BoU; A CBDC IS A DEADLY EVOLUTION OF THE CONCEPT OF MONEY

Towards the end of September, the Bank of Uganda issued a consultation paper on a Central Bank Digital Currency (CBDC). This topic rarely receives significant media coverage unless someone is financially supporting it, to drive a certain narrative that he or she might prefer. Such discussions are usually confined to specialists, yet they have a substantial impact on our freedoms and liberties. The reality is that 99% of our politicians are likely unaware of this important project, which touches on the potential restriction of our constitutional rights. Currently, the Bank of Uganda is welcoming feedback from the public on its CBDC white paper, but I can guarantee that less than 0.5% of Ugandans will participate.

Many people mistakenly believe that throughout history, there has only been one issuer of money: the state or its central bank. This is a misconception. Money has always been an integral part of our cultural evolution, leading to a free market for currency where individuals can choose the forms of money they prefer. Historically, a variety of items have been used as money, and for much of that time, the issuance of currency was not solely a function of the state until the 1690s.

It's important to note that Uganda did not initiate the idea of a CBDC; this is a response to a global trend from major players who are concerned that cryptocurrencies might dominate if governments and central banks do not adapt. Currently, eleven countries have successfully launched their own digital currencies. In Africa, Ghana and Nigeria are at the forefront. Eighteen countries are in the testing phase of their digital currencies, while 32 are in the development stage. Additionally, 39 countries are researching their options regarding digital currencies, with only 15 remaining inactive, two of which have cancelled their plans. So, what exactly is a Central Bank Digital Currency (CBDC)? While the concept of CBDCs was significantly influenced by cryptocurrencies and blockchain technology, it’s crucial to understand that they are not the same.

CBDCs are centrally controlled by central banks or governments, whereas cryptocurrencies are decentralized and cannot be regulated by a single entity. Furthermore, CBDCs do not necessarily rely on blockchain technology, unlike cryptocurrencies. According to Investopedia, CBDCs are defined as “digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country’s fiat currency.”? Traditionally, in accordance with Section 23 of the Bank of Uganda Act, “legal tender” status is restricted to notes and coins. However, with the introduction of CBDCs, these electronic “digital tokens” will need to be included in an amendment to the Bank of Uganda Act to be classified as legal tender. According to this act, legal tender does not exist purely in digital form, as seen with Bitcoin, which has no physical form.

Much of what we refer to as electronic representations of government-issued money in our bank accounts or mobile money services is not actually money. Instead, these are merely promises to pay you money. This raises an important question: why is the Bank of Uganda proposing to digitize the Uganda shilling when it is already digital and accessible via mobile money USSD codes on our phones? The answer lies in the significant difference between true digital currency and the current system we use today.

Our monetary system largely relies on digital claims to currency. This means that when we use banks or mobile money services like MTN Mobile Money, we are transferring digital IOUs and claims to money, rather than the money itself. Banks require third-party institutions to verify transactions to ensure that the funds we are transferring actually exist. For instance, for MTN to issue electronic money in the form of mobile money, they must demonstrate that they have an equivalent value in physical cash. The same principle applies to banks accounts. The money you put in a bank is a liability to the bank.

A true digital currency would enable direct transfers of value between parties without the need for multiple third-party banks. While this concept aligns with the goals of cryptocurrencies, there are notable differences. Central Bank Digital Currencies (CBDCs) are managed through a private network controlled by the government, which means they are not decentralized. This structure allows the government full control over the currency's supply and the speed of transfers.

There are both advantages and disadvantages to this approach, leading to diverse opinions on the topic. If the government were to create its own CBDC, there could be several potential outcomes, both positive and negative. For instance, a central bank digital currency would grant the Bank of Uganda direct control over the money supply, which can be advantageous.

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A CBDC offers unique benefits such as safety, finality, liquidity, and integrity. As our economies transition to digital platforms and advance into the Fourth Industrial Revolution, we must leverage these advantages. However, the main challenge with a CBDC lies in its design. A CBDC that does not prioritize principles of privacy, security, and broad usability should not be accepted.

These principles must be central to the Bank of Uganda’s design decision for a CBDC. Any CBDC issued in Uganda should protect user privacy in accordance with current data protection regulations. Unfortunately, data protection is often not upheld by both state and private actors in Uganda, despite the existence of relevant laws.

A Central Bank Digital Currency (CBDC) can be classified as either “wholesale” or “retail.” A wholesale CBDC operates similarly to the current Real-Time Gross Settlement (RTGS) system at the Bank of Uganda, where only a limited number of banks have accounts with the central bank for settlement purposes. In contrast, a retail CBDC would be used by consumers and businesses. However, I should note that research into retail-based CBDCs has seen a downward trend in recent years.

One significant challenge is that Uganda is predominantly a cash-based economy, with few people using digital payment methods. According to an analysis by Nicholas Anthony on Coindesk, the Nigerian government sought to encourage a transition to a cashless economy by introducing a CBDC. However, the implementation of cash usage restrictions led to public protests calling for the return of paper money. Despite the government’s attempts to increase CBDC adoption—by removing access restrictions and offering payment discounts—these efforts were largely unsuccessful.

Further complicating matters were cash withdrawal limits and currency redesigns, which resulted in a cash shortage and heightened public discontent. As a result, CBDC adoption in Nigeria remains extremely low, with less than 0.5% of the population utilizing it, while over 50% have embraced cryptocurrency.

Uganda should take lessons from Nigeria’s experience and ensure that the Bank of Uganda approaches this initiative thoughtfully and not simply for the sake of innovation.

To date, Central Bank Digital Currencies (CBDCs) have been implemented in two countries, Finland and Ecuador, where they ultimately failed and were abandoned. Additionally, there have been ongoing implementations in three Caribbean nations, as well as in China and Nigeria. These experiences can be summarized as a series of failed experiments and significant misjudgments by policymakers, one of which has already resulted in a major disaster. Therefore, for a CBDC to succeed, it must coexist with cash.

The need for a Central Bank Digital Currency (CBDC) in Uganda should be driven by local demand and dynamics, rather than solely by global geopolitical trends. Therefore, the Bank of Uganda should not treat this initiative as a vanity project. There should be a visible demand problem that the central Bank seeks to solve that’s actionable.

One of my main concerns is that the government could potentially program a CBDC if they choose to do so. I appreciate that the Bank of Uganda's CBDC consultation paper acknowledges the ability to ?program privately held CBDCs to achieve policy goals. Practically, through the use smart contracts, which are inherent in the underlying technology of blockchain, Bank of Uganda could program money that individuals hold privately. This should concern everyone.

To enhance the circulation of money, the Bank of Uganda could consider introducing an expiry date for CBDC in digital wallets, encouraging immediate spending. This can be achieved if the money is programmable. Additionally, this CBDC could be programmed to restrict spending on certain activities, such as political campaigns. It is crucial that any CBDC developed by the Bank of Uganda ensures that citizens retain the privacy, freedoms, and anonymity associated with physical cash and coins. There is an argument that CBDCs should be pseudonymous and anonymous to ensure anti-money laundering rules are implemented. i don't think the public will buy this narrative as a selling point for CBDCs

If we are not cautious in this digital age, we risk entering a dystopian Orwellian surveillance society. Many people mistakenly believe that throughout history, there has only been one issuer of money: the state or its central bank. This is a misconception.

Money has always been an integral part of our cultural evolution, leading to a free market for currency where individuals can choose the forms of money they prefer. Historically, a variety of items have been used as money, and for much of that time, the issuance of currency was not solely a function of the state until the 1690s.