Africa-Press – Tanzania. Bank of Tanzania (BoT) has embarked on a journey to analyse the possibility of introducing asset backed central bank digital currency (CBDC)–e-shilling.
The journey following the growing need for digital currencies locally and abroad are pushed by technology advancements and easing global transactions.
Digital currency or stablecoin is one type of cryptocurrency that is designed to maintain a fixed value over time. The value of a stablecoin is typically pegged to a specific real currency, often the U.S. dollar.
And unlike highly volatile cryptocurrencies such as Bitcoin, the price of stablecoins is not meant to fluctuate. In Africa, Nigeria became the first country to introduce a digital currency, the eNaira almost a month ago while South Africa is researching a possibility to introduce wholesale CBDC.
CBDC comes into two ways retail or wholesale. Retail is intended for use by non-depository businesses and ordinary citizens, it is referred to as a “general purpose” while wholesale is used to settle transactions between authorised financial institutions and is not available for use by the general public.
BoT Governor Prof Florens Luoga said they cannot ignore the impact of the innovation of digital currencies on the financial sector in the country thus embarked on a journey to study the impact on both sides.
“We have started analysing the current technological innovation to enhance financial inclusion and improve the efficiency of payments. “In particular, the Governor said on his closing remarks at the just ended two days Conference of Financial Institutions (COFI) “we are assessing potential applications and design CBDC choices and critically reviewing the conditions under which benefits will materialise.” The central bank is doing this to ensure they minimise, if not mitigate, the possible effects of a CBDC on its core business, that is monetary policy, financial stability and integrity, and payment system structure and development.
However, the Governor assured the public that they are not blocking digital currencies innovation since they cannot regulate the unknown.
“As far as we know cryptocurrencies are not safe. We cannot give timelines when to issue regulations, we are still researching – we will give regulations when we have finished our research,” Prof Luoga said.
The public is however confusing between the stablecoin and cryptos, the like of Bitcoin. Stablecoin values are usually at par with fiat money-physical currencies and exchanges one to one.
Inutu Lukonga of IMF Monetary and Capital Markets Department said when presenting her paper virtually at the meeting that currently many central banks, especially in Europe, Asia, and America, are researching into or conducting pilot experiments to issue CBDCs.
In many emerging market and developing economies (EMDEs), CBDCs are mostly motivated by the need to enhance financial inclusion and improve the efficiency of payments while Advances Economies (AEs) are driven by the declining role of cash, the emergence of new monetary and payment systems and geopolitical factors, Ms Inutu said.
She further said that to minimise disintermediation risks, CBDCs could be designed to include caps on funds to be held in CBDC wallets.
The benefit of the cap is to reduce the magnitude of deposit disintermediation and the use of CBDC in illicit activities. Also, the cap ensures that a CBDC is used as a means of payment and not a saving or investment instrument.
“Cap on allowable off-line transactions to minimize double spending risk,” she said adding there are disadvantages as well on cap hence may reduce adoption and use of CBDCs and weaken their function as a means of exchange.
Cap could be designed to function offline especially in natural disaster prone areas but increase double spending risks and settlement risks. “Countries are still considering designs options, but there is some emerging convergence,” Ms Inutu said but suggested that “a CBDC must be supported by robust technology that ensures its security and efficiency.”
The convergence include the intermediated access model is preferred to minimize disruptions to payment system structure and financial stability risks and access frameworks tend to be based on account identification than tokenbased anonymity, but some are combining both and CBDCs are predominantly domestic focused but there is growing recognition that crosses border coordination should be considered early in the design.
On legal issues, she said the issuance of a CBDC should be anchored in a mandate established by the central bank. “Does the law authorize the central bank to issue all types of currencies or only banknotes and coins? [then] legal tender status should be clarified If only banknotes and coins, then amend the law,” Ms Inutu said.
Evidence from different jurisdictions shows that legislative action is likely to be required before most central banks can issue CBDC. BoT said one overarching lesson and a key takeaway out of COFI 21 was the importance of digitisation and technology. “Digitalization does not only contribute to productivity and efficiency but also broader socioeconomic development.
It is an accelerator of development and as a country, we must be prepared to make the most out of it,” Prof Luoga said. To achieve this there is a need to finance the development of home-grown technologies rather than being dependent on outsourced technologies.
“We are aware that there is a growing number of stakeholders who are ready to support innovation in Tanzania – including angel investors, donors, venture capitalists, foundations, the private sector, and the government.
“As financial institutions, we cannot escape being involved in the financing of the innovation ecosystems. I am aware that some financial institutions are already in it, what is needed is coordination in the financing,” Prof Luoga said adding: The BoT will work with Tanzania Bankers Association (TBA) and other stakeholders in the financial sector for coordinated financing.
Financial institutions need to leverage technological developments by digitizing the credit process and a good example pointed out is digital microloans, which will encourage borrowers in accessing credit from these institutions. However, BoT cautions that this should be cautiously undertaken to avoid the mounting of non-performing loans.
For More News And Analysis About Tanzania Follow Africa-Press
