The Central Bank of Kenya stated on June 2 that it will take a cautionary approach in implementing the Central Bank Digital Currency (CBDC). This follows the release of its public discussion paper on CBDCs with views from stakeholders.

The discussion paper request went out in February 2022 and incorporated views from the financial sector, the payment service providers (PSPs), technology providers, academia, the legal fraternity, and international development partners.

Even though the launch of a CBDC would have benefits for the largest economy in East Africa, the bank heavily considered the factors that would dampen an effective rollout of the digital currency. However, the bank stated it is not abandoning the idea of having a CBDC and will continuously study the concept.

Here are the top five reasons why Kenya will not be following the Nigeria way in introducing a centralized digital currency in the near-term:

1. Instability in Global Crypto Market

The CBK mentioned that the global crypto market has been facing turmoil and instability last year.

“Recent instability in the global crypto assets market has amplified concerns and the need for a careful review of the innovation and technology risks,” the CBK noted. In its discussion paper, the bank said past issues such as the fall of FTX, the bankruptcy of crypto lender Celsius Network, among half a dozen cases cited in 2022 and 2023.

Notably, the US Securities and Exchange Commission (SEC) suit of Binance and Coinbase this week (June 2023) triggered a $700 million withdrawal within 24 hours on Binance protocols alone. According to Coindesk, the withdrawals of funds from Binance was the highest since the banking crisis in March 2023.

In this latest case, SEC claimed that Binance offered and sold securities, including digital asset securities, without complying with registration requirements. Such developments have made the crypto market volatile.

2. Too Many Cooks

The central bank acknowledged there are enough technologies that have helped the country achieve to digitize its financial sector, stating that it might not need another mechanism to solve financial inclusion issues.

“Significantly, Kenya’s pain points in payments could potentially continue to be addressed by other innovative solutions around the existing ecosystem,” the bank said. “Respondents also highlighted the need to consider Kenya’s highly developed digital payments ecosystem and the high level of financial inclusion.”

On the forefront is the evolved mobile money sector that allows users to send, receive and pay through virtual currency. According to data from the Communication Authority of Kenya (CA), there are 38.6 million mobile money subscriptions representing a penetration rate of 78.2%.

3. Financial Sector’s Concern

Kenya’s financial sector, including banks, commented on the discussion paper that there could be instability in the sector with the introduction of the CBDC.

“Disintermediation and threats to financial stability, particularly where the direct or retail model is adopted and the Central Bank issues CBDC directly to customers. This is because customers would perceive CBDC as risk-free and convert their deposits to CBDC,” the report reads.

Consequently, this would place strain on bank deposits, pose a risk to financial stability, and negatively affect the transmission of monetary policy. CBK would also be competing with banks, putting it in a compromising situation as a regulator for the financial sector.

Partly to mitigate this, the respondents said that the central bank should consider non-interest-bearing retail CBDC to discourage the conversion of deposits to CBDC.

4. Cost Concern

Financial inclusion is a benefit for a digital currency, however, the inverse could be witnessed if access to digital infrastructure such as a phone or Internet connectivity is limiting or expensive.

“To mitigate financial inclusion concerns, it was proposed that CBDC should be designed on low-cost technology that can operate in both online and offline environments,” the CBK report noted.

To minimize the risk of exclusion, several measures can be implemented. Firstly, leveraging smart contracts, offline functionality, interoperability, and promoting consumer education can greatly contribute to this goal, the report noted.

Additionally, maintaining a customer-centric approach is crucial, ensuring that a CBDC genuinely fulfills a specific need. Another effective strategy is to establish a dual system wherein both cash and CBDC coexist, ensuring inclusion for all individuals.

5. Global Stance on CBDCs

The CBK incorporated views from other jurisdictions on CBDC which mostly offered a cautionary approach to implementation, including Tanzania in January 2023.

“On the global stage, the allure of CBDC is fading. In recent years, there was a race by central banks to be the first to adopt CBDC. However, this has been tempered by implementation challenges,” the bank said.

In Nigeria, the IMF found that about 98.5% of eNaira wallets downloaded after the unveiling of the digital currency have been abandoned.

“Despite the laudable undisrupted operation for the first full year, the CBDC project has not yet moved beyond the initial wave of limited adoption,” the IMF said in its report in May 2023.

-Edited by Faustine Ngila, Shigeru Sato