The outbreak of the Covid-19 pandemic came with a lot of inevitable changes that have overtaken the usual way how transactions have been happening on various platforms. The greater one has been the digital transformation.
Since then, Central banks have been doing feasibility studies on the possibility of introducing Central Bank Based Digital Currencies (CBDC).
The goal will be easily achieved in consideration of technological advancements that highly support the implementation of digital currency.
Central banks (i.e Central Bank of Kenya-CBK) have introduced CBDC, which is a new type of money that intends to serve as a legal tender.
The CBDC will use the same technology as cryptocurrency, however, they differ in terms of legal banking.
A cryptocurrency is largely unregulated, and its value is not tied to any asset. Mostly, its value depends on a lot of speculation by investors and traders.
A CBDC will be regulated based on the value of the Kenyan shilling. Additionally, a CBDC is a centralized system, while cryptocurrencies are not centralized.
Countries that have incorporated the Digital Currency
In September 2021, El Salvador was the first country to accept cryptocurrency as its legal tender, together with US Dolar.
In Kenya, despite the CBK issuing caution on the usage of cryptocurrency, many Kenyans are trading in cryptocurrencies for a while now.
Sand Dollar is a CBDC that has already been introduced in the Bahamas. The Kenyan government is equally considering its adoption.
In Africa, Nigeria was the 1st country to introduce and adopt a CBDC called eNaira.
eNaira is a form of digital wallet facilitated by a smartphone.
Introducing such in Kenya could be so easy given that there already exists a form of mobile money transfer and wallet.
However, many people have argued that Kenya should not pressure itself to introduce a CBDC since its market has been highly penetrated by several mobile money platforms.
Pros and Cons of introducing CBDC
A lot of Pros and Cons come along with the introduction of a CBDC.
Recent research reveals that CBDCs haven’t proved that their advanced will outweigh their risks.
In commercial transactions, adopting CBDCs will cut off middlemen like banks. Perhaps, this is a double-edged sword since it will negatively affect the banking industry while protecting the consumer from the effects of the failed banking sector.
Despite the fact that CBDC is open to data privacy breaches and cyberattacks, its adoption will support commercial transactions like smart contracts.
Introducing a CBDC benefits the nation in looping the unbanked population. For example, CBDC is very beneficial in the Bahamas due to the large unbanked population. Generally, this boosts the countries economy.
Introducing a CBDC in Kenya may not have a huge impact due to the high penetration of mobile money and financial services.
However, the CBK has defended the argument, stating that its introduction is meant to foster transactions across the border.
Finally, the Kenyan constitution defines legal tenders as notes and coins. For a CBDC to be introduced and adopted, some legal reforms will have to be undertaken to allow its use.
The government, through CBK, has allowed for comments and views from the citizens in consideration of the CBDC introduction.