Should the Central Bank of Kenya issue its own digital or cryptocurrency?
This is not a popular question to ask, particularly at a time like now when the most famous cryptocurrency has shed off 90 percent of its value over the last one month.
Additionally, the question of a sovereign country issuing its own cryptocurrency begs another question – what is the problem with the current physical fiat currency that would necessitate a digital version?
A final begging question would be – aren’t we creating an oxymoron by putting Central Bank and digital or crypto currency in the same sentence, especially because cryptocurrencies like bitcoin were designed from scratch to eliminate the need for intermediaries like Central Banks?
Some of the answers to these questions can be found in a useful World Bank Study titled Distributed Ledger Technology and Blockchain.
The report first clarifies the differences between a digital currency and its more established entity known as electronic money or eMoney, which is a digital representation of fiat money. Your bank and M-Pesa balances are all eMoney since they are simply a convenient way of representing your physical money as issued by the Central Bank.
Digital currencies, on the other hand, are defined as:
Digital representations of value that are denominated in their own unit of account, distinct from e-money, which is simply a digital payment mechanism, representing and denominated in fiat money.
Indeed, bitcoin is the best known example of digital currency, but there are a thousand others in the market, with key characteristic being their decentralised nature of issuance, operation and accountability.
The World Bank report looks at a slightly different version of cryptocurrency that is ''permissioned'' rather than ''permission less'' in terms of who can create, use or update it.
Increasingly referred to as ''Stable-coin'' or Central Bank Digital Currencies (CBDC), this type of cryptocurrency aims to leverage on the benefit of distributed ledgers or blockchain while avoiding the downside of hyper-volatility and anonymity that is common in other cryptos like bitcoin.
SMART AND TRANSPARENT
Essentially, Central Banks around the world are exploring how they can issue a digital currency that would be initially used at a wholesale level to increase efficiency and transparency with respect to Intra-bank transfers.
Current systems are prone to too much fraud, as the collapse of several commercial banks in recent times due to cooking of their accounting books.
If the financial loan books and settlements at a wholesale level were re-engineered and implemented through a distributed ledger, the opportunity for fraudulent accounting would be eliminated while the regulatory effort on the part of CBK would reduce, given the increased transparency of the ledgers.
In addition, the ability to ''programme money'' or create smart contracts with the digital currency would open a whole new world of possibilities within the financial sector.
A smart contract would enable execution of a financial agreement by automatically exchanging value when the terms or condition of the agreement is due, hence saving time and effort required to do manual follow ups of amounts due.
These are some of the benefits of a ''permissioned'' digital currency, as issued by a Central Bank.
As a leader in innovative financial products, Kenya should be ready to chart through this new environments and leverage on their benefits while being cautious to mitigate any arising risks.
Mr Walubengo is a lecturer at Multimedia University of Kenya, Faculty of Computing and IT. Email: [email protected], Twitter: @Jwalu