CRYPTOCURRENCY AND THE CENTRAL BANK DIGITAL CURRENCY IN KENYA by Chantel Addero

By @Chantel Addero

The past few weeks have seen a drastic downturn in the cryptocurrency market – for example, the value of the most popular cryptocurrency, Bitcoin, from its all-time high of $69,000 in 2021, to its current low of $27,000 today. This recent crash within the cryptocurrency market has doused the spirits of many investors globally, with a good number of them cutting their losses and getting out of the market altogether. ?

The volatility of Bitcoin, and cryptocurrency in general, has resulted in the rise of the naysayers of the digital currency, with several analysts predicting that there is still room for a further fall of the currency. However, pundits state, that volatility was to be expected as Bitcoin is still a relatively young currency, having begun use in 2009 when its implementation was released as open-source software. It has since risen in popularity when the price of one token rose from fractions of a dollar to $0.09, and boasts of an increase in price to tens of thousands of dollars, sometimes rising and falling by thousands in a matter of days.

Some of the factors that have influenced such a volatile price history include the fluctuating demand and supply of Bitcoin, investor ?and user sentiments, as the wealthier individuals and investors tend to hold their Bitcoins for longer periods, thus increasing demand yet limiting supply, media hype, and government regulations.

In light of the above, perhaps it’s time to revisit the Central Bank’s discussion paper on Digital Currency, which was released on 10th February 2022, as a means to begin the conversation on the regulation of Cryptocurrency as well as the introduction of a Central Bank Digital Currency (CBDC).

A Central Bank Digital Currency is a digital token, similar to cryptocurrency, which is issued by a Central Bank. It is pegged to the value of that country’s fiat currency or legal tender. With many countries researching the transition to digital currency, the conversation on CBDC is an important one for our country as we aim to keep up with global economies and trends.

One of the goals of the introduction of a CBDC here in Kenya would be the increase financial inclusion by the improvement of the current financial ecosystem, which is, cost, efficiency, and consumer protection. On the final goal, the Central Bank hopes to record all transactional information in a digital ledger, minimizing the number of individuals with access to this data, and thus keeping the security of the user information completely secure. This ideally refers to a unilateral model of CBDCs, where the Central Bank handles everything up to the retail level.

The existence of this digital ledger implies that when compelled, the Central Bank may share the ledger with the revenue authority for tax collection purposes. In an ideal situation of 100% financial inclusion thanks to the existence of a CBDC, this may result in a widened tax base, increased revenue collection, and the general improvement of the economy. However, one downside that is not often spoken of is that with the introduction of a CBDC, many Kenyans may completely move from traditional banking to CBDC wallets, potentially crippling the banking industry.

In conclusion, the introduction of a CBDC, while a young conversation, would have very far reaching and perhaps industry altering consequences for our country, potentially ushering in a new era of money. All we have to do is wait and see.?