Guest Articles

July 2

Michaella Allen / Christine Hougaard

Overthrowing the King: Could Central Bank Digital Currencies Replace Cash in Post-COVID-19 Africa?

In an age where we can send mail electronically in seconds at no cost rather than going to the post, it seems odd that people still walk around with pieces of metal and paper in their pockets to pay for things. Yet cash has remained the undisputed king of payments for consumers and small businesses in sub-Saharan Africa (SSA). The World Bank Global Findex survey for 2017 showed that only a third of SSA adults reported having made or received any digital payment in the past year. Among the reasons provided is that cash is seen as trustworthy, convenient and cheap. And for those wishing to remain informal, it has the added benefit of not being traceable.

However, COVID-19 has placed a stigma on the use of cash, given the proximity and contact that goes with it. Governments across SSA are actively encouraging the use of contactless digital payments as part of their COVID-19 response – from waiving mobile money transaction fees and increasing e-wallet sizes (Rwanda, Kenya, Uganda), to developing fully fledged digital financial service frameworks (Ghana).

This renewed emphasis on digitisation has highlighted the potential of central bank digital currencies (CBDC) as a prospective alternative to cash. But there is still much uncertainty regarding what exactly CBDC is and when to pursue it. Is CBDC a suitable option to rapidly digitise payments in Africa? And are traditionally cash-based economies ready to establish a retail CBDC and reap its benefits? We’ll discuss those questions below.


What Are Central Bank Digital Currencies?

Retail CBDC (hereafter referred to as simply CBDC) is a digital sovereign currency. Simply put, it is cash – just digital. Like cash, CBDC is issued under the auspices of, and supervised by, a central bank, and is constituted as national legal tender. It is a universal medium of exchange for frequent low-to-medium-value transactions, and a reliable store of value denominated on a one-to-one basis with national currency. It therefore has all the characteristics that make cash “cash,” other than that you can’t physically touch it. Instead, it would sit within either a consumer’s e-wallet or bank account, depending on the design chosen by a given central bank.

While it does not yet exist anywhere in the world, CBDC is actively being explored by various central banks, including in the United Kingdom, where it is in the research phase, and China, where CBDC is in advanced pilot testing.

It is important to understand what CBDC is not. CBDC is not a government-owned cryptocurrency. It is also not the same as mobile money, or the money in a bank account or on a card. Despite sharing the commonality of being digital, CBDC differs from these instruments in three important ways:

It’s issued under the authority of a central bank: As of today, no cryptocurrency or form of e-money is officially backed and issued by a central bank in Africa. CBDC would be.

It’s universally accepted: Despite the near ubiquity of some mobile money schemes like M-Pesa in Kenya, businesses and individuals in most African countries are not legally bound to accept mobile money in exchange for goods and services. The same holds for bank-issued e-money, Bitcoin and other cryptocurrencies. As legal tender, CBDC would be universally accepted in the issuing country. It would either take the place of cash (i.e.: all physical cash would be eliminated) or be used alongside it.

It’s fully interoperable: Despite numerous interoperability initiatives, most private cryptocurrencies – and a large proportion of mobile money schemes – remain close-looped systems. This means, for example, that while Bitcoin users can exchange payments amongst each other, Bitcoin cannot be sent directly to an Ethereum wallet and FNB eBucks cannot be remitted to a MTN MomoPay wallet. Instead, these payments would need to be exchanged in a stepwise process of clearing and settlement between uniquely designed payment schemes. Due to its legal tender status, CBDC would integrate and interoperate universally among any scheme denominated in the local currency.


Five reasons to adopt CBDC

Adopting CBDC offers five main benefits:

Reducing the danger and cost of cash: Where cash is used, it needs to be printed, circulated, handled, guarded and reconciled. This is costly. Cash bookkeeping and operational processing can account for up to 80% of operational costs for banks, and highly cash-based economies are estimated to spend up to 7% of GDP on cash handling. And under COVID-19, the opportunity cost of cash increases as the resources required to fund cash management could have been allocated to the pandemic response. CBDC can help alleviate the cash burden by encouraging the uptake of digital alternatives – first as a complement to cash and, eventually, even as a substitute.

Enhancing the convenience and value of mobile money and digital payments: Even before it becomes a substitute for cash, CBDC can enhance the convenience of mobile money or digital payments, thereby promoting digitisation – a particular imperative during the COVID-19 pandemic. Consumers will use what is most convenient to them. Convenience requires full interoperability and channel ubiquity. CBDC can enable better interoperability between mobile money schemes and across bank systems by forming a common back-end design protocol across these schemes.

Offering system-designed privacy: To earn the trust of the population that is needed for the system to scale, CBDC must offer similar privacy to cash. Unlike with e-money or money in bank accounts, privacy can be designed into the system. Transactions via CBDC would all be encrypted and not visible to any financial institution unless with the user’s consent.

Recovering national funds: The World Bank is predicting a sharp decline of about 23% in remittances in sub-Saharan Africa due to the effects of the pandemic. Foreign direct investment and overseas development assistance will most likely also decrease. Over the medium-term, optimising internal revenues will therefore be important for the economic recovery drive of national economies and their governments. Yet as much as US $1.3 trillion (1980-2018) has been lost from Africa as a result of tax evasion and illicit financial flows enabled by slow or poor tracking of funds across different financial service providers. CBDC could address this constraint, given that the digital identity of each user would be embedded within every CBDC token and e-wallet. Access to these identities and respective transactions could be granted by a judge under strict conditions.

Boosting liquidity for policy response: COVID-19 is challenging governments to find the best way to finance and target interventions. CBDC can generate extra government liquidity by improving revenue collection, bringing cash from illicit flows into the financial system and reducing government expenditure on cash handling. It can also provide an efficient way to disburse social transfers.


Together, these factors would accelerate the creation of digital ecosystems and allow for use cases as numerous as the ones that currently exist for cash.


Five preconditions for adoption

These benefits are compelling enough to conclude that CBDC is the way to go. And COVID-19 would seem to be the much-needed trigger. But it’s not as simple as that. In the long term, the move towards CBDC is inevitable, but we would caution against rushing towards CBDC as a short-term response to the pandemic. Five preconditions need to be satisfied before any country can reap the full benefits of CBDC:

Reliable infrastructure and service delivery: To go fully digital, a steady electricity supply and internet connectivity throughout the country are basic prerequisites. For many sub-Saharan African countries, this is not yet the case. In 2018, only 45% of households had access to electricity, and only 28% of individuals reported using the internet in 2019.

High digital engagement: Secondly, while CBDC can itself be a driver of digital uptake, its adoption is more likely to succeed if the population already has at least some familiarity and trust in digital payments. Mobile money is gaining increasing traction in sub-Saharan Africa, but, as mentioned above, a critical mass of trust in, and familiarity with, digital payments is still lacking in most countries.

High or universal access to formal digital identity: CBDC implementation requires a country to have a robust digital system that can store, integrate and verify digital identities. Such systems are essential to ensure compliance with national customer due diligence procedures, and also to facilitate universal acceptance of CBDC across payment providers and payment schemes. Yet many countries in Africa still lack a centralised ID database and, to date, only 25 have made inroads in the adoption of digital biometric identity.

Robust cybersecurity and data protection: A strong data protection and cybersecurity framework is needed to ensure the privacy of consumer transactions. In 2018, only 19 African countries were recorded as having data protection and privacy laws, while six had laws in draft stages.

Good governance and strong institutional capacity: To get the public to adopt CBDC, they must trust that CBDC will be immune to political interference and manipulation – from currency devaluation, to efforts to fund illicit activities outside of national budgets (or line the pockets of the powerful). Furthermore, central banks will need added supervisory capacity to oversee near-instantaneous payments 24/7. This requires strong national institutions. However, Africa only scores 49.9 out of 100 on overall governance, according to the Ibrahim Index Of African Governance for 2018, with indices for safety and rule of law on a downward trend.


In summary: A retail CBDC can help Africa achieve much more than the short-term recovery from COVID-19 that it seeks. In fact, adopting a CBDC will be essential to building an economy that’s better able to innovate and weather economic shocks in the long term. But it cannot be a quick fix. Patience is needed to first complete the groundwork. COVID-19 has been a wake-up call to start investing the time and money needed to lay this foundation, even if it comes at an opportunity cost in a time where there are many other pressing priorities. Governments and donors with vision will heed this call.


Michaella Allen is a research analyst and Christine Hougaard is Technical Director at Cenfri, a NextBillion partner.


Photo courtesy of TLC Jonhson.




Coronavirus, Finance, Technology
COVID-19, cybersecurity, digital payments, financial inclusion, remittances