Africa Is Experiencing A Revolution In CBDCs
Nigeria and Ghana on CBDC Pilot
While central banks have long been interested in developing digital versions of their fiat currencies, the global pandemic helped intensify this desire.
Financial inclusion is a huge concern for everyone on the African continent. With the proliferation of mobile money services across parts of the continent helping drive this mantra, will the use of central bank digital currencies (CBDCs) help bring banking services to the masses?
This piece is intended to inform readers about current and former CBDC projects on the continent. This information might help interested parties make better-informed decisions regarding opportunities in the region.
Senegalese eCFA
With the West African CFA franc as its major currency, the Africa nation of Senegal boasts a richer association and history with cryptocurrency than most countries from the West. Going as far back as 2016, the country was experimenting with digital currency.
As a nation, Senegal relies mainly on agriculture, fishing, petroleum, and tourism. Its economy remains competitive relative to others on the continent.
Between 2018 and 2020, the country’s average inflation rate hovered around 1%, indicating a relatively stable economy.
In November 2016, regional Senegalese bank Banque Régionale de Marchés (BRM) announced the release of a “high-security” digital currency named eCFA, which was created in collaboration with eCurrency Mint Limited.
The digital currency, which was designed to fulfill multiple objectives, was created to be interchangeable with physical money. In addition, it harnessed cryptography to help prevent counterfeiting.
Further, it was designed for use on all money platforms, a quality that could potentially help bring greater financial inclusion to Senegal.
The project was perceived as holding significant potential, as it was thought of, at least in some quarters, as something that “could become the region’s digital fiat currency.”
eCFA Gains No Traction
The eCFA was designed to comply with the regulations put forth by The Central Bank of West African States, the institution responsible for governing monetary policy in the West African Monetary Union, a group of eight nations, which includes Senegal.
In spite of these efforts, the region’s central bank stated that it was in no way involved with the eCFA, and had no plans to do so. It emphasized that it was not thinking about creating “digital currency in any of its member states.” Further, the financial institution stated that BRM should refrain from using the term eCFA “to prevent any kind of confusion with the legal currency.”
After the central bank pointed out these matters, the eCFA project went quiet, as no further developments surrounding the digital currency were reported.
Eswatini Central Bank CBDC Diagnostic Studies
The kingdom of Eswatini is a landlocked country to the east of South Africa. Eswatini, formerly known as Swaziland, is distinguished by its rich culture and unique government structure as a diarchy. Since 1986, King Mswati III and Queen Mother Ntfombi Tfwala have ruled the country together. Under this form of government, “the king is the administrative head of state while the queen is the national head of state,” according to CGTN Africa.
The Central Bank of Eswatini teamed up with the Centre for Financial Regulation and Inclusion (Cenfri) to research the possibility of a central bank digital currency (CBDC), as well as the potential use cases for such a digital fiat currency.
The study explored three use cases, the payment use case, consumer use case, and the economic policy use case.
The diagnostic study outlined four planned phases to assess the potential of a CBDC in Eswatini. The phases were described as follows:
Phase 1: Deepen understanding of potential benefits (demands) of CBDC in Eswatini.
Phase 2: Evaluate key prerequisites and regulatory environment.
Phase 3: Conduct gap analysis and feasibility assessment.
Phase 4: Identify roadmap for potential testing and roll-out of CBDC.
Findings from the first phase of the inquiry indicated that there are indeed three potential use cases that need further investigation by the Board of Directors of CBE for the possible pilot testing and introduction of CBDC within Eswatini. These include 1) bolstering payment efficiency, 2) enhancing economic policy through heightened transparency, and 3) working toward greater financial inclusion by increasing the use of mobile payments.
Greater payment system efficiency, stronger financial inclusion (which could, in turn, enhance demand), and better-informed policy formulation could all contribute to stronger economic conditions.
This, in turn, suggests that delving further could create the capacity to implement a CBDC in Eswatini which would prove beneficial to the economy. Therefore, the onus lies on the CBE to conduct additional research in order to promote a sustainable, efficient, and inclusive modern financial system that is in-line with long-run economic development.
In August 2020, Cenfri published an article stating that the CBE had completed phase 1 of its inquiry and would conduct subsequent phases later on.
The author of this piece requested an update from CBE, but at the time of this publication, no response had been received.
Tanzania, Mozambique, and Madagascar
A recent Bank for International Settlements (BIS) survey, which polled 65 central banks during late 2020, revealed that 86% of these financial institutions were exploring CBDCs.
Interestingly, the central banks of three African countries, Tanzania, Mozambique, and Madagascar, took part in this annual survey for the first time. They joined the likes of Egypt, Cape Verde, Eswatini, and South Africa, which participated in the assessment previously.
Mrs. Rakiya Mohammed, director of information technology for the Central Bank of Nigeria, made a statement early last month at an online news briefing during a Bankers Committee meeting that the nation’s central bank was considering launching its digital currency later in 2021.
“Before the end of the year, the Central Bank will be making [a] special announcement and possibly launching a pilot scheme in order to be able to provide this kind of currency to the populace,” she said.
In terms of particular use cases, Mohammed emphasized remittances, stating that implementing a CBDC might make it easier for these payments to reach the African nation.
She also clarified that when the aforementioned digital fiat currency is implemented, it will not replace cash notes, but will instead accompany them.
Will the digital currency the financial institution is seeking to roll out be blockchain-based, as the industry expects? I doubt it, but if the answer is yes, does the CBN have the technology and expertise needed to implement such a gargantuan project within this short time frame?
There are a lot of questions on my mind considering the silent war going on between the CBN and the crypto industry in Nigeria. To this very day, the central bank has not provided us with a convincing explanation as to why they banned banks from dealing with cryptocurrencies.
Earlier this year, the CBN issued a statement justifying its stance, but the arguments it presented contained many inaccuracies and pointed to an understanding of cryptocurrencies that was superficial at best.
My Take
The economies of African nations are weak to begin with, so any attempt by their central banks to stifle or delay innovation within this space will put them at risk of further decline.
I have come to believe, based on my own personal observation, that one reason why banks in Nigeria stopped dealing with cryptocurrencies was the fact many Nigerians were using them for day-to-day activities, which of course was causing trouble for the naira.
Significant research and innovation are happening in the cryptocurrency space. Facebook’s proposed digital currency, which has been renamed “diem,” could take advantage of these largely unbanked middle-income economies and leave the sovereignty of their fiat currencies in the dust.
Not long ago, The European Central Bank asserted that central banks who fail to issue a CBDC could potentially put themselves at risk of losing their autonomy to foreign entities that issue currencies, for example, Western tech giants.
“Issuing a central bank digital currency would help maintain the autonomy of the domestic payment system and international use of a currency in the digital world,’’ the ECB said in its recently released report.
Final Note
Central bankers across Africa are gearing up to fully digitize their currency.
Egypt, Tunisia, and Morocco are all blockchain-friendly countries, having participated in the BIS survey, with the central bank governor of the latter country recently stating that “The Blockchain, and more broadly the distributed general ledger (DLT) technology, is by far the most disruptive technology of this decade.”
On July 12, 2021, Maxwell Opoku-Afari, the 1st deputy governor of the Bank of Ghana, announced that the financial institution planned to pilot the digital version of the Ghana cedi, which would be called the e-cedi, in September. He elaborated, stating that the central bank planned to make the digital currency available to the public after having it operate in a sandbox environment for a time.
In the Southern Hemisphere, South Africa will lead the way in terms of driving CBDC adoption. At the same time, smaller economies like Eswatini are already finding their path.
In West Africa, Nigeria and Ghana appear to be driving adoption, recently generating headlines with the news that they might pilot a CBDC this year.
Whatever shape African CBDCs end up taking, we can only hope they will be compelling enough to achieve domestic and international adoption.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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