Central Bank Digital Currencies in Africa

The world is changing at a rapid pace, and this is having consequences for Central Banks across the world. Globally, central banks are starting to see the advantages of Central Bank Digital Currencies (CBDCs). 90% of central banks in the world are exploring issuing a digital currency, with a growing number of them being on the African continent. The Central Bank of Nigeria (CBN) and the South African Reserve Bank (SARB) have been the most advanced on the continent in terms of CBDC development.

In 2021 Nigeria successfully launched the eNaira, becoming the first African country to introduce a digital currency. South Africa recently completed a prototype system called Project Dunbar in collaboration with the Bank for International Settlements (BIS) Innovation Hub. This followed earlier developments in Project Khokha.

Given all this activity around CBDCs on the continent, the Algorand-UCT Financial Innovation Hub hosted its inaugural CBDCs in Africa Symposium at the UCT GSB Academic Conference Centre. We brought together representatives from various African Central Banks, leading academics, and representatives from industry to discuss the impact of CBDCs and ongoing payment innovations. The symposium consisted of two-panel sessions that explored African Central Banks and their Digital Currencies, CBDCs, and ongoing payments innovation. Both panels were moderated by Carlos Mureithi, a former Quartz journalist who recently joined OCCRP.

In our first panel, we had Rakiya Mohammed from CBN who was instrumental in the recently launched e-Naira, Gerhard Van Deventer from SARB who participated in Project Dunbar, Hub Director and UCT Associate Professor Co-Pierre Georg and Peter Munnings from Adhara – a leading financial software company that has developed a leading CBDC suite aimed at Central Banks. Co-Pierre and Peter kicked off the discussion about the evolution from wholesale CBDCs to retail CBDCs and now mCBDCs and whether we really need both forms. Gerhard from SARB was able to offer insights into mCBDCs given his involvement in Project Dunbar.

“The decision that central banks make around infrastructure matters. Before acting, we must think about implications and be deliberate and that policymaking and designing must be agile and adaptive.” - Gerhard Van Deventer.  Project Dunbar is an mCBDC. Gerhard discussed the reasons for this experiment – one key question he said SARB was left with was how governance would work when it came to mCBDCs in terms of AML when it comes to onboarding different banks.

Rakiya Mohammed gave her insights on crypto regulation in Nigeria and its impacts on their newly launched CBDC. As the first African country to launch a CBDC, Nigeria experienced some challenges. One key finding was that the eNaira has the potential to improve financial inclusion and grow the economy. She explained how Nigeria began by strengthening their crypto regulation first before launching their CBDC given how CBDCs find their roots in cryptocurrencies.  “There were plenty of learnings and it has been a continuous process of learnings,” Rakiya Mohammad.

The second panel consisted of Pietro Grassano from Algorand, Jan Pilbauer from BankservAfrica, Andries Brink from the 42Markets Group, Pierre Durandt from Sumbion SF and James Wallis from Ripple. This panel discussed modern-day payment systems, a world with a wholesale CBDC and whether this would lead to big changes in the interbank market. This panel also discussed how blockchain can facilitate interbank payments on par with current payment systems.

This panel then turned their attention to Project Khokha and other projects that found that blockchain can facilitate interbank payments on par with current payment systems. While the vote was split on whether our current payment systems are broken and need a complete overhaul, our speakers were able to agree that a new payment system is not a magic wand that will make the financially excluded included. This is for a multitude of reasons – one being the closed loops which make it difficult and cost-ineffective which is why the majority of South Africans still transact in cash. The panel then turned its attention to retail CBDCs, particularly in Africa followed by a debate on whether retail CBDCs should become legal tender. This debate offered the audience interesting perspectives. One of these came from Pierre, “it’s important when developing a payment instrument that it has characteristics of (i) ease of use (ii) accessibility (iii) ubiquity and (iv) utility. As this is what will make adoption easier for consumers thus increasing prospects of financial inclusion and not necessarily the status of whether it is a legal tender or not.”

A recurring theme from both panels was how do CBDCs solve financial inclusion (if at all) and what is the purpose of CBDCs. This is particularly important on a continent where 57% of the population remain unbanked (limiting their access to financial services) and where a digital identity is not as prominent. James agrees that while digital identity is an issue and cannot be ignored, CBDCs bring the potential for financial technology companies to enter the space and provide low-cost products for the financially excluded.

Interestingly a comment from the audience that “without an ID there is no financial inclusion,” paved the way for future conversations around the impact CBDC adoption has on financial inclusion in Africa. As more African central banks explore the feasibility and advantages of CBDCs through trials and research there is a clear need for Pan African collaboration. We hope to continue this conversation as we plan future engagements at the Algorand-UCT Financial Innovation Hub.