Central Bank Digital Currency (CBDC): Good or Bad for African countries?
By GITTEL AYUK Esq.
Introduction
Central Bank Digital Currency (CBDC) is a current and trending evolution of cryptocurrency. More and more countries are considering creating their own cryptocurrency, making it a digital version of their fiat currency. According to a 2020 survey by the Bank for International Settlement (BIS), about 80% of Central Banks in the world are undergoing research work on CBDCs.[1]
Meanwhile CBDC projects have been received with much ambivalence by Crypto Analysts, Economists and enthusiasts look at CBDCs more positively, as they feel that the coming of CBDCs mean countries are more open to adopting Cryptocurrency. Before delving into the impact of CBDCs within Africa, a general perspective on CBDCs and how they operate is essential.
[1] Codruta Boar, Henry Holden & Amber Wadsworth, January 2020, Impending arrival – a sequel to the survey on central bank digital currency, BIS Papers No 107, January 2020. Available at, https://www.bis.org/publ/bppdf/bispap107.pdf.
What is CBDC?
CBDC is a particular form of cryptocurrency created, issued and managed by the central bank of a country. Just like the original forms of Cryptocurrency, CBDCs are created and run using the blockchain or the Distributed Ledger Technology (DLT). CBDCs intend to operate in two models: a Wholesale CBDC and Retail CBDCs.
The Wholesale CBDC (W-CBDC) will be used by specific institutions like banks for the settlement of interbank payments and securities settlements. Retail CBDC (R-CBDC) which could also be called General Purpose CBDCs will be used by members of the general public for their daily financial transactions[1]. CBDCs generally pursue the objectives of enhancing Financial Inclusion, Access to payments, making payments more efficient, Ensuring Resilience of Payments, Reducing Illicit Use of Money, Monetary Sovereignty and Competition.[2]
[1] OMFI & IBM, 2019, Retail CBDCs: The Next Payment Frontier, Pp. 2, Available at, Retail-CBDCs-The-next-payments-frontier.pdf (omfif.org)
[2] Gabriel Soderberg et al., 9, Feb, 2022, Behind the Scenes of Central Bank Digital Currency Emerging Trends, Insights, and Policy Lessons, International Monetary Fund, Available at, Behind the Scenes of Central Bank Digital Currency (imf.org).
CBDC: Greenlight for Crypto Adoption in Africa
According to the Atlantic Council’s CBDC’s Tracker, Nigeria’s e-Naira, is the first CBDCs in Africa.[1] Apparently, the e-Naira is the only launched CBDC in Africa. Many other African countries have initiated research programs on CBDCs. The focus however, is not just be excited about the launching of CBDCs by African Countries but to ascertain how the CBDCs will affect the economic and monetary paradigm of African countries.
[1] Central Bank Digital Currency Tracker – Atlantic Council
In this regard, the first important issue to determine is whether CBDCs will mean the adoption and legalization of cryptocurrencies in Africa?
To answer the above question, it necessary to decipher whether or not CBDCs will be listed in Cryptocurrency exchanges like every other Cryptocurrency? If yes, then it would be good news for Cryptocurrency ecosystem in Africa.
Since CBDCs will serve almost the same purpose as stable coins, the masses would easily acquire CBDCs which would later be used in the global Cryptocurrency exchanges. Stable coins are a form of cryptocurrency which have the same value as fiat currencies and are not subject to crypto price fluctuations. That’s to say whether, the price of a bitcoin rises to $1 M or falls to $10, the price of a stable coin remains the same. They are listed on cryptocurrency exchanges like every other cryptocurrency and trade against any other cryptocurrency. Popular examples of stable coins include the USDT and the USDC.
The Issuance of CBDCs by the central banks of nations, obviously means they would not be subjected to price fluctuations like every other cryptocurrency which position CBDCs like stable coins. This will reinstate the financial sovereignty of states which have almost completely been lost to financial decentralization. If the CBDC projects go through and are well managed, they will slowly have dominance over traditional stable coins which will reinstate some financial dignity for states.
An Opportunity for African Countries
While many have demonized CBDCs, the coming of CBDCs may just be what some African Countries need to gain their financial autonomy. Some African countries, especially those of the Sub-Saharan Africa have their national currencies completely controlled by other countries (in some cases their former colonial masters). Creating CBDCs may be perfect for such Countries.
Conclusion
Since the creation of Cryptocurrency in 2009, most governments of the World have reacted negatively towards its adoption because of its alleged disruptive effect on their economies. However, as Cryptocurrency gains more credence, talks about Central Bank Digital Currencies have become the order of the day. CBDCs are a proof of the success of Cryptocurrency as Governments seek ways to fit themselves into the space in order to rip their own share of the profit as well as regain their financial sovereignty.