The concept of CBDC

CE NTRAL bank digital currencies (CB DC) are fast gaining traction the world over, including in Zimbabwe. The

Reserve Bank of Zimbabwe, in its latest Monetary Policy Statement released this

February, reverberated its preference for a central bank digital currency to cryptocurrencies, as it now explores the viability of adopting a Zimbabwean CB DC.

What is a CBDC?

It’s a digitised version of a domestic currency that’s equal to physical cash or the reserves held by the central bank. CB DCs operate just like the money you see when you check your bank accounts online, and are held directly in citizens’ digital wallets.

They are typically pegged to the fiat currency in place at the central bank and are regulated digital assets. Comparatively, infamous for being highly volatile, crypto assets are decentralised, unregulated and unbacked.

How do CBDCc work?

The country's central bank issues its CB DC, which has the backing of the central government. That CB DC can then be used as legal tender for transactions such as paying employees or buying goods and services. This may appear familiar to what we already have as you can transfer money from your bank account to a friend's account at another bank, and it will all happen digitally. However, with a CB DC, this type of transaction wouldn't need to pass through multiple banks and take several business days. It could all happen nearly instantaneously on one digital ledger. Consumers also wouldn't need a commercial bank account to use a CB DC. For those who are unbanked, CB DCs would provide a way to transfer money digitally.

CBDC sweep

One of the most serious international efforts to explore the efficacy of a CB DC system is being led by the Bank for International Settlements (BIS) and central banks from seven jurisdictions (Bank of Canada, Bank of England, Bank of Japan, European Central Bank (ECB ), the Federal Reserve System, Sveriges Riksbank and Swiss National Bank).

Nigeria became the first country in Africa to launch its own CB DC, dubbed the eNaira, in October last year while Ghana is said to be at an advanced stage of launching its e-cedi. The Bank of Zambia and the Kenyan Central Bank are also carrying out research on digital currencies. To date, nine countries have launched a digital currency — 14 are in the pilot stage while 87 others are exploring it. Deliberations on how CB DCs could be used for crossborder payments are ongoing according to the IMF.

Merits and demerits

There are several merits for CB DCs, including:

The possibility of faster, cheaper and more secure transactions; easier detection of fraud and other illicit activities considering CB DC transactions are recorded on a digital ledger — allowing easier tracking. In addition, in countries that create retail CB - DCs, consumers can get direct access to central bank funds notwithstanding the financial inclusion that could come with the instrument for countries with significant unbanked populations.

On the other hand, there are also several potential downsides to CB DCs.

Given full control, a central bank could place restrictions on the types of transactions it allows. A case in point would be the Bank of England’s scenario where ministers requested CB DC transactions to be programmable and allowable for specific purchases. No doubt, It will take time for CB DCs to catch on as the populations gain understanding and trust in CB DCs versus crypto which has enjoyed the first mover’s advantage whose users may be reluctant to switch to CB DCs

It is also important to note that cryptocurrencies were established on the premise of having a deregulated and uncontrolled system of finance, a piquant contradistinction from the ideals of central banking. CB DCs aim to adopt certain elements of crypto while exerting control over the digital currency— defeating the essence of the cryptocurrency ecosystem

Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.net