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With COVID-19 ensuring that the world of digital payments will never be the same, it can no longer be doubted that the enthusiasm around digital currency is a very real phenomenon – and Africa is well poised to take advantage of this transformational technology. 

Even before the COVID-19 crisis struck, some countries like the Marshall Islands and Venezuela had already started moving towards their national digital currencies – the Sovereign and Venezuelan Petro respectively. 

Coming to the more advanced, global economies, the UK is leading the way, with the Bank of England noting that it is examining how “Britain could adopt a bitcoin-style digital currency as part of a global group of central banks that have joined together to examine the possible pitfalls of relying on electronic money.” 

Meanwhile, a draft document issued by the European Union (EU) in December 2019 suggests that the union should consider issuing its own digital currency. The draft prepared by the Finnish EU presidency notes that “The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect.”

However, even as, on the one hand, the drive advocates for the adoption of digital currency among the masses to promote financial inclusion at an unprecedented level, on the other hand, governments, monetary authorities as well as international financial organisations alike are increasingly echoing concerns arising from the open nature of such a financial world. 

Why is a Central Bank Digital Currency needed?

With most new digital currencies developing out of sovereign control, it poses a great challenge for central banks, financial regulators and finance departments of the government, as well as fiscal authorities and statistical authorities. On the other hand, when it comes to implementing a digital currency within sovereign control, it is becoming increasingly clear to all participants of the digital currency ecosystem that putting such a novel payment instrument in place would necessitate stringent regulations and frameworks. 

With central banks in particular playing an important part in the global economic and financial systems, it is no wonder that almost 25% of the central banks globally are opening up their jurisdictions to different use cases of state-backed digital currencies, stable coins and cryptocurrencies. Such a Central Bank Digital Currency (CBDC) will support domestic payments, retail, wholesale and cross-border transactions; a viable alternative money for large, small and emerging economies.[Y1] 

What is a Central Bank Digital Currency?

Simply put, CBDCs are a government-issued cryptocurrency designed to replace the traditional or physical form of fiat currencies, denominated by commonly used legal tender in the form of bank notes or coins. On a more technical note, the Bank of International Settlements defines a CBDC as “a new form of central bank money. That is, a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.” 

The BIS goes on to use a Venn diagram called the “money flower” to explain the differences between various types of CBDCs (represented by the grey area below) and the Bitcoin as well as other cryptocurrencies which are deemed to be private digital tokens.

Source: CoinTelegraph illustration of the Venn diagram by BIS

What are the latest developments in Africa?

In Africa too, the continent appears to be well poised to benefit from the digital currency revolution as West African nation Senegal launched its national digital currency in 2016. Known as the eCFA, Senegal’s CBDC co-exists as a legal tender alongside the recognised fiat currency, CFA Franc, whilst holding an equivalent value. 

Also, as recently as 2019, there were reports in numerous publications that Tunisia, located in Northwest Africa, was moving fast to launch its national digital currency, the eDinar, on the blockchain. In the meantime, these claims have been refuted since by none other than the Central Bank of Tunisia and the status of the eDinar remains a matter of speculation. 

In terms of the implications of the CBDC for several economies in Africa where mobile money usage has outstripped the rates in the rest of the world, key findings from a joint study by the FSD Africa and Cenfri suggest that the application of retail CBDC to mobile money has significant benefits. Among these, the major advantages of a CBDC for Africa would be the potential to foster greater interoperability, improve payment efficiency, facilitate cost-saving gains by minimising reconciliation complexity and notional costs, as well as reduce key payment risks typically associated with mobile money.

However, on a cautionary note, the study also warns that, if implemented incorrectly, CBDC could undermine the financial stability, security and inclusiveness of an economy.

Digital is the way forward

Will key economies in Africa eventually reduce their reliance on physical cash and transform themselves into digital economies? Only time will tell how long this journey will be, and how CBDC users, investors, policymakers, key intermediaries and other stakeholders will work towards this common objective.

What is clear though is that systematic integration and effective control of the digital ecosystem is needed to boost the confidence of diverse stakeholders in their respective national digitalisation strategies, and ultimately create a conducive regional environment for the widespread adoption and use of a Central Bank Digital Currency.