eBusiness Weekly
Gamu Pasi
During the recently announced 2022 Monetary Policy Statement, the Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, maintained his stance against adopting cryptocurrency as a legal form of currency in the country, but rather opting for the trending “central bank digital currency” (CBDC).
A CBDC is a digital or virtual format of a country’s base currency. The same can be used for a region in cases where a region has its own currency. To better understand a CBDC here in Zimbabwe, think of it as a “huge” EcoCash-like product, but this time not under the administration of a private company, but run by the central bank.
Why CBDC and not cryptocurrency?
A CBDC and a cryptocurrency are similar in that they are both digital tokens. The only difference is that cryptos are stored on a decentralised blockchain network hence their ability to be used across the globe while a CBDC is issued and stored using a more centralised system.
The risks associated with decentralisation of cryptos are the major reason why the RBZ is skeptical of approving their use. The few countries with CBDCs generally peg them to fiat currencies supported by monetary reserves and ensure central bank regulation, thus reducing the inherent volatility in cryptocurrencies such as Bitcoin.
In 2018, the RBZ blocked a currency exchange called Golix which claimed had already 50 000 users and had an Automated Teller Machine (ATM) which was converting Bitcoin to USD.
Global and Regional CBDC development so far
The RBZ is not seeking to be the first to occupy the CBDC space, but should it pursue the move, it will be amongst the first movers globally. So far only two countries are using CBDC, one being Bahamas through its Sand Dollar launched in 2020 and our own African giant, Nigeria, through its eNaira launched in October 2021.
In Nigeria, the eNaira has two mobile applications, the eNaira speed wallet and the eNaira merchant wallet. The eNaira is projected to boost economic growth and improve GDP by US$29 billion over the next 10 years. The other reason for Central Bank of Nigeria (CBN) launching the eNaira was to counter the rise in use of unregulated cryptocurrencies in the country.
This is evidence that African central banks are facing similar challenges with cryptos. We wonder how they win the battle as cryptos cannot be entirely stopped for they are difficult if not impossible to track. Crypto transactions are taking place in secret even here in Zimbabwe.
Besides Bahamas and Nigeria, China has been running its pilot for its e-CNY to be released this February. Kazakhstan, one of the leading nations in Bitcoin mining, is preparing a pilot CBDC project to be launched by end of 2022. Russia is also looking to launch its digital ruble early this year while Brazil will start its pilot this year with the hope of launching in 2024.
Kenya — A more similar example to Zimbabwe
Earlier this week, the Central Bank of Kenya (CBK) issued a discussion paper assessing the applicability of a CBDC in a country with real-time mobile money system mostly dominated by M-Pesa. M-Pesa is Kenyan version of Zimbabwe’s EcoCash. The question that CBK is asking is “What can a CBDC do that M-Pesa cannot?”
The same can be asked comparing an RBZ CBDC versus EcoCash.
Some analysts are of the view that a CBDC has advantages over mobile money services like M-Pesa and EcoCash in that it allows the creation of smart contracts that can be used to create escrow contracts or rotating savings schemes. CBDCs can act as bridges between traditional finance and all the new decentralised finance projects.
CBDC’s role in a market already dominated by mobile money
The establishment of a CBDC in Zimbabwe and Africa should not seek financial inclusion per se considering the already high penetration of mobile money in most countries. Instead, concentration must target cost reduction for transactions, payment interoperability between merchants and agents, improving efficiency, and speed of payments.
Through regional and global integration, CBDCs can play a critical role of enhancing cross-border payments. Corporates should be challenged to innovate around CBDC-related payment services.
CBDC possible impact on banks
A CBDC poses risk on banks as their role as intermediaries will be reduced. The moment a CBDC begins to handle payments including regional and global, it might become more effective and efficient that clients could reduce use of banks resulting in low bank deposits. Bank’s ability for credit creation could be constrained.
Just like any money transfer service, the risk of cyber-attacks on CBDC infrastructure cannot be ruled out.
Financial risk by its very nature cannot be avoided, but can be reduced. That is the very reason why the RBZ remains doubtful in onboarding cryptocurrencies because they will have zero control unlike in a CBDC. It’s all about minimising risk!
Gamu Pasi is a finance and investment professional with experience and interest in stocks and financial risk. He can be contacted on +263 772 615 181 and [email protected]
