Currency debate: Would digital currency work for Zimbabwe?

“NIGERIA has become the first country in Africa, and one of the first in the world, to introduce a digital currency to her citizens,” President Muhammadu Buhari said in a televised speech at the launch in Abuja, the capital.

“The adoption of the central bank digital currency and its underlying technology, called blockchain, can increase Nigeria’s gross domestic product by US$29 billion over the next 10 years.”. Zimbabwe has been grappling with a currency crisis. The growing awareness of digital currencies has raised debate of whether this country is a right candidate.

Cross-border transactions could get faster. Cheaper central bank digital currency (CBDC) has become a matter of considerable interest.

According to the Bank of International Settlement (BIS), 80% of the central banks around the world are now studying the feasibility of this new form of digital central bank money for cross-border transactions as well as for internal benefits. CBDC is expected to ensure three basic principles — those of “do no harm”, “coexistence”, “promote innovation and efficiency”.

 Zimbabwe, which has been in a currency quagmire for many years, should be among the countries to seriously consider having a digital currency that would ultimately replace cash transactions. This is possible, given the country’s relatively young population demography and also the necessity of digital transformation.

Digital currency exists purely in electronic form. Digital money does not have a physical or tangible form, such as a Zimbabwe dollar note or a coin, and is accounted for or transferred using online systems. The CBDC will lower the economy’s reliance on cash, and enable cheaper and smoother international settlements.

 Not just that, it will also promote financial inclusion and simplify the implementation of monetary and fiscal policy. The transactions will be made using distributed ledger technology (DLT). In a DLT system, nodes or shared ledgers connect to form a common network to process transactions.

This network can also extend to other jurisdictions and minimise the processing time for transactions. It provides transparency to authorities and stakeholders, improving the resilience of a financial network by eliminating the need for a centralised database of records.

CBDCs represent a unique opportunity to design a technologically advanced representation of central bank money, one that offers the unique features of finality, liquidity and integrity. That said, CBDC is expected to promote financial inclusion. It can help extend the typically insufficient reach of existing payment systems by implementing digital distribution channels and ICT infrastructure to provide access to central bank money to majority population.

 Where maintenance of high-volume, low-value payments and other financial services is deemed unsuitable or commercially unattractive for commercial banks, CBDC can provide a government-authorised solution for storing value and making payments.  Indeed money and payments are changing fast.

 The Covid-19 pandemic has accelerated a number of recent digital payment trends across economies. Growth in e-commerce has expanded online payments and in-person transactions increasingly use contactless debit and credit cards. Before the pandemic, although cash circulation was growing, its use for payments had been declining in most countries and the number of ATMs falling. At the end of 2019, cash holdings per capita ranged from around US$500 to US$7, while bank deposits per capita varied from US$20 000 -US$100 000.

 Pandemic lockdowns have apparently amplified earlier trends, by driving a decline in withdrawals and fewer opportunities to use cash, resulting in access concerns in some countries. As such, use of CBDC can ease cross-border payments.

The current financial infrastructure is a complex system of many entities. Conducting a transaction between financial institutions takes time and money because they work in different technological systems and regulation regimes.

 For cross-border transactions, for instance, the People’s Bank of China has combined with the Hong Kong monetary authority, the Central Bank of United Arab Emirates and the Bank of Thailand to explore the potential of making CBDC inter-operable between platforms.

 The same model can be adopted in the Southern African Development Community (Sadc) region for instance, taking advantage of the Sadc regional cross-border settlement system called the Sadc Integrated Regional Electronic Settlement System (Sadc-RTGS), formerly known as SIRESS. 

Given the already existing platform, it is therefore easy for Sadc states to launch a regional digital currency. The Sadc-RTGS system has been in operation since July 2013. It is an automated interbank settlement system, which settles payment obligations between Sadc participating banks on either real-time or delayed basis.

 The current system settles payments denoted in ZAR (South African rand). There are considerations to include additional currencies on the system in the near future. The SadcRTGS system is operated by the South African Reserve Bank (SARB) as appointed by the participating Sadc central banks. Participants include central banks and financial institutions, that is banks and non-banks in Sadc that are authorised by the central bank in the country of origin to participate in that country’s settlement system.

 The People’s Bank of China combined with the Hong Kong monetary authority, the Central Bank of United Arab Emirates, and the Bank of Thailand, with the help of Bank of International Settlement’s Innovation Hub concluded a successful experiment of settling international payments using a distributed ledger for their respective digital currencies.

The payments took seconds, instead of days, as happens with the traditional Swift network for cross-border flow of funds. The cost was about half of that for conventional payments. This is a major step forward in friction-free international payments. Interestingly, the blockchain technology that underpins the distributed ledger is also capable of producing smart contracts, that is contracts that execute themselves once payments are made.

Digital currency could serve as a means of settling international payments without using a dollar. India and Singapore, for instance, said they are working to link their digital payment systems to enable instant low-cost funds transfer in a major push to disrupt cross-border transactions between the two nations that amount to over US$1 billion each year.

 The main advantage of digital money is that it speeds up the transaction, simultaneously cutting back on costs. Innovations in such payments is an evolving phenomenon. While making innovations, three factors are considered — overall cost, settlement time, and safety and security of payments.

The flip side, however is, it could increase terrorism financing. Efforts need to be expended to ensure that this also gets minimised, if not completely eliminated. Everything put together, it would seem that CBDC is set to become a game changer, especially in the Sadc region.  In time, data from early CBDCs, including Nigeria which became Africa’s first, should provide insight into their take-up.

Until then, analysis of CBDCs’ implications should consider a range of potential uptake scenarios, given the significant uncertainties. In the coming year, data should start to become available on the rollout of some early CBDCs, notably the Bahamian “sand dollar” launched in October 2020, the e-naira and the digital yuan currently in pilot testing.

 The authorities may also consider commissioning research into consumer attitude or other aspects of the market as this may boost public awareness campaigns for CBDCs, their features and interest in uptake across the population.

*About the writer: Tinashe Kaduwo is a researcher and economist. He writes in his personal capacity. Contact kaduwot@gmail. com whatsapp +263773376128