In a document that was recently released, the central bank in Kenya has acknowledged that the country’s financial system could certainly benefit from the launch of a central bank digital currency (CBDC). However, the bank did warn that rolling out a CBDC could also have some risks for the same. In a discussion paper, the Central Bank of Kenya (CBK) has suggested that there could be enhanced ‘efficiency gains’ and cross-border payments if a central bank digital currency (CBDC) were to be introduced. However, the bank acknowledged in the same document that these digital currencies could also be risky for the financial system.
For instance, the bank has cited some ‘unknowns’ in the document, which include how the core functions of the central bank would be affected by the CBDC, such as monetary policy, payments system oversight, and financial stability. The financial disintermediation argument has also been regurgitated by the CBK, which is often used by critics of CBDCs. The document stated that the ability of banks when it comes to credit creation could be affected if significant deposit balances are moved to CBDCs from bank deposits. As it is not possible for central banks to provide the private sector with credit, it is essential to understand the role of bank credit.
The document further said that the cost of credit could also go up if banks were to lose a significant volume of low-cost transaction deposits. Meanwhile, the central bank claimed that introducing a CBDC in the country did open up the risk of financial exclusion. This would happen in the event that the required technical literacy and technological infrastructure is not accessible to all sections of the public. The CBK also argued in the document that they were still unclear on the potential benefits of a Kenyan CBDC, it also emphasized that it was necessary to have the perspective of ordinary Kenyans regarding this topic.
The central bank stated that for addressing the questions that have been highlighted, it is necessary that people be at the center of making assessments for any innovation. It is said that a technology’s usefulness does not depend on its uniqueness but on its capabilities of solving a societal problem. Meanwhile, the CBK justified its plan of obtaining the point of view of the people by highlighting the rise of mobile money, which has put the country at the center of innovation in Africa.
The Kenyan central bank said that mobile money has turned out to be quite a success in Kenya and this is mostly because it has addressed the challenge of individuals being able to transfer money to their family members. Likewise, the central bank went on to say that a central bank digital currency (CBDC) has to be based on functionality and should be able to resolve a problem for the people. The underlying technology of the CBDC should not be the focus because it is the problem that it solves, which will determine its usefulness at the end of the day.