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How Feasible Is The Creation Of A Central Bank Digital Currency in Africa?

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Central Bank Digital Currencies
Source: Bitfxt (Image was modified)

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. 

READ ALSO: Senegal’s Digital Currency – eCFA: Four Years in Retrospect

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. 

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Jack Dorsey‘s Square to develop open source Bitcoin mining

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Jack Dorsey Bitcoin

On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Financial Leaders from G7 Release Guidelines for Central Bank Digital Currency

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Source: World Atlas

At a meeting that was held in Washington, yesterday, October 13, G7 leaders discussed central bank digital currency and endorsed 13 public policy principles with regards to their implementation. The financial leaders from G7 agreed that CBDCs would complement cash and should not be detrimental to the monetary system. The G7 leaders have been discussing CBDCs this week concluding that they should do no harm and meet rigorous standards.

It should be noted that G7 includes finance leaders in advanced economic nations comprising of Canada, France, Germany, Italy, Japan, the U.S and the U.K. the G7 leaders make it mandatory that any newly launched CBDC should not harm the central bank’s ability to perform its duty of maintaining financial stability. In a joint statement by the G7 finance ministers and central bankers, they said that, 

“Strong international coordination and cooperation on these issues help to ensure that public and private sector innovation will deliver domestic and cross-border benefits while being safe for users and the wider financial system.” 

The joint statement further states that CBDCs are complements to cash and could serve as a liquid or safe settlement assets with an added advantage of anchoring existing payment systems. CBDCs issuance should be entrenched in a long-standing public commitment to transparency, rule of law, and sound economic governance. The statement added at CBDCs must be so efficient that they are fully interoperable on a cross-border basis. 

The G7 leaders agreed that they had a duty to minimize the incidence of ‘harmful spillovers to the international monetary and financial system” 

The G7 statement reiterated a similar statement earlier made by G20 that no global stablecoin project should begin operation until such a token has addressed legal, regulatory and oversight requirements. 

Countries like China and Nigeria are ahead of the pack with regards to the adoption of digital Yuan and Naira respectively. China’s crackdown on cryptocurrency may be a step forward for the country’s plan to promote its digital Yuan. Nigeria, on the other hand, postponed the launch of its eNaira in deference to the 61st anniversary of Nigerian independence on Oct 1. 

However, countries like the US and the UK are dragging their foot with regards to the introduction of CBDCs to their financial system. There are insinuations that America is in danger of being left behind technologically and financially if it doesn’t get serious with the implementation of CBDC in its financial system.

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Learning Guides

Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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