KAMPALA – Friedrich Hayek, Nobel laureate in economics, contemporary and arch-nemesis of Lord Maynard Keynes once said: “Money was originated in its most primitive form and frozen there for 300 years.” This stagnancy has meant the usage of coins and bank notes for what seems like eons; mainly championed by governments, only being challenged by the inception of digital money in the form of cryptocurrency.
Cryptocurrency, is a form of decentralised digital money issued online by the private sector, grounded on a sophisticated database technology called blockchain. The influence of cryptocurrency especially it’s flagship currency-Bitcoin, has mounted pressure on central banks the world over to develop their own currency to rival the various cryptocurrencies.
The result being Central Bank Digital Currencies (CBDCs).
A Central Bank Digital Currency (CBDC) is a digital currency issued by the central bank into its citizens’ digital wallets in the form of digital coins and notes and is mostly based on blockchain technology although not limited to it; basing on its design. Currently, 60% of central banks are carrying out pilot studies on digital currencies and 80% of them are considering issuing them in the future. Bank of Settlements (BIS)- a club of central banks says in 3 years, a fifth of the world’s countries will be using it.
The CBDC will operate online like online banking and will be issued by the central bank to citizens through what is called a digital wallet and will be accessible by digital coins on mobile phones. Governments, could then decide if they want to create direct accounts for their citizens with the central bank or with existing financial institutions like commercial banks.
China is at the forefront of the CBDC revolution and is farthest along with its pilot on the digital yuan, in an advanced phase ready for use during the Beijing
2022 winter Olympics. Other countries carrying out pilots on CBDCs are: US, UK, Sweden, Australia, Hong Kong, EU.
In Africa, Tunisia was the first to launch its CBDC followed by Senegal. A host of other countries- South Africa, Ghana, Rwanda, Morocco are carrying out pilot
studies with a slew of others preparing for trials. Expected dividends of a centralised digital currency are: Lowered costs for cross border payments much cheaper than what a bank would charge for thesame transaction. Promotion of financial inclusion because their reach can be far and wide since they can be accessed by mobile phones like the fintech application- Mobile money.
Also, the adoption of a CBDC by the central bank, will reaffirm the
government’s control of the financial system; challenging the stewardship of
telecom companies which through poorly regulated financial technology-mobile money, hold up to $8.2 billion of nationals’ money in Uganda.
A centralised digital currency system will make payments faster, cheaper and
target payments to the vulnerable easier: in case of relief aid to those affected by disaster, the elderly et al, not to mention putting a cap on money laundering and illegal financial transactions.
The downside is: A loss of privacy because all the payments, data transactions will be collected in one place, giving governments a lot of power, thereby making unlawful surveillance of nationals imminent. This online digital system is prone to hacks and power outages. In the event of both, if the data has not been backed up, all that useful information could be lost in a trice.
Fundamentally, in the adoption of a centralised digital currency, the general public has got to be engaged in all stages. It is important to point out that central banks are not looking to expunge physical cash; rather, their interest is the coexistence of digital currency with it.
In Africa where commercial banks are the major source of capital, CBDCs pose
a threat because if everyone put their money into CBDCs, commercial banks could be out of work: since they rely on consumer deposits to finance their loans and get commission.
Their attitude towards crypto, digital currency is best explained by then Stanbic bank Uganda executive Patrick Mweheirwe who quipped, “Ugandans are better off investing their money in cows than plunging into the unknown world of cryptocurrencies”.
This disdain by those who are best positioned to understand, implement and advise the government on digital advancement; explains Uganda’s dormancy on launching a pilot study of a centralised digital currency.
In Uganda, no interest has been shown in the undertaking of a centralised digital currency. The government through the central bank- Bank of Uganda has nothing in the works; a ferret of their website suggests that. Their primary focus now is on the regulation of the national payment system, for fintech-mobile money. However, in very strong language, the government abhors
cryptocurrencies in a public document issued in 2019 distancing itself and warning it’s nationals to stay clear of the phenomenon.
I co-sign the adoption of CBDCs and cryptocurrencies by countries because to
echo the words of economics laureate, Friedrich Hayek over 35 years ago, “No
government in the world is capable politically or intellectually of providing the exact money that is needed for its economic development.
“So competing institutions are going to take the monopoly of money away from governments, and we are not going to have decent money again as we
So, the earlier governments embrace the digital advancement of currencies, the better, because these advances are here for the long haul.
Mark Kidamba is an Independent Financial/Investment Analyst