Kenya: a focus on the central bank digital currency (CBDC) developments

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Considering the current and rising adoption of mobile money, the primary emphasis on issuing a central bank digital currency may not be on improving access to financial services.

  • The wave of innovation and technology has caused a fundamental shift in how people manage money.
  • According to Financial Sector Deepening (FSD), about 18 per cent of Kenyans use cash only in transactions.
  • A maturity evaluation might help the CBK make decisions on CBDCs.

The controversy around comments on Bitcoin

The recent comments by Kenya’s Central Bank Governor (CBK) have sparked controversy about Kenya’s position on crypto adoption. The governor believes that using Bitcoin as a reserve currency represents a crazy move warranting a jail term.

The comments came in the wake of uncertainty on Kenya’s position regarding the possible implementation of a Central Bank Digital Currency (CBDC). A CBDC represents a digital currency issued by the central bank to serve as legal tender.

ALSO READ: Kenya Central Bank Governor rejects bitcoin as country’s reserve currency

After the COVID-19 pandemic, digital platforms emerged globally as critical financial inclusion instruments.  Policymakers looked to step up to gain full advantages and minimize risks. Consequently, central banks examined the prospect of using CBDC solutions to fulfil their future payment requirements in a digital economy.

Per the Bank for International Settlements (BIS) 2021 research on central banks, 86 per cent have actively explored the possibilities for CBDCs, 60 per cent have confirmed experimenting with the technology, and 14 per cent were deploying trial projects.

In the wake of the governor’s comments on Bitcoin, many people might think Kenya’s primary financial watchdog has a hands-off approach to digital currencies. However, the CBK has continually monitored the developments in the crypto and fintech spaces.

Close observation remains crucial. Policy decisions among central banks globally need to mirror the specific jurisdictional circumstances and requirements at a period in time. Therefore, the fundamental precepts demand that central bank-issued and private digital currencies have some core characteristics: simplicity, low transaction fees, convertibility, prompt settlement, reliability, safety, adaptability, flexibility, and a high level of security.

The payment landscape in Kenya

Payment methods have developed from early barter trade to present forms of currency. The wave of innovation and technology has caused a fundamental shift in how people manage money. Consequently, a considerable transition is underway. Payments have gradually shifted from cash payments to card payments and other electronic payments enabled by web and mobile platforms.

The prevalence and ease of access to mobile devices and the advent of Fintech businesses that continually create new products to operate on these devices have expedited the move to digital payments.

The Kenyan domestic payments ecosystem combines private and public sector players, including CBK and payment service providers (PSPs). Importantly, the CBK is Kenya’s monetary authority. The CBK remains responsible for developing monetary policy to attain and maintain price and financial stability. The monetary authority achieves stability by developing and implementing efficient and effective payments, clearing, and settlement systems.

Moreover, the CBK develops and executes foreign exchange policies, stores and administers foreign exchange reserves, issues currency, grants licenses, and supervises PSPs. Furthermore, the CBK serves as the Government of Kenya’s banker, advisor, and fiscal agent.

Kenya’s payments landscape is a blend of digital currencies and cash. The blend incorporates mobile money transactions, which was crucial in enhancing financial inclusion to 83.7 per cent in 2021. Kenya ranks third after China and Mongolia in financial inclusion out of 52 countries within developing economies and emerging markets.

Furthermore, the payment systems in Kenya are classified in terms of volumes and values processed. Retail or low-value payment systems include mobile phone money transfer services/e-wallets, automated clearing houses (ACH), card payments, and Pesalink (inter-bank transfer).

East African Payment System (EAPS), Kenya Electronic Payment and Settlement System (KEPSS), Society for Worldwide Interbank Financial Telecommunication (SWIFT), and Regional Payment and Settlement System (REPSS) are examples of large value or wholesale or payment systems.

These are designed to handle large domestic transfers and cross-border remittances and payments. Efforts have been made to lower cross-border remittance costs in Kenya. The efforts have lowered the costs from more than 15% in the previous decade to 8% in 2020. However, the cost remains higher than the Sustainable Development Goal of 3% by 2030.

ALSO READ: Kenya: the place of blockchain, web3 and crypto under the new administration

Understanding Kenya’s CBDC situation

Digital technology remains the main driver in the uptake of financial accounts. As with mobile money, the emphasis of CBDC innovation should be on efficacy and the issue it addresses for the financial services consumers rather than the technology involved.

Considering the current and rising adoption of mobile money, the primary emphasis on issuing a CBDC may not be on improving access to financial services. Cost reduction, on the other hand, is a worthy reason.

The post-Covid-19 pandemic era has shifted a lot of things to digital. Notably, the pandemic made a marked impact on non-cash payments. In the Covid-19 period, mobile transactions in Kenya, as a share of total transactions, increased from 55.7 per cent to 79.6 per cent.

Many continue to make fewer payments in cash beyond the coronavirus crisis. According to Financial Sector Deepening (FSD), about 18 per cent of Kenyans use cash only in transactions.

Several African countries (Nigeria, South Africa, Ghana, and Mauritius, among others) are testing their CBDCs. Therefore, it remains crucial Kenya will not lag. Moving with speed is especially critical in light of the recent developments with the African Continental Free Trade Area (AfCFTA).

The CBDC’s promise of immediate transfer, interoperability, low cost and high convenience will be hard to resist. A CBDC issued by CBK would represent sovereign currency in a digital form appearing as an asset to the users and a liability on CBK’s balance sheet. The most valuable opportunities that encourage the issuance of a CBDC would be if it can support CBK’s public policy objectives.

However, risks abound in the creation of a CBDC. For instance, if CBK introduces a CBDC, it would be inevitable for some people to transfer their money from bank accounts and into CBDC wallets. Nevertheless, the CBK has noted such a risk since it would prove a recipe for significant chaos amongst banks.

The introduction of CBDCs would have far-reaching consequences for decades for households, businesses, and the monetary system. If successful, CBDCs will usher in a new era of money. Nonetheless, it is still early days. It is still hard to tell.

No generally applicable best practices or standards will ensure CBDC issuance’s eventual success. On the other hand, a maturity evaluation might help the CBK make decisions on CBDCs. This position informed the CBK’s decision to seek feedback from the public on the applicability of a CBDC in February 2022.

ALSO READ: Central African Republic announces plans for a central bank digital currency


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