Bahama's Sand Dollar: What can African Central Banks learn from the CBDCs implementation from Bahama's CBDC?

Africa ranks with great potential as a promising continent in the digital banking world. It houses the youngest and the fastest-growing population in the world, with over half of the population being under the age of 35. This young population is tech-savvy and eager to adopt new technologies. Kenya, for example, has witnessed how the inevitable power of mobile money transfer has revolutionized her economy and placed it as a perfect go-to example. With Africa's high mobile penetration rate and over 500 million mobile phone users, what lessons can we learn from Bahama's adoption of Central bank digital currencies (CBDCs) in their monetary systems?

What Is a Central Bank Digital Currency (CBDC)??

Central bank digital currencies (CBDCs) are a form of digital currency issued by a country's central bank. Unlike cryptocurrencies (private sector minted), CBDC's value is determined by the central bank (other than a commercial bank) and equivalent to the country's legal tender. Legal tender includes a country's physical coins and banknotes to facilitate daily payments by households and businesses. Owing to the fact that CBDCs denote the word 'digital'; it is thus a currency that operates as an electronic counterpart of the physical legal tender. Unlike Cryptocurrency, CBDCs do not need distributed ledgers, as is the case in the blockchain.?

A major economy to note on this digital currency front is The Bahamas, the first to adopt it into its monetary system. Back on the continent, Nigeria is the only country that has launched a CBDC. Tunisia, Ghana, and South Africa are still in the piloting stage for a CBDC system. While only Mauritius' is at its development stage, most African countries covered in the report are still in the research phase.

The?Bahama's Sand Dollar

In October 2020, The Bahamas took center stage in the digital space. The Bahamas launched the world's first central bank digital currency, the Sand Dollar, which is pegged to the Bahamian dollar. The Sand Dollar allows Bahamian citizens and businesses to carry out their day-to-day payments and send money to each other. The Central Bank of The Bahamas is the issuer and regulator of this digital currency.

Imagine a country extended over water: The Bahamas, a spread-out archipelago of over 700 islands, making it unprofitable for commercial banks to have ATMs or physical branches on remote islands. The Sand Dollar has come as heaven-sent to solve this problem by providing a convenient and affordable way for Bahamians across the islands to access financial services.

Are African countries ready for a central bank digital currency at the moment? Even as Nigeria frog-leaps into this yet-to-be-explored digital economic front? The two case studies pose a myriad of lessons to be taken home by the motherland. By adopting a Central Bank Digital Currency (CBDC), Kenya can bring about several benefits, building on the nation's existing digital financial infrastructure and addressing some of the challenges Kenyans face. Here are some potential advantages and solutions that a CBDC can offer:

1. Financial stability: having an electronic currency will help stabilize most African economies on a downward slope worsened by the COVID-19 pandemic. Electronic transactions are swift and secure; thus, even Central Banks and Revenue authorities can monitor growth.
2. Curb money laundering: As is the case in most economies, money laundering threatens the legitimacy of legal tenders. Central bank digital currency is managed in an electronic system, an end-to-end transaction that can help save this menace.
3. Fight corruption: It's no shocker to see African countries rank top on corruption indexing. Corrupt individuals tend to take advantage of the porous nature of physical transactions. Thus if African Central Banks adopt CBDC's, every amount transacted will have a justification.
4. Financial Inclusion: CBDC, when adopted, will bring Africa's tech-savvy population, which is the majority on board financially. It's practical because even Small and Midsize Enterprises (SMEs) can carry out daily transactions without fretting on the cash circulation market.?
5. Boost Cross-Border Remittances: Various trade initiatives, such as the African Continental Free Trade Area(AfCFTA), have called for free trade and eco-friendly laws when it comes to exchange. Thus, calculating tariffs and exchange rates becomes easy while transacting is seamless.
6. Access to financial products: the time taken to process and access loans tends to be tedious when it comes to cash. CBDCs will give most African entrepreneurs easy access to financial products.

How should CBK leverage on Safaricom's Mpesa ecosystem to successfully launch Kenya's CBDC?

1. Assessment & Infrastructure:

• Initial Assessment: Understand the current infrastructure of M-Pesa and assess its capacity to support a CBDC. Given M-Pesa's widespread adoption in Kenya, leveraging its existing infrastructure could be crucial.
• Technical Integration: Ensure that the CBDC platform and M-Pesa can integrate seamlessly. This might involve the collaboration between CBK's tech team, M-Pesa's team at Safaricom, and possibly third-party blockchain or fintech experts.

1. User Education & Onboarding:

• Leverage Existing Trust: M-Pesa has built significant trust among Kenyan citizens. This trust can be transitioned to the CBDC if people understand it as a natural evolution of digital money.
• Education Campaigns: Roll out educational campaigns using M-Pesa's platforms. Given that many M-Pesa users may not be familiar with the concept of a CBDC, clear and concise information is critical.

1. Integration with Existing Financial Ecosystem:

• Banking Integration: Facilitate easy transition between CBDC and traditional bank accounts. As M-Pesa already has integrations with many banks in Kenya, this step might be expedited.
• Cross-border Transactions: M-Pesa has some level of cross-border functionalities. The CBDC can leverage this framework to make cross-border transactions more seamless with countries considering or having CBDCs.

1. Regulatory & Policy Adjustments:

• Regulatory Collaboration: Work closely with Safaricom (the company behind M-Pesa) to ensure all regulatory standards are met. Adjustments might be needed given the new nature of a CBDC.
• Consumer Protection: Enhance consumer protection measures in case of technical glitches, fraud, or other challenges.

1. Piloting & Phased Roll-Out:

• Pilot Phase: Before a full roll-out, conduct a pilot phase with a subset of M-Pesa users to test the CBDC's functionality, integration, and reception.
• Feedback Loop: Create mechanisms for users to provide feedback on issues or challenges, ensuring continuous improvement.

1. Monitoring & Evolution:

• Transaction Monitoring: Use advanced analytics to monitor CBDC transactions. This will help in understanding spending patterns, potential fraud, or money laundering.
• Evolving with Technological Advancements: Digital currency technology is rapidly evolving. Ensure that both the CBDC and its integration with platforms like M-Pesa continue to evolve with the times.

1. Global Collaboration & Standards:

• Engage Globally: Engage with central banks globally to understand best practices, challenges, and potential collaborations, especially in regions where M-Pesa operates beyond Kenya.
• Interoperability: Ensure the CBDC is designed keeping in mind potential interoperability with other CBDCs or global digital payment systems.

M-Pesa's widespread adoption and robust infrastructure offer a unique opportunity for the Central Bank of Kenya to introduce and scale a CBDC. However, careful planning, collaboration, and a phased approach will be critical to its success.

By Isaac Oketch