The introduction and evolution of blockchain technology has created interest in a cashless society and digital currencies.
The Covid-19 pandemic has further precipitated the need to avoid contact with physical banknotes and coins. Responding to the exigencies of our times, the Central Bank of Kenya (CBK) has proposed a Central Bank Digital Currency (CBDC). The CBDC works just like physical money but is primarily managed, stored or exchanged on digital computer systems, especially over the internet.
Kenyans are not new to digital currencies. M-Pesa, Airtel Money and T-Kash are already ubiquitous parts of citizen lives. Goods and services are bought and sold using these to the extent that they are as acceptable as physical notes and coins.
There are reservations by some over the introduction of the CBDC. However, these fears are unfounded and stem largely from the confusion of CBDC for cryptocurrencies. Whereas all cryptocurrencies are digital currencies, the vice versa does not hold true. For starters, cryptocurrencies have no centralised authority like the CBK to regulate transactions. Rather, these are verified, and records maintained by a decentralised system using cryptography.
Then cryptocurrencies are not legal tender. Jeffrey Frankel, professor of Capital Formation and Growth at Harvard University says, “they are not well designed to fulfil any of the classic functions of money-a unit of account, store of value or means of payment-because their prices are extraordinarily volatile.” He further adds that the volatility is caused by the fact that, “cryptocurrencies are backed by neither reserves nor reputable well-established institutions such as a government or even private bank or other trusted corporation.”
CBDCs have a number of benefits. First, they have no transaction fees. Users of credit or debit cards know that a charge of between 2 per cent to 5 per cent is levied on every transaction. CBDCs eliminate these charges. Second, the speed of processing transactions is usually completed within a few minutes. Comparatively, legacy financial systems have been known to take hours, even days, for transactions to reflect.
Third, because CBDCs do not require users to have a bank account, they increase financial inclusion. Systems like M-Pesa have, in the past, harnessed the vast potential of the unbanked and introduced them to financial services previously found exclusively in banking halls.
But is there a need for CBDCs? Does the need arise to complement or replace entirely physical fiat money that has worked for centuries? Andrew Ndambuki, a Kenyan Telco specialist living in Dubai thinks so. “The advent of 4G and now 5G will see the dearth of physical cash. Homes, buildings and cities are becoming smart, meaning, everything is being digitised. The speed of digitising money needs to keep pace with this transformation otherwise it will be difficult for economies to stay analog while everything else is getting digital,” he says.
Mr Ndambuki further talks of the infiltration of digitalisation in everyday Dubai life saying, “the need to track every transaction for security, ownership and records requires digital currency. Even cars now are digitised, and each part has a lifespan. When a specific part has a fault or needs replacement, you get an alert from the car itself to your smart device (phone or watch) and similar alerts are connected to the manufacturer. That is how they detect massive faults on models. Digital payments are married to repairs carried out.”
Ndambuki and other Kenyans living overseas are responsible for diaspora remittances which, at USD 3.7 billion, make up slightly more than 3 per cent of Kenya’s GDP. They decry the high costs involved in making these remittances and aver that digital currencies will defray these.
Crucially, the government’s entry into the digital currency space is not only timely, but very necessary. There is a danger posed when everything is left in the hands of private digital currencies. Many Kenyans can identify with the frustration of incomplete transactions when vendors are unable to connect to M-Pesa or other digital currencies. CBK’s CBDC is the way to go.
Mr Khafafa is a public policy analyst