CBDCs: the new target of African central banks

Several central banks in sub-Saharan Africa are exploring or are in the pilot phase of a digital currency, following the introduction of the e-Naira by Nigeria last year. Nigeria was the second country, after the Bahamas, to set up a CBDC which stands for ‘Central Bank Digital Currency’.

CBDCs are digital versions of cash that are safer and less volatile than crypto-assets because they are issued and regulated by central banks. According to statistics, South Africa and Ghana are carrying out experimental projects, while other countries, such as Kenya or Namibia, are in the research phase.

The South African Reserve Bank

The South African Reserve Bank is piloting a CBDC for wholesale, which can only be used by financial institutions for interbank transfers, as part of the second phase of its Khokha project. The country is also participating in a cross-border pilot project with the central banks of Australia, Malaysia, and Singapore.

The Bank of Ghana

The Bank of Ghana, on the other hand, is testing a general-purpose or retail CBDC, the e-Cedi, which can be used by anyone through a digital wallet app or a contactless smart card. which can be used offline.

Countries have different motivations for issuing CBDCs, but for the region, there are potentially significant benefits.

Countries have different motivations for issuing CBDCs, but there are potentially significant benefits for the region.

The first benefit of the CBDC is the promotion of financial inclusion within the banking industry. CBDCs could bring financial services to people who did not have bank accounts before, especially if they are designed for offline use. In remote areas without internet access, digital transactions can be made at low cost or even at no cost using simple feature phones.

Social allowances

CBDCs can be used to distribute well-targeted social benefits, especially during unforeseen crises such as a pandemic or natural disaster.

CBDCs can also facilitate cross-border transfers and payments. Sub-Saharan Africa is the costliest region in terms of sending and receiving money, with an average cost of just under 8% of the transfer amount. CBDCs would make it easier, faster, and cheaper to send funds by shortening payment chains and creating more competition between service providers. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world.

However, before issuing a CBDC, there are certain risks and challenges to consider. Governments will need to improve access to digital infrastructure such as telephone or internet connectivity. Although the region has made considerable progress, further investment is needed.

Data privacy

More generally, central banks will need to develop the expertise and technical capabilities to manage risks related to data privacy, including potential cyberattacks, and financial integrity. To do this, countries will need to strengthen their national identification systems so that know-your-customer requirements are more easily enforced.

There is also a risk that citizens withdraw too much money from banks to buy CBDCs, which could affect banks’ ability to provide loans. This is a particular problem for countries with unstable financial systems.

Central banks will also need to consider the impact of CBDCs on the private digital payment services sector, which has made significant strides in promoting financial inclusion through mobile money.

Disclaimer

Widelia and its affiliates do not provide tax, investment, legal or accounting advice.  Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, investment, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult https://widelia.com/disclaimer/ for more information.

Author

Fred Trebley

Entrepreneur Leadership Network Contributor. After graduating in European Law from the University of Exeter and l’Université de Rennes 1 in 2005, Fred worked in investment banking in London, qualifying as a stockbroker before moving to Gibraltar to join an asset management firm. Fred has enjoyed a career spanning multiple sectors and countries helping leaders and business owners reach their full potential.

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