With an increasing number of Africans turning to cryptocurrencies in place of local currencies to preserve their purchasing power and make cross-border payments, many African central banks plan to issue digital currencies in the near future. One has already.
In October 2021, the Central Bank of Nigeria issued the eNaira, Africa’s first central bank digital currency (CBDC), in the face of a crypto craze that continues to gather steam despite an officially sanctioned banking blockade.
African central banks, like those of Botswana, Ghana, Kenya, South Africa, Tanzania, Uganda, and Zimbabwe, are at various stages of crypto regulation and issuance of CBDCs. It is debatable whether CBDCs will be able to replicate the utility of cryptocurrencies for many Africans, who resort to them owing to hard currency scarcity, galloping inflation, and high costs of making cross-border payments.
Global integration will require a critical mass of central banks to issue CBDCs. With about 80 percent of central banks around the world at various stages of issuing a digital currency, the prospect of greater interoperability in the future is high
Even when central banks proclaim their digital currencies to be hybrid CBDCs, they are almost always effectively either wholesale, for the use of financial institutions or retail, when the end-users are consumers and businesses. A more effective taxonomy is also to see cryptocurrencies as private digital money and CBDCs as government-backed or public digital money. CBDCs have also been termed “government-controlled cryptocurrencies,” which better exposes the distinction with private cryptocurrencies as no more than the source of ownership or control. After all, being as they are all digital tokens, the same technology underpins them all.
Private digital currencies are a challenge for African central banks
Despite their popularity, private cryptocurrencies suffer from significant deficiencies. Owing to design rigidities, cross-border payments are slower, even though they are cheaper. Cryptocurrencies are also highly volatile. These drawbacks have not discouraged their use, however.
With hard currency hard to come by, African traders find easy refuge in cryptocurrencies for their international transactions. In fact, cryptocurrencies came particularly handy during the height of the Covid-19 pandemic in 2020, as African entrepreneurs were still able to import goods from abroad, even as banks and countries were in total lockdown. Digital currencies backed by central banks will hardly be able to do likewise, as they will face similar constraints as cash on such occasions. Were government-owned cryptocurrencies to be interoperable between themselves and private cryptocurrencies, they might actually stand a better chance of attracting users away from private digital money, the primary goal of the central banks that are increasingly antsy about them.
Global integration will require a critical mass of central banks to issue CBDCs. With about 80 percent of central banks around the world at various stages of issuing a digital currency, the prospect of greater interoperability in the future is high.
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Remittances and financial inclusion are key motivations
The relatively high cost of remittances is a major factor behind why African central banks are keen on CBDCs, especially as it costs little to nothing using private digital money like bitcoin, ether and the like. It costs about 6% to send remittances from G8 countries using fiat currencies like the American dollar or British pound, whereas the sum of fees charged by cryptocurrency exchanges for transactions are typically below 1 percent.
The prospect of greater financial inclusion is another key motivation. Even so, some African central banks are not in a hurry to issue digital versions of their currencies. For example, a digital South African rand is still a few years away, according to Kuben Naidoo, a deputy governor at the South African Reserve Bank (SARB), in mid-May 2022, albeit crypto regulations to curb money laundering, theft and monetary policy hindrances, will almost certainly be in place by late 2023.
Still, the SARB is already testing a wholesale CBDC for interbank transfers by financial institutions and is collaborating with the Reserve Bank of Australia, Monetary Authority of Singapore and the Central Bank of Malaysia to test the use of CBDCs for international settlements. As examples in Botswana (PosoMoney), Ghana (e-Zwich) and Kenya (Huduma Namba) show, African authorities have a mixed record with retail digital initiatives, especially when they act as regulators and players at the same time.
An edited version was originally published by the Italian Institute for International Political Studies in Milan, Italy. See link viz: https://www.ispionline.it/en/pubblicazione/african-countries-race-mint-cbdcs-35673
