A Continent in Need of Digital Currencies
For the most part, developed countries have well defined financial systems that are primarily digitized. However, a region where CBDCs have the potential to transform the entire financial scape is Africa.
The continent is largely seen as the last resort for IT and financial innovations due to the infrastructural problems that plague the region. However, in the past few years, many youths in Africa have turned to cryptocurrencies. Crypto assets are used as a means of storing value and hedging against the volatility of their national currencies.
CBDCs in Africa
The governments in Africa appear to be waking up to the new realities of digital currencies. The anglophone countries lead the way, with South Africa conducting second tests for a national digital currency. Ghana has also done extensive research towards launching a pilot program. Kenya is following suit, while Nigeria has also joined the train despite its recent ban on cryptocurrencies.
Nigeria and South Africa have the largest economies in Africa. Therefore, it is not surprising that the two countries are looking to expand their existing financial systems with the launch of a national currency.
Beyond this, it shows that Africa is not ready to be left behind in the crypto revolution. CBDCs can resolve one of the inherent problems in the African finance system, “corruption.” African nations are known for their high levels of corruption, mainly in the public sector.
CBDCs can provide an immutable trail for financial enforcement agencies to monitor money allocated and spent within the public sector. This will help to significantly reduce the wastage of public funds and reduce financial crimes within the continent.
Other Advantages of CBDCs in Africa
CBDCs can also help promote intra-continental trade within the continent. The financial and logistical costs of trade within the continent have forced many countries to embark on unfavorable trade deals with foreign governments to meet domestic needs. An efficient payment system backed by CBDCs would facilitate internal trade between African nations. Tourism is another sector that would thrive in the continent with the advent of CBDCs.
The African Union can also achieve its long-term goal of developing a currency that unites the region similar to the Euro. The digital currency can be universally adopted and align the fragmented payment systems in the continent. Ecowas can also leverage blockchain technology to build a regional digital currency to ease existing trade movements within its member countries.
The adoption of CBDCs will also ensure an efficient payment system for foreign trades. African countries are largely dependent on foreign exports of national resources, and a CBDC can bring greater transparency to Forex earnings. Remittance is also huge in Africa, where a significant population works in Europe and America. Central Banks can offer better exchange rates and faster transactions for citizens sending remittances back home to their families.
Digital currencies will also foster the growth of blockchain technology within the continent. Several countries in the region have stifled the development of blockchain companies with policies. However, this could change with the deployment of CBDCs within the region. A government-issued digital currency will also provide a boost in investors’ faith in blockchain technology.
Existing Problems Could Hinder Implementation of CBDCs
Despite all the potentials of CBDCs, African countries could face problems in implementing digital currencies successfully. At the moment, many countries lack legal frameworks for blockchain and cryptocurrencies. Therefore, there needs to be a conscious effort from regulators and lawmakers to introduce a friendly blockchain framework.
Central banks also face the problems of aligning a fragmented financial system with an efficient blockchain-based system. This can be resolved with the proper blockchain infrastructure, and several financial bodies like IBM have developed specific blockchains for Central banks that want to build digital currencies.
Given the current context facing African nations, CBDC is a no-brainer. Blockchain technology has proven to work and is here for the future. Africa cannot afford to be left behind in this financial movement that will have a similar effect to how the internet has turned the world to a global village.