- 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.
- 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.
- 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.
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.