Will CBDCs sail or sink?

When the cryptocurrency craze hit the world, currency regulators – Central Banks around the world – feared that their worst fears had been actualized. A currency they had no control over had been created, giving people an alternative to fiat currencies. As cryptocurrencies gained increasing popularity in countries around the world, especially populous ones like Nigeria and China, regulators swung into stringent action, banning local banking institutions from dealing in and facilitating payments for crypto exchanges. However, the rage for cryptocurrencies could not be ignored and Central Bank Digital Currencies (CBDCs) were born.

If the sprint started in 2021, the Bahamas jumped the gun, as the country pioneered CBDCs with the launch of the Sand Dollar, which was pegged to the US dollar. China led the 2021 sprint with the launch of the e-yuan in April and has since conducted multiple trials in preparation for full take-off in 2022. Four months after Nigeria’s crypto ban was announced, the government announced plans to introduce the e-Naira to be launched on the country’s independence anniversary in October. Although delayed by a few weeks, the e-Naira was eventually launched in late October.

The digital currency’s performance so far has done nothing to taper skepticism about its prospects as a perfect substitute to physical notes. Nigeria’s CBDC pilot is now the second-largest – behind China’s digital yuan – and aims to digitize payments and increase financial inclusion in Africa’s most populous country. Other African countries in the race include Ghana, South Africa, Kenya, Tanzania, and Rwanda. Although progress levels in the latter countries are unknown, the future pursuit of this model by other African countries hinges on the success of the two frontrunners – Nigeria and Ghana.

CBDCs are a welcome development since we know that technology is here to stay as innovative twists to the legacy financial regulation model can help to address issues that have long inhibited perfect financial inclusion in various countries. CBDCs combine the power of blockchain technology with the power of regulatory oversight to monitor financial activities. This, however, is the major argument against CBDCs according to critics. To many, the beauty of blockchain lies in the decentralized system it operates on, which makes it impossible for a single entity to control or regulate the system.

At the end of the race to launch CBDCs, central banks expect economic rewards in form of increased financial inclusion among the populace, improved transparency in transactions to allow them to tackle economic crime and fraud, reduction in transaction costs through the elimination of financial intermediaries from transactions especially remittances, improved liquidity by allowing faster transaction speeds especially for cross-border transactions.

Cumulatively, these benefits are expected to boost a country’s GDP if rapid adoption is achieved in the next 10 years.
While CBDCs offer a complement to the legacy money supply model of central banks, concerns remain about the stability of the system they are built on, the ability of countries – especially LDCs – to maintain such systems, and the ever-present threat of cyber security. However, the benefits seemingly outweigh the risk as more regulatory banks globally jump on the digital currencies wagon. It is safe to say that money is evolving yet again, and only time will tell if CBDCs will sail or sink.