Shaky crypto: CBK shelves search for digital currency

Global crypto market is in upheaval following collapse of high-profile exchanges. [iStockphoto]

The Central Bank of Kenya (CBK) has shelved plans to develop a digital currency on the back of instability in the global crypto assets market and the high adoption of digital payments in the local market.

This is the outcome of public consultations carried out by the regulator to determine its readiness to roll out a Central Bank Digital Currency (CBDC).

According to the CBK, the allure of CBDCs globally is fading, and other central banks that were first to roll out digital currencies have faced challenges that have hampered implementation.

"Recent instability in the global crypto assets market has amplified concerns and the need for a careful review of the innovation and technology risks," said the CBK.

"Against this backdrop, implementation of a CBDC in Kenya may not be a compelling priority in the short to medium term."

Money transfers

Last year the CBK invited the public to submit comments on a CBDC as a payments instrument backed by the regulator, and that could assist in processing large and retail payments and ease cross-border money transfers.

"A CBDC could enhance financial stability in a jurisdiction by contributing to resilience in payments," said CBK in the policy document.

"By providing a new method of making payments, a CBDC could diversify the range of payment options."

The CBK received more than 100 responses from individuals and institutions across nine countries with the majority highlighting the need to weigh potential benefits such as increased efficiency against risks such as financial exclusion and cybercrime.

Recent developments in the global crypto assets market further served to dampen the regulator's enthusiasm for rolling out a digital currency.

In March this year, two major US banks - Silicon Valley Bank (Sh28.8 trillion in assets) and Signature Bank with Sh15.1 trillion in assets - collapsed, sending jitters throughout the global financial markets.

A woman who was part of a line entering the Silicon Valley Bank's headquarters pauses for a selfie in Santa Clara on March 13, 2023. [AP photo]

Preliminary investigations indicate a failure to observe proper risk management practices and a run on the two banks contributed to their collapse.

Signature Bank, which was one of the biggest firms that accepted deposits in crypto assets, also suffered the fallout from the collapse of FTX, a crypto exchange, last year.

"This volatility has led to investor caution and reduced interest in crypto assets," said CBK.

"It has also highlighted key liquidity issues faced by cryptocurrency firms, exacerbated by poor governance frameworks."

The CBK had proposed that Kenya could adopt one of three forms of administering an official digital currency.

In the first instance, CBK issues the CBDC as a claim, maintaining a retail ledger of transactions and working with intermediaries to onboard customers.

The second instance is an intermediated CBDC where intermediaries, for instance, commercial or investment banks, onboard clients and execute retail transactions on their behalf, under the supervision of the CBK that will hold a wholesale ledger of payments between intermediaries and their customers.

A hybrid model on the other hand would see intermediaries onboard clients and handle retail payments on behalf of the CBK, which would retain a copy of the full retail ledger.

According to the CBK, a digital currency is a double-edged sword in regards to financial inclusion and on the one hand, it could provide the financially excluded access to digital payments.

"However, users would require access to the underlying technology and the technical know-how, which could be a constraint for some individuals, ultimately excluding them."

Conflict of interest

Another risk that has been identified is that the CBK acting as a regulator and issuer of a digital currency presents a conflict of interest and could lead to a bank run, destabilising the country's commercial banking sector.

"Customers would perceive CBDC as risk-free and convert their deposits to CBDC," explains the CBK.

"This would in turn stress bank deposits, threaten financial stability, and adversely impact monetary policy transmission due to an increase in central bank-issued money, and a reduction in deposits held by banks."

The CBK has for a long time been cagey about the prospects of introducing digital currencies into the Kenyan economy.

Outgoing CBK Governor Patrick Njoroge. [Elvis Ogina, Standard]

In 2017, CBK Governor Patrick Njoroge, outgoing, cautioned traders to be wary of Bitcoin as a potential Ponzi scheme owing to the high volatility in trading.

In recent years, however, this position gradually softened on the back of increased adoption of cryptocurrencies among tech-savvy Kenyans and early adopters.

Largest population

A report by the United Nations Conference on Trade and Development (UNCTAD) released last year said 4.2 million Kenyans held cryptocurrencies, the largest population in Africa.

In 2019, a taskforce on Distributed Ledgers Technology and Artificial Intelligence appointed by former ICT Cabinet Secretary Joe Mucheru recommended adopting blockchain and cryptocurrencies in the public sector.

The taskforce chaired by Bitange Ndemo proposed setting up a blockchain trading platform where the government could make initial coin offerings (ICO) to facilitate public trading of blockchain ledgers.

"The government should develop a digital asset framework to enable citizens to raise funds through ICOs as a strategy to help local investors put their resources in cryptocurrencies underpinned by the utility of local resources," said the taskforce in its report.

"These will help transform many viable small and medium enterprises and start-ups to scale to other countries. Governments too could raise infrastructure resources to locally issued ICOs and minimise foreign debt."

This enthusiasm seems to have carried through to the Kenya Kwanza administration.

In the Finance Bill 2023, the National Treasury has proposed a digital asset tax, a three per cent levy on the value of the digital asset being transferred including cryptocurrencies and non-fungible tokens.

At the moment, however, CBK has opted to place the development of a digital currency on the back burner.

"Significantly, Kenya's pain points in payments could potentially continue to be addressed by other innovative solutions around the existing ecosystem," said the regulator.

"This would be consistent with CBK's vision for a payments system that is secure, fast, efficient, accessible to and works for Kenyans."

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