Central Bank Digital Currencies: The future of global trade transactions?

As of May 2022, 100 countries, representing over 95 percent of global GDP, had at least one initiative related to Central Bank Digital Currencies (CBDCs) initiative.  All G7 countries are considering the use of CBDCs, and the European Central Bank is aiming to introduce an eEuro by 2025. Nineteen of the G20 countries are exploring a CBDC, with sixteen already in development or pilot stage. Eleven CBDCs have been launched, all in developing countries, namely Bahamas, Eastern Caribbean states, Jamaica and Nigeria.  An increasing number of African countries are considering the launch of CBDCs, even though this is at the research stage only. South Africa and Ghana have initiated a pilot programme to test their CBDCs (eRand and eCedi respectively[1]). The Bank of Central African States (BEAC) is proposing the introduction of a CBDC for members of the Central African Economic and Monetary Community (CEMAC), made up of Cameroon, Chad, Central African Republic, Equatorial Guinea, Congo and Gabon. This follows the introduction of Bitcoin as legal tender by the Central African Republic in April 2022.

CBDCs are money that is essentially a digital version of traditional money, that is a liability of and backed by the Central Bank, and can be used by citizens to settle any financial transactions. CBDCs will be prone to the same characteristics as traditional currencies when it comes to vulnerabilities and strengths, being driven by the same fundamentals of traditional currencies, only they create distinct efficiencies by their very digital nature.

Earlier this year, the Bank of International Settlements (BIS) and the Swiss National Bank (SNB) ran a pilot successfully to settle wholesale CBDCs transactions using existing back-office systems and processes at five commercial banks. In late October 2022, the BIS Innovation Hub and HKMA (Hong Kong Monetary Authority) released a report that describes the prototype for two-tier, “full-stack” (front-end and back-end) CBDC system comprising a wholesale interbank system and a retail e-wallet system. Accordingly, this project could help to “catalyse and inspire the global quest for the most suitable CBDC architecture.”

Source: https://www.atlanticcouncil.org/cbdctracker/

Many governments are considering introducing CBDCs owing to the several advantages to the local economy. The adoption of CBDCs is expected to lead to greater monetary stability as it will maintain the same level of control that Central Banks had with traditional currencies, therefore helping to stabilise economic and monetary cycles. CBDCs are also expected to provide several opportunities for businesses and consumers, including via lowering the costs of transactions, facilitating cross-border transactions, and improving financial inclusion. The effect of lowering the costs of transactions can be delivered through the digitalisation of processes internal to the financial intermediary as well as the settlement of transactions easily in real time. Facilitatation of  cross-border transactions is delivered via modernising the payment landscape which remains complicated and outdated in the developing world, sometimes taking days for transactions to be cleared in bank accounts. Coupled with initiatives such as the Africa Continental Free Trade Area (AfCFTA), the introduction of CBDCs can ease and lower the costs of conducting business between countries. CBDCs can reduce transaction costs and time undertaken to effectuate payment by reducing reliance on the US dollar as a common currency, reducing the number of intermediaries involved in the payment chains, and by improving competitiveness among private-sector providers. CBDCs can equally facilitate cross-border transactions with extra-regional partners. The Chinese Government, which is currently testing its digital renminbi (e-CNY) in multiple provinces has announced that it could potentially connect its CBDC system to that of trade partners. The digital currency is said to be “technically ready for cross-border use”.

Finally, financial inclusion can be improved, as many CBDCs are being developed to serve those who are currently unbanked.  CBCDs can improve access to finance by allowing individuals to make monetary transactions without requiring a bank account, yet the currency is backed by the Central Bank, unlike mobile money. Thus, many businesses will be able to extend their services to a range of previously inaccessible markets and a broader client base. It is therefore important for businesses to work alongside their respective governments and ensure that the CBDC system being designed is conducive to such purposes. Given that such transactions are traceable, business owners in the informal sector can also produce records of their financial history to benefit from loans and credit which may allow them to expand their operations, improve productivity and therefore formalise. However, to reach underserved communities, further investments in digital infrastructure and network connectivity will be required across the continent.

However, there are also numerous risks associated with digital currencies issued by Central Banks. Of primary concern to businesses are the implications resulting from the disintermediation of commercial banks which can reduce access to finance. Faced with disintermediation, commercial banks may resort to increasing the cost of loans and credits and introducing stricter eligibility requirements when providing loans. This is of great significance in a continent like Africa, especially when more than 80 percent  of micro, small and medium enterprises (MSMEs) are underserved.

There is undoubtedly going to be some difficult teething problems associated with the introduction of CBDCs, and it will disrupt the opportunities of other digital currencies, especially lowering the value of holding stable coins (which are the equivalent of CBDCs but issued outside of Central Banks purview). Nonetheless, CBDCs could bring about significant benefits to the continent, and businesses need to reconsider their payment model to take advantage of the changes that it will bring about.

 Paul Baker is the founder and chairman of International Economics Consulting Group. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on trade technologies for trade and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He led the work on creating an e-Payments Blueprint for Africa and is currently working on the trade aspects of a continental harmonization strategy towards a Single African Digital Market. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s Trade Select Committee, and UN panels and events regarding trade impact analysis.

Reference:

[1] The eCedi is a token based CBDC of the cedi on the blockchain, with one eCedi equivalent to one physical cedi.

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