• Thursday, March 28, 2024
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African countries race to mint CBDCs (2)

African countries race to mint CBDCs (2)

Upcoming African CBDCs will avoid eNaira pitfalls

The eNaira, which has a two-tiered CBDC architecture or a hybrid model, is the only African CBDC in circulation currently. Still, it functions largely as a retail CBDC, with the CBN not only the issuer of the digital currency but also the manager of the eNaira wallet, thus limiting the role of financial institutions to the handling and processing of retail payments.

While financial institutions are also charged with distribution of the eNaira, their role is almost literally ceremonial, as a chunk of the transaction process takes place in the eNaira app, which is controlled and managed by the CBN.

In other words, the CBN is not only the issuer of the digital currency but also effectively the banker of eNaira users. Unsurprisingly, the eNaira is not enjoying much custom. About a third of the over 200,000 eNaira wallets that the CBN has set up thus far were inactive in late May 2022, according to BusinessDay, a reputable local business newspaper, with only 80 merchants and about 18,000 individuals funding their wallets.

To achieve its financial inclusion objective, a CBDC must operate as seamlessly as possible in areas with limited or no internet infrastructure as it would in more ideal digital circumstances

Customers still prefer to use the mobile phone apps of their banks for electronic transactions, research by BusinessDay shows. As the eNaira is as yet not equiped for cross-border payments, being as destination countries must have CBDCs too, users have not been able to use it for remittances either. Even so, the eNaira will have a better chance at success if financial institutions are the front-end that customers interact with, like they do with cash.

A pilot launch of the Ghanaian eCedi is already underway. Quite instructively, the eCedi avoids some of the design bottlenecks of the eNaira, as it simply mimics cash, with all the stakeholders in the financial system maintaining their roles.

That is, the Bank of Ghana (BoG) will perform the same regulatory functions with the eCedi as it does with the cedi. The financial intermediation role of banks with the eCedi will not be altered in any material way either, as envisaged in the design paper of the digital cedi, at least.

Whereas the CBN hosts the eNaira wallet, the eCedi wallet will be hosted online by financial institutions via a smartphone app, payment card or feature phone, with users also able to hold the eCedi offline in a smartcard, key fob, smart watch or wristband.

Read also: eNaira: CBDCs can’t win unless available everywhere – Report

The offline eCedi is the version being tested in the pilot launch, which commenced in late May 2022. To achieve its financial inclusion objective, a CBDC must operate as seamlessly as possible in areas with limited or no internet infrastructure as it would in more ideal digital circumstances.

By starting with an offline eCedi, the prospect of wider adoption of the online eCedi when it is launched is high, as the evolution mimics cash. The eCedi looks set to be an instant success, with other African central banks, including the CBN, likely to take a cue from the BoG’s diligence.

More African central banks will issue CBDCs while regulating cryptocurrencies

As an increasing number of African central banks are already working towards issuing CBDCs, they are also preparing regulations for cryptocurrencies. The Central African Republic adopted bitcoin as legal tender in April 2022, for instance. Nigeria’s securities and exchange commission published new rules and regulations for digital assets in May 2022, albeit the CBN continues to block crypto transactions in the banking system.

In late June 2022, Abdellatif Jouahri, the governor of the Bank of Morocco announced that a bill to regulate cryptocurrencies was being drafted for submission to the Moroccan legislature for passage into law. The majority of African central banks will probably come around to allowing both private and government-controlled digital money to operate side by side in their financial systems to avoid creating shadow monetary systems that will simply undermine their capacity to implement monetary policy effectively.

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