryptographically stored on cards or phones, as token based or as account based.

Does the quest for this digital currency pursuit in any form seeks to present the role of traditional payment systems like paper as by far outdated?

There are views that hold on to the uniqueness and relevance of paper money because of fears and suspicions of certain high risks connected to the introduction and implementation of central bank digital currency.

However, to others, CBDC performs functions exactly as current cash and can be considered a perfect substitute. Payment is done by transferring the value note from one person to another- Similar concept to cash payment transactions, where payment is done by transferring banknotes and or coins from person A to person B.

Benefits and Challenges

Chief among the objectives that central Banks seek for by introducing the central digital currency is the benefits of financial inclusion that potentially can be achieved. There are 189,090,428 adults in Sub-Saharan Africa who are still without any form of traditional or mobile accounts – Findex data 2021. Hence, the introduction of CBDC will bring financial services to people who previously did not have bank accounts or were not active players in the banking space.

If the introduction of CBDC’s requires the involvement of all citizens, then those in remote areas where there are less, or no mobile networks or internet access must be considered. There is therefore a great need for improvement in digital infrastructure in order to see a full and effective implementation.

The banked adult in sub–Saharan Africa are faced with certain barriers some of which include lack of money, distance to nearest financial institutions, insufficient documentation required, lack of mobile phones, and high illiteracy levels. There is therefore the need to tailor a Bespoke approach according to the region’s peculiar issues.

The introduction of the CBDC also aims to foster cross-border transfers and payments, making it cheaper by shortening payment chains and creating more competition among remittance service providers. According to IMF data, transfer of funds into Sub Sharan Africa attracts an average cost of 8% of transfer amount, making it relatively expensive to send or receive money in the Sub region. It is the belief of central banks that CBDC’s in sub-Saharan Africa will make cross border transactions cheaper and faster, and ultimate foster the needed regional integration being championed by the African Continental Free Trade Area (AfCTA) agreement.

Like other forms of digital money, CBDCs are exposed to the risk of cyber-attacks, therefore, central banks need to invest in cybersecurity programs which can be an expensive demand that must be made available. Additionally, there is the digital infrastructure and technical cost that will be needed to be done, hence, central banks in the region will need to carefully evaluate the benefits and weigh them against the challenges and risks, considering the local context and internal capacity.

The Rise Of Digital Money - Central Bank Digital Currency (CBDC) In Africa

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