Do the risks and high cost outweigh the benefits?


A recent survey on the topic of the development of central bank digital currencies (CBDCs) in Africa gives some new insight into the motivations and concerns of their development and regulators. Nonetheless, analysts around the world are questioning the implementation of CBDCs, be it in Africa, China or the US

Central bank digital currency, popularly known as CBDC, has been touted as the next step towards financial inclusion. They have the potential to transform the financial system specific to a region. So it is more likely that government bodies are collaborating with regulatory bodies to strengthen their control over their respective payment systems.

From central banking and tech-driven institutions to politicians – many people have their fingers on the pulse of this latest payment innovation. Places such as China and Russia have already started pilot programmes, while others, such as the US, are in the research stage. BeInCrypto has extensively covered the pros and cons of CBDC implementation in China and the United States.

But another important area for CBDC development is in Africa. Serious cracks have emerged in the operation of CBDCs in the region that could arguably see the most benefits.

African CBDC: what and why

CBDCs are seen as a tool to strengthen the monetary system with a central bank to support secure, low-cost and inclusive payments while promoting innovation.

CBDCs could bring financial services to people who previously did not have bank accounts, especially if they are designed for offline use. In remote areas where there is no internet access, digital transactions can be done at little or no cost using simple feature phones. This has the potential to further boost cross-border transfers and payments.

Sub-Saharan Africa remains the most expensive region to send and receive money, with the average cost being less than 8%t of the transfer amount.

Average cost of a financial transaction by region of the world according to World Bank data
Source: World Bank

CBDCs can ideally help to counter this blow and promote financial inclusion within the African region, especially in comparison to other EMEs (Emerging Market Economies).

Compared to the latter, financial inclusion ranks above digital cash among other motivations, as seen in the chart below:

Benefits of CBDCs - Each bar indicates the percentage of central banks that choose a given motivation for financial inclusion as one of their top three benefits of a CBDC/barrier.
Source: bis.org

While several regions of the African continent are exploring CBDC implementation, Nigeria and Ghana are leading the pack.

Status Report on CBDCs in Africa

The interest of African central banks in CBDCs has increased recently. While all those surveyed are analyzing CBDCs, only a few have projects at advanced stages (pilot or live).

The State of CBDCs Around the World Today with a Special Focus on Africa
Source: cbdctracker.org

Several sub-Saharan African central banks are either researching or are in the pilot phase of a digital currency following the introduction of Nigeria’s e-naira and Ghana’s e-cedi.

There are still many risks and challenges, including data privacy, cyberattacks and public access to digital infrastructure.

visible cracks in the infrastructure

A recent report highlights some key differences and different motivations in the African CBDC movement. The Bank for International Settlements (BIS) conducted a survey of 19 African central banks that served as the basis for the report:

A direct threat to liberty that a CBDC could pose is closely related to its threat to privacy. According to the report, the main operational challenge cited is cyber risk, more so in Africa than anywhere else.

Concerns related to CBDCs – Each bar indicates the percentage of central banks that chose a given downside as one of their top three concerns.
Source: bis.org

A successful cyber attack on a CBDC could cause severe and widespread damage and destroy the base of the entire region’s economy. Attacks on credit card systems and databases containing consumer credit profiles already offer a glimpse of the potential threats involved.

You may remember an infamous hack on the central bank of Bangladesh in 2016. The criminals compromised the computer network of Bangladesh Bank, saw how transfers were made and gained access to the bank’s credentials for payment transfers.

Bangladesh bank robbery or SWIFT attack - one of the biggest bank robberies ever and the most influential cyber-crime in history
Source: niceideas.ch

Another significant challenge is the operational burden of maintaining a CBDC. BIS Survey Note:

“Here African central banks highlight the same aspects as other EMEs: network resilience, cost, availability, and combinability of technologies, and their scalability and functionalities. The operating cost of such a complex system is high.

Infrastructure Determining Ideas - Each bar indicates the percentage of central banks that choose a given stimulus as one of their top five ideas regarding infrastructure.
Source: bis.org

Meanwhile, low adoption and the risk of bank disruption are also among the top concerns. According to a BeInCrypto report, Nigeria’s central bank digital currency has been adopted by only 0.50% of the country’s population. Subsequently, other analysts declared that “Enayara has been a colossal failure.”

These shocks could also potentially complicate monetary policy.

Concerns in America and around the world

BeInCrypto contacted Nick AnthonyA policy analyst at the Cato Institute, took to Twitter to comment on the ongoing CBDC situation.

Fellow analysts raised similar red flags on CBDC adoption, including cyber security risks in the US. Anthony said:

“A CBDC would most likely be the biggest assault on financial privacy since the creation of the Bank Secrecy Act and the establishment of the third party doctrine.”

In addition, he opposes the financial inclusion attribute about the Americas, as discussed earlier in the article, in the case of Africa. “Considering privacy and mistrust of banks are the top three reasons for the unbanked, it is hard to imagine how a CBDC will solve this issue when trust in government is at a historic low,” he added.

Public trust in the US government is at a historic low
data compiled by Nick Anthony

There is also a risk that a CBDC could undermine both the foundations and the future of financial markets.

“Not only would this risk disrupting the banking system, but countries around the world have shown that they want CBDCs to exclusively keep their monopoly on money.”

suggestions should be considered

Congress should explicitly prohibit the Federal Reserve and Treasury from issuing CBDCs in any form in order to prevent financial privacy, financial freedom, free markets, and cyber security risks. To do so, Congress could amend the Federal Reserve Act, as explained in a research paper shared with BeInCrypto.

Finally, in a concluding narrative, the policy analyst asserted:

“A US CBDC poses substantial risks to financial privacy, financial freedom, free markets and cyber security. Yet the purported benefits fail to stand up to scrutiny. CBDCs have certainly made central banks the talk of the town and has breathed life into an otherwise dense policy sector. But there is no reason for the US government to issue a CBDC when the costs are so high and the benefits so few.”

But again, these are suggestions. While the Americas have a different economic strength and power than Africa, CBDC concerns are at the forefront.

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