CBDC Initiatives in Africa You May Not Know

The African continent is witnessing significant strides in digital currency initiatives, driven by the evolution of financial technology (fintech). Regulatory authorities are keenly exploring opportunities presented by fintech to enhance financial services while carefully managing associated risks. In South Africa, the collaborative Intergovernmental Fintech Working Group (IFWG), comprising various regulatory bodies, illustrates a concerted effort to navigate the complexities of this technological evolution.

Central banks across Sub-Saharan Africa are delving into initiatives, some specifically addressing central bank-issued digital currencies (CBDC) and policy positions on crypto-assets/currencies. The debate around retail CBDC has gained momentum, driven by concerns about competition from private crypto-assets like Bitcoin and stablecoins such as Facebook’s Libra. This heightened interest reflects a global trend where central bankers are exploring CBDC as a means to regain control over national money supplies.

The financial landscape is evolving rapidly, with an emphasis on real-time, frictionless services. Mobile money schemes, notably exemplified by M-pesa in Africa, have reshaped electronic payments. Concepts of crypto-assets/currency and CBDC are now at the forefront. The IFWG defines crypto-assets as digital representations of value, distinct from CBDC, which represents a central bank liability issued in digital form. While fully implemented CBDC arrangements are yet to emerge, central banks are actively researching and experimenting, driven by public policy objectives such as financial inclusion and efficient disbursement of social benefits. As Africa navigates this digital frontier, the potential for transformative impacts on financial services and economic inclusion is substantial.

Key aspects relating to digital currency initiatives

1. Regulatory Positions on Crypto-Assets/Currencies

Regulatory authorities, including the South African Intergovernmental Fintech Working Group (IFWG), have actively published position papers on crypto-assets. The IFWG’s Crypto Assets Regulatory Working Group’s position paper outlines policy and regulatory positions on these digital assets, reflecting a concerted effort to navigate this evolving landscape.

2. CBDC Initiatives: Exploratory Nature

Across Sub-Saharan Africa, initiatives related to Central Bank Digital Currencies (CBDC) are predominantly exploratory. While several countries are engaging in CBDC exploration, the emphasis is on understanding and analyzing the benefits and potential risks associated with this novel concept.

Objectives Behind the Initiatives:

a. Regulatory Positions on Crypto-Assets/Currencies:

• Policy Clarification: Regulatory authorities aim to provide clarity and outline policy positions on crypto-assets/currencies, recognizing the dynamic nature of these developments.
• Dynamic Regulatory Framework: Acknowledgment that regulatory positions must evolve over time as business models and technologies progress.

b. CBDC Initiatives:

• Capacity Building: To develop a deeper understanding of the CBDC concept, analyzing its potential benefits, and assessing associated risks.
• Feasibility Exploration: Exploring the feasibility of CBDC issuance by central banks, with a focus on electronic currency.
• Modernization of Financial System: Objectives include modernizing the financial system, reducing transaction costs, enhancing service delivery, increasing payment efficiency, and improving financial inclusion.
• Control of Money Supply: Seeking to reduce the cost of circulating fiat currency, increase control over the money supply, and mitigate threats from third-party entities in currency issuance.

Interconnected Objectives:

• The stated objectives are interconnected, combining short- to medium-term exploration and learning to achieve longer-term goals of modernizing and improving existing financial arrangements and systems.

Specific CBDC Program Objectives:

• Use Case Identification: Identifying viable use cases and deployment models for CBDC.
• Legal and Regulatory Considerations: Addressing legal and regulatory issues associated with CBDC implementation.
• Monetary Policy Implications: Assessing the implications of CBDC on monetary policy.
• Financial Stability Implications: Evaluating the impact of CBDC on financial stability.
• National Payment System: Examining the possible influence of CBDC on the national payment system.
• Technical and Security Aspects: Ensuring thorough consideration of technical and security aspects in CBDC development.

These objectives collectively underline the multifaceted nature of digital currency initiatives in Sub-Saharan Africa, reflecting a strategic approach to navigate the complexities of the evolving financial landscape.

Key Drivers of Digital Currency Initiatives in Sub-Saharan Africa

1. Policy/Regulatory Positions on Crypto-Assets:
   • Risk and Benefit Communication: The primary goal is to communicate risks and potential benefits associated with crypto-assets. Regulatory authorities aim to create awareness among financial system stakeholders and the public about their stance on these evolving developments.
2. Central Bank Digital Currency (CBDC) Initiatives:
   • Proactive Evaluation for Cash Decline: A proactive stance is taken to evaluate the feasibility of CBDC usage in anticipation of a possible decline in cash use. While this decline may not be prevalent in many African countries, global indications suggest its occurrence elsewhere. This driver aims to explore CBDC concepts to adapt to potential shifts in payment preferences.
   • Response to Private Sector Crypto-Asset Growth: The growth of unregulated private sector firms exploring crypto-assets prompts central banks to assess their role. Concerns revolve around the risks that private initiatives may pose to the economy. Central banks aim to meet market demands unfulfilled by current payment mechanisms, exploring CBDCs to ensure both market needs and financial stability.
   • Adapting Payment Systems for Efficiency and Resilience: Central banks, mandated to ensure the development of the payment ecosystem, respond to changes in the financial system. In the digital era, characterized by the demand for frictionless and real-time services, central banks aim to enhance support arrangements aligning with their key mandates. This driver focuses on maintaining efficiency and resilience in the payment system.

Common Themes Across Drivers:

• Market Needs and Fulfillment: Both the evaluation for declining cash use and responding to private sector growth are anchored in the idea that market needs are not adequately met by existing payment mechanisms. CBDC initiatives aim to bridge these gaps and address unfulfilled demands.
• Financial Stability: Throughout these drivers, the overarching concern is to ensure financial stability. Proactive evaluation, response to private sector growth, and adapting payment systems all aim to strike a balance between meeting market needs and safeguarding economic stability.

While the outlined drivers are not exhaustive, they capture the shared motivations among stakeholders in Sub-Saharan Africa embarking on CBDC initiatives. These initiatives represent a strategic response to evolving financial landscapes and emerging digital trends.

Key Considerations for Digital Currency Initiatives

Crypto-Assets Policy Positions:

1. Unit of Account, Medium of Exchange, Store of Value:
   • Central banks assess crypto-assets’ viability as a unit of account, medium of exchange, and store of value. Evaluation against these characteristics helps identify potential risks, enabling regulators to formulate appropriate policy positions communicated to the public.
2. Benefits and Frictions in the Payment System:
   • Authorities weigh potential benefits crypto-assets might bring to the payment system, such as reducing frictions. The assessment includes understanding how these assets could enhance or detract from the existing payment infrastructure, influencing decisions on their approval as legitimate means of payment.

Central Bank Digital Currency (CBDC) Initiatives:

1. Efficiency and Stability of Payment System:
   • Regulatory bodies and central banks consider whether CBDC issuance would enhance payment system efficiency and stability by diversifying the system and reducing concentration risk. Assessing these factors contributes to building a robust business case for exploring CBDC.
2. Financial Inclusion and Monetary Policy Implementation:
   • Examination of whether CBDC issuance could advance financial inclusion and improve monetary policy implementation and transmission. These considerations are pivotal in reinforcing the case for CBDC exploration, aligning with broader economic objectives.
3. Competition and Trust in the Monetary System:
   • Regulatory authorities assess if CBDC introduction would foster competition and build trust in the monetary system. These factors contribute to the overall evaluation of the CBDC initiative, influencing its potential impact on the financial landscape.
4. Cost Comparison and Remittance Impact:
   • Consideration of the cost implications of CBDC issuance compared to traditional cash. Additionally, assessing whether CBDC could reduce remittance costs, thereby enhancing its attractiveness and economic feasibility.
5. Security and Stability for Cross-Border Payments:
   • Evaluation of whether CBDC offers a secure and stable alternative for cross-border payments. This consideration addresses the global dimension of CBDC implementation, taking into account its potential role in international financial transactions.
6. Financial Action Task Force (FATF) Implications:
   • Examination of the implications of CBDC initiatives in alignment with FATF guidelines. This involves practical considerations related to issuance, distribution, transactions, and ongoing monitoring and maintenance of CBDC, ensuring adherence to international regulatory standards.

These key considerations form the foundation for robust decision-making in digital currency initiatives, addressing risks, benefits, and broader economic and regulatory implications.

Characteristics of a Successful Crypto Asset or CBDC

For a crypto asset or Central Bank Digital Currency (CBDC) to achieve success, several key characteristics are paramount. Users, merchants, and participants in the payment system seek specific attributes in their chosen instruments. While this list isn’t exhaustive, it encapsulates the most crucial features ensuring widespread acceptance and sustainability.

1. Legal Tender Acceptance:
   • The crypto asset or CBDC must be recognized as legal tender. This legal status reinforces its legitimacy and ensures that users can confidently transact with it, fostering trust among stakeholders.
2. Trust Building:
   • Building trust is fundamental. The currency should instill confidence not only in its holders but also in parties accepting it as a valid means of payment. Trust is the cornerstone for wider adoption and sustained usage.
3. Non-Exclusivity and Ubiquity:
   • Non-exclusivity ensures that the crypto asset or CBDC is universally accepted. Ubiquity assures users, merchants, and service providers that the currency can be exchanged seamlessly within the conventional payment system.
4. User-Friendly and Non-Cumbersome:
   • The currency should be user-friendly, ensuring a seamless and convenient user experience. It must not be cumbersome to use, promoting accessibility for a broad range of users.
5. Interoperability:
   • Interoperability with other conventional payment systems is crucial. The crypto asset or CBDC should seamlessly integrate with existing financial infrastructure, facilitating smooth transactions across different platforms.
6. High Security Standards:
   • Meeting stringent security standards is imperative. The currency must ensure the highest level of security to protect users’ assets, transactions, and sensitive data from potential threats.
7. Regulatory Compliance:
   • Compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations is non-negotiable. Adhering to regulatory standards is vital for legal approval and mitigating risks associated with illicit activities.
8. Scalability and Flexibility:
   • The instrument should be scalable to accommodate growing transaction volumes. Flexibility in its usage and scalability are essential for adapting to changing market demands and technological advancements.
9. Versatility for Online and Offline Transactions:
   • Ideally, the crypto asset or CBDC should be usable for both online and offline transactions. This versatility enhances its practicality in diverse scenarios, catering to a broad spectrum of user preferences.
10. Convenience and Issuer Flexibility:
    • Convenience for users is paramount. When approved by regulatory authorities, the issuance of the currency should be flexible for issuers within controlled measures. This balance ensures both regulatory compliance and user convenience.

These characteristics collectively form the bedrock for a successful payment instrument, ensuring its seamless integration into the financial ecosystem and sustained user trust and confidence.

Possible Challenges in Crypto Asset or CBDC Initiatives

When delving into the realm of crypto assets or Central Bank Digital Currencies (CBDCs), a delicate balance must be struck between identifying potential risks and recognizing the associated benefits. This task is challenging, as clear identification of risks may trigger negative perceptions, potentially leading to premature abandonment of initiatives or the adoption of a cautious policy stance. An anticipatory approach that acknowledges possible challenges is essential to navigate the complexities of this evolving landscape.

1. Loss of Confidence in Commercial Banks:
   • Challenge: Introducing a retail CBDC that provides the public with direct access to the central bank could lead to a loss of confidence in commercial banks during times of financial crisis. There’s a risk of a shift in deposits from commercial banks to CBDC, impacting the stability of the broader financial system.
   • Mitigation: Careful design and communication strategies are required to manage public perceptions and ensure that the introduction of CBDC complements, rather than undermines, the existing banking system.
2. Interoperability with Existing Payment Systems:
   • Challenge: Achieving interoperability with existing payment systems is a complex task. Seamless transactions with other conventional payment instruments must be facilitated to avoid disruptions in the financial ecosystem.
   • Mitigation: Thorough planning and collaboration with relevant stakeholders are essential to ensure that CBDC integrates smoothly with existing payment infrastructure, promoting a frictionless user experience.
3. Public Acceptance and Cybersecurity Concerns:
   • Challenge: Anticipating public acceptance of CBDC poses challenges. Additionally, concerns related to cybersecurity and the protection of consumer data and privacy need to be addressed.
   • Mitigation: Implementing robust cybersecurity measures, conducting public awareness campaigns, and incorporating strong data protection protocols are vital components of managing these challenges.
4. Potential Growth of Central Bank’s Balance Sheet:
   • Challenge: High demand for CBDC could lead to a considerable expansion of the central bank’s balance sheet.
   • Mitigation: The central bank must be prepared to manage the consequences of increased demand, including potential impacts on its balance sheet. Robust risk management strategies and regulatory frameworks should be in place.

While these challenges are not insurmountable, they underscore the importance of thorough planning, stakeholder engagement, and proactive measures to ensure the successful exploration and implementation of crypto assets or CBDCs.

Approaches to Crypto-Currencies and CBDCs in Sub-Saharan Africa

The landscape of crypto-currencies and Central Bank Digital Currencies (CBDCs) in Sub-Saharan Africa reflects a cautious yet exploratory approach by regulatory authorities. In the Southern African Development Community (SADC) region, countries are closely monitoring fintech developments, including crypto-assets, with a reserved stance on formal recognition and regulation.

Policy Positions on Crypto-Currencies/Assets:

• In the SADC region, countries issue policy stances emphasizing non-regulation of crypto-currencies/assets while highlighting associated risks. Position papers, such as Namibia’s on distributed ledger technologies and virtual currencies, emphasize observation rather than immediate regulation.
• South Africa’s Intergovernmental Fintech Working Group (IFWG) has issued a position paper on crypto-assets, making recommendations for potential regulation, currently under consideration.

CBDC Initiatives:

The global landscape for CBDCs is dynamic, with countries either conducting feasibility studies or contemplating issuance. In Africa, two countries, Ghana and South Africa, have taken an exploratory approach to CBDC initiatives.

• Ghana’s CBDC Pilot Project: The Bank of Ghana, in its 91st Monetary Policy Committee Press Release in November 2019, announced its intention to explore a CBDC pilot project. This project, set in a sandbox environment, aims to assess the feasibility of introducing an electronic cedi (e-cedi). The initiative is still in its early stages, with a committee dedicated to studying the opportunities, risks, and potential impact on the financial ecosystem.
• South Africa’s CBDC Feasibility Study: South Africa, a key player in the African economy, has launched a comprehensive CBDC feasibility study. Covering the entire lifecycle of a CBDC, including issuance, distribution, transacting, monitoring, and maintenance, the study is a collaborative effort involving prospective partners. The study’s secondary objectives encompass design considerations, policy impact, legal and regulatory frameworks, and insights from international forums.
• The global landscape for CBDCs is dynamic, with some countries conducting feasibility studies, while others are contemplating issuance. However, reports on CBDC adoption in Africa, particularly in Senegal and Tunisia, have been met with denials from authorities.

Challenges and Considerations:

• Challenges include potential loss of confidence in commercial banks, interoperability with existing payment systems, public acceptance, cybersecurity concerns, and the possibility of the central bank’s balance sheet growing significantly.
• Considerations involve evaluating the risks and benefits of crypto-assets, exploring CBDC feasibility, and ensuring alignment with national financial goals.

Conclusion:

The varied approaches across Sub-Saharan Africa demonstrate a balance between curiosity and caution regarding crypto-assets and CBDCs. While regulatory authorities emphasize non-regulation of crypto-assets, the exploratory CBDC projects in Ghana and South Africa signal a proactive stance in understanding the feasibility and potential impact of digital currencies. The evolving landscape calls for continuous monitoring, international collaboration, and careful consideration of risks and benefits to shape effective policies in this emerging financial frontier.