The Harare Institute of Technology (HIT) is hard at work on developing the Zimbabwean Central bank Digital Currency (CBDC). This is according to reports by the Herald from the institution’s 13th graduation ceremony held recently with President Emmerson Mnangagwa in attendance. This is not the first mention of Zimbabwe’s CBDC but the first we have heard of work being done in earnest on the digital currency.

HIT Vice Chancellor Dr Quinton Kanhukamwe expressed that the CBDC was being worked on to solve many problems in Zimbabwe’s monetary space, including reducing printing costs, reducing transactional costs, eliminating currency manipulation, eliminating cash hoarding and black market trading. We’ll discuss the veracity of each of these claims for a CBDC but first what is it?

Central Bank Digital Currency

CBDC is a digital asset similar to cryptocurrency or other digital assets issued by a Central Bank of a country or territory to be used for the purposes of transacting. CBDCs can either be blockchain-based or non-blockchain based. When blockchain-based, they are decentralised because the records (ledgers) of the currency and transactions are distributed and immutable, meaning no one party in the ecosystem can exert control or undue influence on the CBDC. CBDCs are a big topic worldwide as countries all over are working on CBDCs in one form or another. 10 countries have launched CBDCs. 9 of these are in the Caribbean hosting 3 CBDCs (Dcash, Jamdex and the Sand Dollar). The 10th is Nigeria’s e-Naira. The 11th is recently live-tested Iranian Crypto rial. Now let’s look at CBDCs and the claims made by the HIT Vice-Chancellor.

Reduce printing costs

Well, if you’re not printing notes, there are no printing costs. Furthermore, Zimbabwe imports printed notes and in the past, there have been instances were the imported notes cost more than their value by some measures.

Reduce Transactional costs

Blockchain technology and digital currency certainly provide lower transacting costs. Especially given the nightmare that is transaction costs in Zimbabwe.  A lot of factors determine the transaction cost but it is proven that digital currencies provide lower transaction costs.

Eliminate currency manipulation

Now, this is where it gets tricky, particularly in the Zimbabwean context. Currency manipulation in economics usually refers to government efforts to lower the valuation of their currency to boost exports. However, in Zimbabwe, we have seen the reverse with pegging of the currency at values higher than widely accepted levels. You could also look at it the other way as people valuing the currency lower than government-accepted levels. A blockchain CBDC because of decentralisation, could eliminate manipulation from all parties. However, CBDCs (as digital assets) are also programmable and this means currency could be programmed not to perform certain transactions or to limit transacting in a certain way. CBDCs are, therefore, not immune to manipulation.

Eliminate Cash hoarding

Well, again, if there is no cash, you cannot exactly hoard it. If we look a little deeper, it is essentially currency hoarding and currency hoarding is a symptom of a problem rather than the problem. The problem is the one outlined before of currency manipulation, which causes market participants to see value in hoarding currency. So again, a blockchain-based CBDC could achieve this.

Black market trading

Just like cash hoarding, black markets are symptoms rather than a cause. A black or parallel market occurs where a market fails to serve participants efficiently, and participants resort to activity outside (or parallel to) that market. Our problems have been in the allocation of foreign currency and the value attached to it. An open, decentralised market is efficient and prices accordingly, meaning a parallel market would ordinarily never become necessary. The same could be said of fiat currency. So here the behaviour of the custodians of the currency matters most.

Improving financial inclusion

There was also mention of the CBDC improving financial inclusion. If we take the example of El Salvador, which adopted cryptocurrency Bitcoin, which happens to be a blockchain-based digital currency as legal tender, they increased financial inclusion from 32% to 62.5% within  6 months as measured by the percentage of the population with functional bank accounts (the latter being Bitcoin wallets).

“Many at times, the unbanked population believe that the traditional financial sector is only there to rip off all their earnings. It has the capacity to reduce significantly the regulatory costs for central banks thus reducing the transactional costs that will ultimately reduce the costs of service. As a result, there is significant reduction in fees,” said Dr Kanhukamwe.

Regulatory hindrances

Like many other African countries, Zimbabwe is interested in digital currency, but regulation has served as a hindrance rather than help. The authorities have in the past quashed all efforts to advance in the realm of cryptocurrency. In spite of this, Zimbabwe registers a healthy 1.42% cryptocurrency ownership rate while having launched domestic projects such as Zimbocash.

CBDCs are being pursued in some way or form by at least half the world’s countries. Developing them takes a while so we can keep the champagne on ice for a little bit longer.