CBK mulls digital currency for cross-border payments

The Central Bank of Kenya (CBK) will consider creating a digital currency to anchor cross-border payments.

The lender of last resort in its discussion paper on Central Bank Digital Currency (CBDC) published on Thursday says it sees the facilitation of cross-border transactions as the potential value of a digital currency.

“Cross-border payments have technologically evolved more slowly than domestic transactions. Currently, international currency transactions are expensive and individuals are charged high fees to move funds from one country to another, especially when it involves currency conversions,” the CBK noted.

“CBDC could positively disrupt the cross-border market by making it more efficient and less costly.”

The CBK does not see a use case for a digital currency locally given the high penetration of mobile-money solutions which are already serving the role a CBDC could play in the future.

Already, the proliferation of mobile money which began in 2007 has pushed the country’s rate of financial inclusion to 83 per cent as of last year.

Kenya is ranked third in financial inclusion after Mongolia and China among emerging markets and developing economies with 70 per cent of adults having a mobile money account.

As of March 2021, mobile transactions were 79.6 per cent of total transactions as per CBK data buoyed in part by the rise of cashless transactions at the onset of the COVID-19 pandemic.

“Mobile money addressed the challenge of individuals transferring money to family members, primarily from the urban areas to their loved ones in the rural areas. Its applicability was further affirmed by the fact mobile money enabled convenience, facilitated faster settlement, enhanced securities of transfers and was affordable,” added the CBK.

On the flipside cross-border payments in the region under the East Africa Payment System (EAPS) has experienced difficulties including the unavailability of partner countries’ currencies in the local market.

To come in as a solution, however, the CBK observes that participating countries would all be required to have operational digital currencies.

A CBDC  is a digital currency issued by the Central Bank and intended to serve as legal tender.

Put simply, the CBDC is similar to the physical notes and coins issued by the Central Bank, only this time in digital form.

Several countries have been piloting CBDCs using their own use cases including China and the Bahamas.

CBDCs are among other emerging financial solutions including Distributed Ledger Technology (DLT) and Decentralized Finance (De-Fi) that have the potential to further impact the payments landscape.

Ultimately, the CBK says the decision to introduce a CBDC would involve the government, regulatory authorities, private sector and engagements with the wider society.

CBK’s discussion paper cites stability and resilience, consumer protection and financial inclusion as opportunities for a CBDC rollout but makes note of risks including the dis-intermediation of the banking sector role, infrastructure costs and cybersecurity risks.