Key Takeaways:
- In a newly disclosed document, Kenya’s central bank stated that a central bank digital currency may enhance the country’s financial system.
- The bank warned that implementing a CBDC might come with its own set of dangers.
- The trajectory of Kenya’s domestic payments suggests the development of a robust, inclusive, and dynamic digital currency (e-money).
Kenya is considering adopting digital currency, and the country’s central bank has already requested public input.
In a discussion paper, the Central Bank of Kenya (CBK) suggests that a central bank digital currency (CBDC) might lead to improved cross-border payments and “efficiency improvements.” However, the bank warns in a recently issued document on CBDCs that such digital currencies could threaten the financial system.
For example, the bank identifies “unknowns” in the document about how digital currency may affect central banks’ critical monetary policy, economic stability, and payment programme oversight. The CBK also repeats the money disintermediation argument that opponents of CBDCs frequently use.
“If significant deposit balances are moved from bank deposits to CBDC, banks’ ability for credit creation could get constrained. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood.”
According to the report, when banks lose a considerable amount of low-cost transaction deposits, the cost of lending may rise. Meanwhile, the central bank warned that establishing a CBDC could lead to financial exclusion if the necessary technological infrastructure and technical literacy are not available to all public parts.
Input from the Public
While the CBK claims in the document that “the potential benefits of a Kenyan CBDC remain uncertain,” it underlines the importance of hearing the typical Kenyan’s perspective on the issue.
CBK emphasises that people must be at the centre of every innovation evaluation to respond to the above questions. The value of knowledge is not in its novelty, but in its ability to address a pressing societal issue,” the central bank explained.
Meanwhile, the CBK used the emergence of cell money to defend the strategy of seeking public opinion, claiming that it positioned our state as a cradle of innovation in Africa. According to the central bank, cellphone funds were a success in Kenya since they solved the problem of people moving money to family members.
Similarly, the central bank believes that the CBDC should be founded on usefulness and its problem for people rather than the underlying technology.
In a study released on Thursday, the International Monetary Fund also addressed the possible risks of digital money.
According to the study, as retail CBDC becomes available across borders, negative macroeconomic consequences such as greater currency substitution and sensitivity to financial shocks are possible.
Kenya’s efforts came a day after Zambia’s central bank confirmed that it has been conducting a study on digital currency.
In October of last year, Nigeria became the first country in Africa to introduce its central bank digital currency (CBDC), the eNaira, while Ghana is thought to be nearing the debut of its e-cedi. Unlike cryptocurrencies such as Bitcoin and Ethereum, CBDCs are created by central banks and backed by their respective countries’ fiat currencies.
