As one of the biggest fintech hubs in Africa, Kenya is looking at adopting a Central Bank  Digital Currency. However at only 44% smartphone usage across the country, a big question remains on whether this is the best solution to bring the population to the connected masses.

To understand the issue at hand, here’s a quick look into what CBDC is and how it fits into the cryptocurrency and digital finance conversation. 

Briefly, the central bank digital currency (CBDC) is a digital representation of government-backed, fiat money. It is issued by the central bank and is secured by a digital ledger to record & secure transactions.  

 CBDCs can be broadly categorized into: 

1. Retail CBDCs 

Retail CBDCs are issued to the general public  and allow users to make payments or store in an electronic wallet or account.

2. Wholesale CBDCs

Wholesale CBDCs are used by banks & other financial institutions and can be used for both domestic and cross-border transactions.  

CBDCs allow consumers without access to traditional banking i.e. a bank account to also transfer money digitally making it an important tool to tap into the unbanked population and over 85 countries are in some stage of development of CBDCs.

As many as 87 countries are exploring a central bank digital currency 

The similarity with cryptocurrencies is striking & by design as the concept for CBDCs came from cryptocurrencies but it is crucial to point out that CBDCs are NOT cryptocurrencies and these are a few ways to distinguish the two: 

1. Centralization

CBDCs as the name suggests are regulated and controlled by the central bank giving them access to all transaction data. This in itself is problematic as such information could be used to impose restrictions on the transactions allowed. 

2. Privacy & anonymity

As CBDCs are run by the government, they are linked with account data and personal information details which is not the case with cryptocurrencies. While the CBDCs could give synchronized access for both the citizens and governments that would speed up service delivery, the trade off is in privacy as all this data is at the hands of the central authority. 

3. Blockchain barrier

While both cryptocurrencies and CBDCs thrive on blockchain technology, CBDCs are generally run on private blockchains where access to the digital ledger is controlled by the governing authority. This is the opposite of the situation with cryptocurrencies that pride themselves on having openly viewable ledgers of transactions made possible by the public blockchain technology. 

Experts are looking into the viability of  CBDCs as a replacement for hard cash   but this is not without its own drawbacks especially in the African continent.

Crucially, the technology to run CBDCs may have a 4G internet requirement and this presents a major challenge as majority of the “connected” population in Africa are relying on 3G, 2G & feature phones without internet entirely. 

As one of the nations looking into CBDCs, Kenya is currently collecting public opinion on the subject but Central Bank Governor, Patrick Njoroge has expressed reservations towards adoption in its current state. With only 44% of mobile phone users having smartphones, he makes the case that this technology could just end up creating another channel to financially exclude citizens. 

Kenya Central Bank Governor explains CBDC

This is where caution must be taken to ensure the new financial innovations adopted align with the goals of inclusion.