Central bank digital currencies popularly known as CBDCs, are starting to gain prevalence all over the world. These currencies will adapt to the technological changes occurring in the financial sector. They will also bypass the challenges that currently affect offline payment systems.
However, while these digital currencies are expanding, many people still do not understand the concept of a digital currency or how the Central Bank Digital Currency works.
That’s why in this article, we’ll be discussing what a Central Bank Digital Currency is, how it works, its benefits, and popular misconceptions.
What is a Central Bank Digital Currency?
A CBDC is a digital variation of money available to the general public regulated by the Central Bank. At the moment, there are physical currencies created and distributed by the Central Bank. These physical currencies are at the liabilities of the Federal Reserves. So, it’ll be the same for digital currencies. What this means is that you can have the virtual version of a currency. You can also send, transfer and even carry out cross-border payments online.
Are Central Bank Currencies Cryptocurrencies?
The answer is no. Cryptocurrencies are unregulated, decentralized currencies that can be extremely volatile. They are also privately owned amongst several entities.
Central Bank Digital Currencies on the other hand are a more stable form of digital money because they are in secure ecosystems. Asides from being regulated and backed by the Central Bank, their values are also directly tied to the rates of the physical currency. So, N1 will be equal to 1 E-Naira.
African Countries with Central Bank Digital Currency Projects
There are several African countries currently looking to implement CBDCs soon. These countries are in the research and testing stage. Some countries, on the other hand, have already launched their versions and are looking to increase adoption. Let’s take a look at some of these African countries;
Nigeria became the first country in Africa to launch its CBDC. The West African country launched the E-Naira on the 1st of October 2021 which was also during its 61st Independence Day celebration. This came after the Central Bank of Nigeria shunned cryptocurrencies and talked about a more stable alternative. Currently, they are working on a more increased adoption across the nation.
In 2021, the Bank of Ghana partnered with a German tech company called Giesecke+Devrient (G+D) to work on the pilot. This assistance will primarily be providing expertise and tech for the e-Cedi project. The pilot will also be tested with banks, payment service providers, merchants, and consumers.
3. South Africa
Currently, South Africa has two CBDC projects. The first called Project Khoka 2, is a feasibility study for general-purpose wholesale and retail by the South African Reserve Banks. This study is also covering all implications that can arise from the policy, regulatory, security, and risk management. The second project called Project Dunbar is in collaboration with other International Central Banks. This project will, however, be solely for international settlements.
The Blockchain-based e-dinar issued by the government post office has been in circulation since 2015. All without the Central Bank’s involvement. Now, there are talks and research on how to advance this project for wider adoption and more usability.
Egypt’s Central Bank has given banks the authority to issue virtual electronic currencies. This act is called the ‘Regulations Governing Provision of Payment Orders through Mobile Phones’. And like every other E-currency, the value is equivalent to 1 Egyptian pound.
Other countries like the Central Bank of Kenya and Rwanda are exploring the possibility of introducing their own CBDC. Rwanda is focusing on the constraints associated with development and issuance. While Kenya is using this as a way to find a more regulated digital ecosystem. The CBN of Madagascar has also launched a two-phase project to study the issuance of its CBDC called the e-Ariary. And Mauritius has also been looking to roll out its CBDC pilot.
Benefits of the Central Bank Digital Currency (CBDC)
Each country has its different objectives for working on CBDCs. However some of the general benefits this digital currency will provide includes;
- Better cross-border trade
- Financial inclusion for every citizen
- Safer transactions
- Cheaper and faster remittance inflow
- Improvements in monetary policy
- Improved payment system efficiencies
We do hope this article has been insightful. We also hope that you now understand just how important CBDCs are to our finance ecosystem. We’d love to hear your thoughts concerning these currencies. Do let us know in the comments below.