The invasion of blockchain applications, predominantly via cryptocurrencies, has flooded the African and global financial space with a myriad of groundbreaking possibilities that hold a promise of reaching the realm of an entirely decentralised financial system. This invasion is, however, a threat to traditional banking giants, especially the Central Banks, as this strips them of the central control they possess. In a bid to level the playing field and regain control without completely stifling the innovation that blockchain offers, central banks in Africa are opting for the creation of a Central Bank Digital Currency (CBDC). Some financial analysts speculate that this move can potentially push the continent closer to embracing blockchain, although this shatters the promise that blockchain holds for a decentralised financial future.
What exactly is a Central Bank Digital Currency?
A Central Bank Digital Currency is simply fiat money embodied in digital flesh and is issued by the Central Bank of a nation. This puts it under the control of a central authority.
Findings from a 2020 survey by the Bank for International Settlements revealed that about 20 percent of the world’s population could access CBDCs within the next three years. Quite a number of nations are already conducting extensive work on CBDCs to make this possible.
In 2019, North African nation, Tunisia, was reported by Russian news agencies, Tass and Iz.ru, to have created the world’s first Central Bank Digital Currency, eDinar. Although this was denounced a few days later by the Central Bank of Tunisia(BCT), via a press release, the bank revealed its plans to create a digital currency that is backed by the Central Bank. “The BCT is presently working on finance digitalisation, in its digital currency dimension and not the one involving cryptocurrency. Its departments are considering the opportunities and risks inherent to these new technologies, notably as regards cyber security and financial stability,” the press release stated. This statement by the BCT indicates that the news of a Tunisian CBDC may, in no time, actually be brought to reality.
Prior to the false news of Tunisia’s Central Bank Digital Currency, Senegal had experimented with digital alternatives that mimicked cash. In 2016, a regional Senegalese bank, Banque Régionalede Marchés (BRM), proposed the eCFA, a digital currency which was reportedly backed by Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), the Central Bank of West African Economic and Monetary Union(WAEMU), which Senegal is a part of. Although the eCFA would later fail, it helped Senegal and the entire continent learn about some of the obstructions that would arise in the creation of a Central Bank Digital Currency or anything like it. The aftermath of the eCFA project also revealed the stance of the region’s Central Bank on the creation of a Central Bank Digital Currency.
According to a report by Bloomberg, the region’s Central Bank claimed it had no involvement with the creation of the digital currency and would never consider doing so. While other nations contemplate whether to experiment with a Central Bank Digital Currency, the Central Bank of the region has clearly distanced itself from any agenda of such, at least for now.
The buzz around the creation of a Central Bank Digital Currency happens to catch the interest of the Central Bank of Eswatini in Southern Africa. In 2019, the bank conducted the first phase of a four-phase diagnostic study to determine the possibility of a Central Bank Digital Currency in Eswatini. The outcome of the first phase showed that a Central Bank Digital Currency in Eswatini has three potential use cases, in decreasing order of perceived strength, which includes: payment system efficiency and functionality; deepening consumer demand and usage of digital financial services; economic policy strengthening. These results are positive, and the bank is encouraged to continue with the other three phases of the study before it decides on whether a Central Bank Digital Currency will be created in Eswatini.
Crypto-friendly country, South Africa, as expected, has shown interest in the development of a Central Bank Digital Currency. In May 2019, the South Africa Reserve Bank(SARB) announced its plans to conduct a feasibility study on a Central Bank Digital Currency for the country. The bank also invited interested parties to join the feasibility project. The SARB is also considering possible challenges to a Central Bank Digital Currency and how to address them. These challenges include: how to circulate the Central Bank Digital Currency without affecting the supply of the South African Rand; how to manage a financial system driven by a Central Bank Digital Currency without hurting commercial banks, since the creation of a Central Bank Digital Currency will give the public direct access to funds which are issued by the Central Bank.
In a way, this leaves almost nothing left for the commercial banks to do. The bank is also putting efforts into solving other issues that surround the creation of a Central Bank Digital Currency in South Africa. This is a major trigger to the bank’s invitation to stakeholders and private companies on the best way to launch a Central Bank Digital Currency in the country without adversely affecting the nation’s already existing banking system.
Central Bank Digital Currency in Africa ; Is it Possible?
Although cash still remains king in Africa, the only way to find out if a Central Bank Digital Currency could possibly dethrone cash is to try it out. Putting into perspective the handful of African countries that have considered creating a Central Bank Digital Currency, its feasibility within the entire continent can only be substantially determined when a majority of African countries experiment with the development of a Central Bank Digital Currency. Their findings will unravel how possible its adoption will be in Africa. Nevertheless, this does not sideline the significance of the disposition of the African populace on the adoption of a Central Bank Digital Currency in Africa, and this is largely subjective. Perhaps, the reign of cash as king may soon be coming to an end in Africa. The possibility, however, is dwindling.