The debate about countries’ adoption of the new Central Bank Digital Currencies (CBDCs) has dominated discussions on financial systems across the globe. Central Banks are at the crossroads— faced with either immediately jumping on the CBDC train or taking little steps to understand the dynamics of CBDCs before launch.
A recent survey by the Bank for International Settlements (BIS) has indicated that 86% of the 65 central banks polled are actively researching Central Bank Digital Currency (CBDC), 60% are experimenting with the technology and 14% are deploying pilot projects. Consequently, China is seven years into the process and has pilot programmes for the e-CNY, or digital yuan.
The European Central Bank is targeting 2025 as ideal time to launch its digital currency. The Bank of England and Federal Reserve, however, are moving more slowly to adopting the digital currency. According to Central Bank Digital Currency tracker from a US think-tank, Atlantic Council, seven African countries are in the race to have their own virtual money. These include Ghana, Morocco, Egypt, Kenya, South Africa, Tunisia, and Senegal. Also, the Central Bank of Nigeria (CBN) has recently issued preliminary guidelines to commercial banks for its proposed e-Naira digital currency and expected to pilot in October.
Ghana at the Piloting stage of E-Currency
Ghana recently joined the bandwagon, numbering among countries deploying a pilot project, specifically for its ‘e-Cedi’ as the BoG announced a partnership with Giesecke+Devrient for this purpose. The Bank indicated that the e-Cedi will serve as an alternative to physical cash and aims to facilitate payments without a bank account, contract, or smartphone, by so doing boosting the use of digital services and financial inclusion.
The Governor of the Bank of Ghana (BoG), in a recent speech, noted: “The e-Cedi, which is the first general-purpose Central Bank Digital Currency in Africa, will complement and serve as a digital alternative to physical cash, in line with the Government’s ‘Digital Ghana Agenda’. “The e-Cedi will be tested in trial phases with banks, payment providers, merchants, consumers and other stakeholders for a nationwide rollout as it will present an opportunity to build a robust, inclusive, competitive and sustainable financial sector.”
While this growing trend is inevitable, the question remains, is it an optimal strategy? Ghana has been touted as having rushed through the process towards launching its own digital currency while others acknowledge the Central Bank as having acted with ‘bravery’ to fast-track the country’s digital agenda with this novel tool.
Be that as it may, these contentions are in place, considering the precautionary tactics being employed by major economies around the world. Well, if the government’s consideration for the adoption of a CBDC is solely due to deepening financial inclusion, despite the risks and complexities flagged with its use, then existing digital payment platforms could still be developed further to gravitate towards ensuring increased access overtime.
Ghana’s CBDC issuance design
The right design for a CBDC is pivotal to the wide acceptance and adoption of its use. Whether Ghana’s CBDC should take the form of a wholesale, retail or hybrid CBDC is a crucial endeavor. For wholesale or Direct CBDC, it entails digital currency issued by the central bank directly to commercial banks, which is in turn distributed by commercial banks in the retail market. Retail or ‘Indirect’ CBDC takes the form of a digital currency issued by the central bank directly to all users, indicating that users would have CBDC accounts at the central bank.
The hybrid CBDC combines the elements of both wholesale and retail CBDCs and operates within the spectrum between wholesale and retail CBDCs. Among these types of CBDCs, the hybrid CBDC dominates as the preferred model implemented by most countries operating CBDC’s or are exploring its use. According to the Bank for International Settlements (BIS), this model ensures technological resilience— a payment system that can run on either a private or public infrastructure. As such, Ghana’s e-Cedi will likely take the form of the hybrid model based on current ongoing conversations.
According to Mr. Kwame Oppong, the Head of Financial Technology and Innovation at the Bank of Ghana, in an interview, noted the use of the e-Cedi will play a complementary role with all other electronic payment systems and Payment Service Providers (PSPs) and especially, drive the country’s cash-lite agenda. “The e-Cedi will be available for use in different means. If you have a bank account, you can spend it with your debit card, you can spend it by moving it with your banking app and similarly you can withdraw it onto offline card as well…” Meanwhile, for those without a smart phone or bank account, they could still use the e-Cedi for transactional purposes via the use of a USSD code.
“To also mention, for those who may not have access to data, but have access to our usual USSD code which is quite common in Ghana, you can still use that to spend the e-Cedi. And so to a large extent, the e-Cedi comes to replace cash and the role that cash is playing in the system now,” Mr. Kwame Oppong averred.
This notwithstanding, as far as information on this front is concerned, Ghana’s e-cedi will be pegged to the value of the cedi cash. Thus, the e-Cedi will assume a cash-like model (i.e. a non-interest bearing status). Supposing that, as a means of regulating the flow of ‘e-funds’ from one wallet to another, the Central Bank places limits on the amount of CBDC holdings, this will have implications on the scope of use by citizens— such as daily limits for sending and receiving, as being implemented by some countries.
Safety and robustness: key requirements to E-currency use
Given the design of Ghana’s CBDC— whether akin to authenticating cash or authenticating the owner— either would have implications for the ‘safety principle’ regarding the e-Cedi. For the former, it may encourage user anonymity while the latter will allow for traceability of users. Of course, to ensure this new tool helps in the combat of the ills peculiar to digital technologies, some form of identification is crucial for the safety of the payment system.
According to the Bank for International Settlement, a purely anonymous system will not work, but even if this would be addressed, what kind of verification or authentication will those who are not banked and do not have access to smartphones to complete transactions with the e-Cedi have? Therefore, an authentication or verification of a sort is required in order to prevent fraud, battle anti-money laundering and combat the financing of terrorism, without which the e-Cedi’s advantage may be undermined. Commenting on the issue, Mr.
Kwame Oppong stressed that the safety of the e-Cedi is based on two fronts— the choice of e-currency designer and the fact that the currency is digital. “…If you look at the choice and the partner [currency designer] we took, that reflects our focus of using the robust technology that will safeguard users of the e-Cedi. So, that entity that we have partnered with and helping us with the technology underlying it, has about 160 years in printing currency.
So that is the first step. “The second thing is the design of the usage of the e-Cedi, and so today because it’s a digital version of cash, on one hand, it’s secured by being digital because people cannot virtually see it and know how much you have and carry the money away. “…on the other hand, it also exposes you to cyber security risks.
And so to that end, the existing processes and existing modalities safeguarding your bank account and mobile money is still at play.” Well, these considerations are fundamental, albeit, not strong enough to ensure safety of the digital currency. Even, for jurisdictions with robust digital systems, safety ranks among the topmost concerns for the slow move towards the use of CBDCs especially in developed economies
Ghana’s E-currency and the conduct of monetary policy
The total amount of money in circulation is assessed by the monetary aggregate M2+ which stands at about GHS 120.5 billion as of May 2021, a 22.24% increase since May 2020, according to the BoG Quarterly bulletin. Currency out of banks also increased to GHS 19.1 billion, representing a 31.1% increase as at May 2021 on a year-on-year basis.
Also, demand deposits recorded a rise to GHS 40.2 billion as of May 2021, from GHS33.3 billion indicating a 20.51% increase while savings and time deposits (jointly digital entries on the ledgers of banks) increased by 24.52% as of May 2021. Currently, the banking sector initiates a large portion of money creation through fractional reserve banking. Via this mechanism, banks continuously lend money to economic agents, but such lending is only backed by a fraction of their reserves with the Central Bank.
This is based on the underlying assumption that depositors do not jointly ask for cash withdrawals concurrently. The Central Bank, on the other hand creates money through the use of monetary instruments such as the Open Market Operation (OMO). Also, issuing the e-Cedi could be the third channel of money creation.
According to the Bank for International Settlement, the Central Bank could create deposit competition with the use of CBDCs during stable business cycles but exacerbate bank runs in times of financial crises by transferring their deposits with banks into their CBDC accounts. In addition, customers would accelerate the withdrawal of commercial bank deposits for safer Central Bank currency. Seemingly, this poses a whole deal of challenges. Compared to private digital payment systems, the e-Cedi is backed by the Central Bank, thus making it safer.
Even if commercial banks offer a higher interest rate to savers than those on CBDCs, it probably would not be effective in a flight to safety. On the other hand, it is also argued that if depositors temporarily move funds from bank deposits to CBDCs during financial crisis, the Central Bank could as well quickly redirect or re-channel liquidity back to commercial banks, much as they do now with open market operations. And as long as the Central Bank supplies CBDC in response to transactional demand for it, the impact on monetary policy and its transmission will be limited. Juggling between the two contending views on the CBDCs effect on the conduct of monetary policy, is based primarily on the design. And this should be considered in the roll out of the e-Cedi.
Barriers to existing digital payment platforms remain for CBDC use
The forces driving government’s decision for a CBDC appear to be fueled by genuine motivations— a cash-lite agenda and the ‘pressure’ behind emerging as the leading country on the continent to have its own virtual money Meanwhile, habits take time to form, therefore, the speed of implementation of the e-Cedi is not the silver bullet to accelerating a cash-lite economy.
Besides, this element (habit formation) has characterized the adoption of several digital payment platforms issued in the past including the recent introduction of the universal GH QR code, the gh-link, credit cards, debit cards, e-zwich system, ATMs, Mobile money, and others. While these have performed quite well and have significantly increased access to financial inclusion, the absorption rate among the population deserves a lot more push – majority of the population still prefers the use of cash. Thus, it is very unlikely that, the mere implementation of the e-Cedi will be immediately absorbed by the population. Besides, having access to this CBDC account does not imply its use.
For instance, despite the vast proliferation of banks and digital payment platforms available, about 42% of Ghana’s adult population remain unbanked, while unique mobile penetration was 67% and internet access via mobile was 50% as of 2020 according Statista. This leads to the next concern; the level of digital and technology literacy in the country is still below the average.
Although the proliferation of mobile money (momo) as a means of payment has become a game-changer in the digital technology space, there are still gaps such as digital education which is likely to impede progress towards the use of CBDCs. Frankly speaking, taking a cue from the slow pace of CBDC adoption by the US Fed and the Bank of England, among others, should signal sentiments of a ‘no need to rush’, given the numerous issues that surround CBDC’s and the ideal timing for its launch, especially in countries without robust financial and macroeconomic systems.
Simply assuming that “if it’s digital, it must be better” is too simplistic— that can be seen as the government’s call all along. However, this is a typical case where speed is not of the essence. And also, this is not a question of avoiding change, but the key is to tread cautiously and not be taken by the surprise of an unchartered territory.