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.
Figure 1 The African CBDC landscape
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% of central banks around the world at various stages of issuing a digital currency, the prospect of greater interoperability in the future is high.
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%. 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.
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 (Central Bank of Nigeria) 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. 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 equipped 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. 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.