Mohamed Waqo

How do CBDCs work?

CBDC works in the same way as conventional fiat currency as it is a digital representation of coins and banknotes in the form of digital tokens. It is similar to a digital payment system allowing users to send and receive money instantly anywhere. CBDC is not only a means of payment, but it also serves as a store of value of fiat currency.

The case for introduction of CBDCs in Kenya

1. Increase Financial Inclusion

   According to the World Bank, approximately 50.57% of the population have access to a bank account. The adoption of CBDCs would provide a wide array of financial services to individuals who do not have traditional bank accounts through creation of digital wallets that can be easily accessed using basic smartphones.

2. Lower transaction costs

   The transaction costs associated with transfer of funds (be it through SWIFT or RTGS) are relatively high and the proposition is that introduction of CBDCs shall greatly lower the transaction costs involved in such transactions by reducing the payments made to various intermediaries.

A Central Bank Digital Currency ( “CBDC”) is a form of digital currency issued by a country’s central bank and serves as a digital representation of a country's fiat currency.

3. Safer and faster cross-border payments

   There is a consensus that CBDC will improve cross-border transactions by shortening the duration it takes to undertake such transactions. Currently, a SWIFT transfer can take between 2 to 5 days. However, the introduction of the CBDC shall significantly reduce the time to effect such transactions by providing instantaneous settlements.

4. Faster and efficient transactions.

   The introduction of the CBDC shall enable real time transactions which are faster and more efficient as compared to the traditional payment systems.

5. Reduction of illicit and illegal activities.

   Since CBK shall be the sole issuer of the CBDC, instances of illicit and illegal activities may be curbed. For example, experts believe that CBDC has the potential to dent circulation of counterfeit notes. Further, due to the blockchain technology, payment of monies relating to illegal activities shall be reduced as the CBK may be able to monitor how and where one’s monies are spent hence reducing instances of tax evasion, financing of terrorist activities, purchase of restricted substances etc.

6. Environmental Suitability

   Introduction of retail CBDCs may contribute significantly to environmental suitability by reducing the need for paper money which largely contributes to logging. By reducing logging, Kenya may significantly reduce the carbon footprint associated with printing paper currency.

Conclusion

With the inevitability of technological advancements and the growth of web3, CBDCs remain a subject of interest for future assessments in Kenya. The delicate balance between harnessing the benefits of CBDCs and mitigating associated challenges underscores the importance of informed decision-making and strategic planning for the financial future of the nation.