Modernising money……..continued

Following the article under this column (Move towards modernising money) published on 17 March 2023, it is official, the RBZ is set to issue a digital currency, the digital Mosi-oa-Tunya Gold Coin. We are in the digital era and the future of money is being rewritten through the issuance of Central Bank Digital Currencies (CBDCs).

In the latest Monetary Policy Committee (MPC) update, the Reserv3 Bank of Zimbabwe (RBZ) said: “To expand the value-preserving instruments and enhance divisibility and widen their access to the public, the MPC resolved to complement the current issuance of physical gold coins with backed digital products.

“This initiative will allow gold coins to be widely traded and in the process expand tradable assets in the economy for store of value purposes and will be over and above the procurement, by the Bank of smaller US$ denominations for divisibility purposes and change for transactions in the economy,” said RBZ governor John Mangudya.

At this juncture, the digital gold coin is being treated as an asset class but banks around the world are moving towards issuing CBDCs. Given the ongoing economic challenges in Zimbabwe which are tied to currency reforms, every economic player has been interested in exploring and experimenting new ways to solve business challenges. With CBDCs – among others – the future of money could be rewritten. Depending on their design and purpose, digital currencies could enable new customer-centric business models and financial inclusion with fit-for-purpose features at their core.

They may provide significant value to corporates and societies by allowing timelier, seamless and more secure collaboration across central banks, countries, corporates and individuals. Payments and settlements of financial transactions could be faster, safer, less error prone and at reduced cost. New formats of money may offer an opportunity to better align the world’s financial system with the realities and challenges that businesses are facing in the digital age. This should be the underlying motivation by the RBZ to issue a digital gold coin. If implemented well, it is the solution to the ongoing currency crisis.

CBDCs offer the opportunity to enhance the financial system to keep up with today’s business realities and challenges. Depending on the design of new forms of money, businesses and banks could walk away from batch processing and benefit from micro payments and a higher velocity of money.

Businesses would be able to support pay-per-use business models and to continuously perform payments and fundraising. Instant delivery against payment would be possible. In addition, intra-day limits between banks and corporates could be eliminated. This would make daily life enormously easier. In other words, we would operate in a new and different payment and financial markets infrastructure than today.

It is important to note that existing payment systems no longer meet the digital era’s needs. There is still a need for several intermediaries to conduct a cross-border payment, which makes the process slow, costly and fraud-prone. In the digital age, one would wish to see not only domestic but also cross-border payments be executed much faster.

Even with SWIFT, there is sometimes lack of transparency on where the money sits and where the fees are deducted. To settle big-volume transactions like mergers and acquisations or bonds, the settlement day is a challenge and often cumbersome – amounts have to be sliced in tranches to run through the system. Delivery against payment is possible with escrow accounts or when all involved parties use the same bank – which, from a counterparty risk perspective, is not a preferred option. Different payment format-requirements and cut-off times that vary among banks drive costs and complexity at the end.

Depending on the design and characteristics of CBDCs, these currencies could join business transactions as cash/money on chain and automatically execute smart contracts including payments and book entries in individual systems of respective business partners. Saving resources in reconciliation and administrative tasks would enable everyone to focus on innovation and value creation to the benefit of societies. This is exactly what the digital gold coin should bring, not just being an alternative investment asset.

The world is moving towards digital assets which also need to be supported by digital currencies for smooth flow of transactions. Digital assets are set to transform financial services in many ways and are not a “tomorrow problem” but are something  every economic player needs to think about today.

The major reason digital assets have been such a hot topic, and may disrupt the traditional financial system, is because they offer a new way of exchanging and storing value. This will ultimately mean lower fees, faster transactions and greater security and more.

The impact of this to the economy and the financial system includes increased liquidity, greater ease with transferring assets across international boundaries, and the creation of new asset classes. It is high time financial services players focused on developing and investing in capabilities to support customers to participate in digital assets.

The RBZ has taken a bold step in modernising money which every player in the financial services sector should support by investing in appropriate infrastructure, delivery channels and supporting products.

About the writer: Kaduwo is a researcher and economist. Contact: [email protected], WhatsApp +263773376128