Central Banks and Crypto: Perfect Match or Problem?

A key promise of digital currencies is lower transaction costs, but that may not be possible with central banks getting into the game.

An increasing number of African countries are considering the launch of central bank digital currencies, CBDCs. In October 2021, the Nigerian government launched eNaira, making it the second country in the world to have made CBDCs available to the public. Meanwhile, South Africa and Ghana have initiated pilot programmes to test their own CBDCs, and ten other African countries are currently researching its viability.

In addition, the Bank of Central African States (BEAC) is proposing the introduction of a CBDC for members of the Economic and Monetary Community of Central Africa (CEMAC), made up of Cameroon, Chad, Central African Republic, Equatorial Guinea, both Congos and Gabon. This follows the introduction of Bitcoin as a legal tender by the Central African Republic last month.

CBDCs are not to be confused with other cryptocurrencies, such as Bitcoin or Ethereum, which are driven by markets. It refers to money that is essentially a digital version of traditional money, which is a liability of the central bank and is regulated by central banks. Accordingly, CBDCs will be prone to the same vulnerabilities and strengths as traditional currencies.

Growing interest

The rise in interest in cryptocurrencies and the potential emergence of new digital currencies by big tech firms have been critical drivers of CBDCs in many parts of the world. Both central and commercial banks realise that ignoring the rapid growth of cryptocurrencies while not offering a more secure alternative is not an option.

Between September 2019 and June 2021, the cryptocurrency system grew 230 times, according to UNCTAD, with new entrants emanating predominantly from developing countries. Kenya, South Africa and Nigeria feature among the top 20 economies with the largest share of digital currency ownership with 8.5%, 7.1% and 6.3% of their respective populations in 2021.

Additionally, governments worldwide have expressed their apprehension over the emergence of privately issued digital currencies by tech giants such as Meta (Facebook) that already have a vast network of users.

In 2019, Facebook announced its plans to launch its digital currency, Libra. The stablecoin, backed by low-volatility assets in stable currencies, was expected to improve financial inclusion and would have been easily exchanged against fiat currency.

Not so fast

However, following harsh criticism from policymakers and regulators worldwide in 2020, Libra was replaced by Diem, which was supposed to be less ambitious in scope. However, it met with a similar wave of pushback with firms such as Mastercard and Visa – that once backed the idea – pulling out.

The then German Finance Minister, Olaf Scholz, described Diem/Libra as a wolf in sheep’s clothing. Earlier this year, Diem wound down and was sold to Silvergate Capital, a Californian-based firm operating in the FinTech and cryptocurrency sphere.

Aside from such threats, many governments are considering introducing CBDCs for the advantages to local economies. Their adoption is expected to provide greater monetary stability with the same level of control that central banks had with traditional currencies.

CBDCs are also expected to offer numerous opportunities for businesses and society, including:

  • Lowering the costs of transactions: Currently, most transactions conducted through commercial banks incur a transaction fee. The fee can vary depending on the business type or the payment method. With the introduction of CBDCs, commercial banks and other financial institutions can settle transactions easily in real-time. 

In Mauritius, for example, faced with rising petrol prices and high merchant fees, many fuel stations stopped accepting payment by card, stating that the fees represent at least 30% of their profit margins.

  • Facilitating Cross-Border Transactions: Currently, the cost of cross-border transactions at the continental level is highly elevated, hindering trade opportunities. A significant share of businesses in Africa finds such transactions very expensive. 

This is caused by a complicated and outdated payment landscape, with transactions sometimes taking days. CBDCs and regional payment platforms that can transact in those currencies are being rolled out to avoid costly traditional payment frameworks.

Cross-border transactions in Africa are significantly more expensive than in other parts of the world. In June 2022, the World Bank’s Remittance Prices Worldwide indicated that remittance costs in sub-Saharan Africa amount to nearly 8% of the remittance value sent.

Coupled with initiatives such as the African Continental Free Trade Area (AfCFTA), the introduction of CBDCs can ease and lower business costs between African countries. They can reduce transaction costs and time undertaken to effect payment by reducing reliance on the US dollar as a common currency, reducing the number of intermediaries and improving competitiveness in the private sector.

CBDCs can also facilitate cross-border transactions. The Chinese government, which is currently testing its digital renminbi (e-CNY) in several provinces, has announced that it could connect its CBDC system to its trade partners. The digital currency is already technically ready for cross-border use.

  • Improving financial inclusion: Many CBDCs are being developed to serve those who are currently unbanked. This is because they can improve access by allowing individuals to make monetary transactions without requiring a bank account and, in certain instances, even without internet access.

So, many businesses can extend their services to a range of previously inaccessible markets and a broader client base. Businesses need to work with their respective governments to ensure that the design of the CBDC system is conducive to such purposes.

Given that such transactions are traceable, business owners in the informal sector can also produce records of their financial history so they may benefit from loans and credit, which may allow them to expand. That said, further investments in digital infrastructure and network connectivity will be required across Africa in order to reach underserved communities.

There are also numerous risks associated with digital currencies issued by central banks. One primary concern to businesses is the implications resulting from the disintermediation of commercial banks, which could reduce access to finance.

Faced with disintermediation, commercial banks may resort to increasing the cost of loans and credit, and introduce stricter eligibility requirements when providing funds. This is significant for the continent, especially when more than 80% of micro, small and medium enterprises (MSMEs) are underserved.

Moreover, private-sector financial institutions developing solutions such as mobile money, digital wallets and e-transfers may equally be at risk as the central bank may co-opt these services. For instance, the e-Naira allows consumers to make peer-to-peer payments or effectuate transactions such as purchasing airtime or data from network services.

But in Ghana, there is currently no recognition of cryptocurrencies as legal tender, meaning it comes at the owner’s risk.

There will undoubtedly be some teething problems associated with CBDCs. It will disrupt the opportunities of other digital currencies, especially lowering the value of holding stable coins (equivalent to CBDCs but issued outside the central bank’s purview).

Nonetheless, CBDCs could bring significant benefits to the continent, and businesses need to reconsider their payment model to take advantage of the changes it will bring about.


Paul Baker is the CEO of International Economics Consulting, with over 25 years of experience as an economic adviser to several G7 and G20 economies. He regularly serves in expert groups at UNESCAP and the World Economic Forum. He is a visiting professor at the College of Europe and a lecturer at the University of Mauritius.

Zahraa Beeharry is a Policy Researcher at International Economics Consulting, engaged in conducting research linked to the political economy of trade and investment policies. She graduated from the London School of Economics and Political Science with a BSc in Politics and International Relations.

This article has been published on Inc.Africa

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