Consumers continue to rally around glamourous new digital solutions as a resolute digitalisation-occasioned global disruption that began in the 1990s ‘dot-com’ era ushers the current Information Age.
Money systems are at the heart of this revolution. The recent call by the Central Bank of Kenya (CBK) for public participation regarding a proposed Central Bank Digital Currency (CBDC), therefore, seems timely. But what is a CBDC?
The Bank of England, in its 54th Quarterly Bulletin, “Innovations in Payment Technologies and the Emergence of Digital Currencies”, defines a digital currency as an electronic, peer-to-peer form of money that features a decentralised online payment system (distributed ledger or blockchain) which all users can electronically access to approve transactions.
A CBK CBDC would, therefore, be a Kenyan shilling-denominated digital currency. It would involve granting unfettered, electronic, 24/7 and interest-bearing access to the shilling risk-free (sovereign bond/reserve-backed) balance sheet to the general population.
The CBK must, therefore, engage in in-depth reflection before crystallising this idea because it impacts the core of our financial system.
The European Banking Authority (EBA) had observed that, since digital currency transactions are borderless, irreversible and masked in anonymity, they often encourage ills such as tax evasion, illicit trade, money laundering and terrorism financing.
In 2020, the FBI seized over $1 billion worth of bitcoin linked to Silk Road, a dark-web black market where 100,000 buyers used the private digital currency to trade in drugs, and worse.
A Kenyan CBDC is, therefore, to the extent that a suspicious-transaction flagging system is embedded, be welcome.
Secondly, with digital currencies widely viewed as investment tokens as opposed to legal tender, they are awash with speculators, making them volatile. Bitcoin’s value, for instance, fell from $69,000 last November to under $40,000 in January.
Thirdly, CBK will have to compel Kenyans to accept CBDC as money. In a 2016 speech titled “Central Banks and Digital Currencies” at my alma mater, the London School of Economics and Political Science, Bank of England Deputy Governor Ben Broadbent said “…the benefit to any individual of using a particular unit of account is greater if others use it too”.
CBDC would most likely have the coercive force of law and the backing of our sovereign reserves and be bundled with merits such as lower transaction costs, financial inclusion and ease of access (like through USSD on phone) to be widely accepted.
Since commercial banks hold on-demand liabilities (deposits) and illiquid assets (loans), they may be faced with a “maturity transformation” problem if the CBDC causes a simultaneous and widespread bank run—hence, their collapse.
CBK should offer its balance sheet to select institutions and not retail depositors. It must benchmark payment solutions—such as the 110-million-user Pix in Brazil that processes more instant transfers than the US.
CBK’s proactivity on CBDC ought to be commended as it will, hopefully, nip in the bud the pervasive mushrooming of private digital currencies that could expose our financial system to multiple risks. BY DAILY NATION