What you should know about Central Bank Digital Currency that RBZ is pursuing

The mid-term monetary policy statement talked about the Reserve bank of Zimbabwe releasing an introductory paper on a Central Bank Digital Currency (CBDC) soon. This is not the first mention of this project but seeing as the policy statement covered the next 6 months we should really start getting prepared for this new animal. It’s not as complicated as it sounds.  91 countries in the world are working on CBDCs and are at various stages so it’s clearly a sign of keeping up with the times, something we haven’t really been able to say about our financial landscape in the last 20 to 30 years.

CBDC

A central bank digital currency is a digital asset that is issued by a central bank to act as currency. If you understand cryptocurrency then you have an idea of what a digital currency is. In case you do not think of it as a digital token, so electronic, is used to represent value online and in many cases built on a blockchain system. A CBDC unlike cryptocurrency is issued by a central bank or other monetary authority of a country as legal tender in that country or territory. So the Reserve Bank’s idea seems like launching a digital currency that can be used within Zimbabwe.

CBDCs are very popular

Africa currently hosts 2 active CBDCs, Nigeria’s eNaira. It hasn’t faired well but we will touch on this a little bit later. The Central African Republic recently launched the Sango, a blockchain-based digital currency that will be legal tender alongside Bitcoin which the country adopted earlier this year. The Sango also experienced slow uptake. 13 other countries are working on CBDCs at different stages of development. The world over many countries are also working on CBDCs so the Reserve Bank is barking up the correct tree.

Hurdles

There are a few hurdles to consider with CBDCs. In Nigeria’s case, the eNaira is a digital representation of the Naira. It is unpopular because of the poor relationship the Naira has with Nigerians, it has inherited its problems. So if the RBZ plans to launch a digital Zimbabwean dollar we can guess how things would go.

While digital currencies can transact on and off-chain the issue of internet penetration is central to both utility and information dissemination when it comes to any new technology. Zimbabwe’s internet penetration is around 31% according to Statista.com as of January 2022. This brings questions about adoption.

Zimbabweans do not dislike the Zimbabwean dollar, they have simply had unfavourable experiences with it. The reality is not lost on Zimbabweans that the Zimbabwean dollar, in all its iterations, is an inanimate object. The negative feelings are towards the custodians of the currency. Changing it to a new shiny technology is not enough to change that as we have seen in Zimbabwe and Nigeria.

An element of CBDCs that is little discussed is their programmability. While cryptocurrencies are decentralised without ownership or regulation CBDCs are supervised and systems can be controlled by the authorities that issue them. The RBZ is no stranger to attempts to control how Zimbabweans use their money. Such control in the wrong hands could be used to prevent transactions the government simply does not like or support.

CBDCs look like the future

A lot of work is being done on CBDCs in the world and some of it should be of interest to us and where we find ourselves. Project Dunbar is the codename for a test conducted by the Bank for International Settlements and four central banks (South Africa, Australia, Singapore and Malaysia) on the interoperability of CBDCs in a global environment. Simply put they were testing transacting with CBDCs as we currently do with money across borders. The test not only proved it possible but that there are multiple ways of doing it. Zimbabwe’s history with exchange control means we could look at this as a positive but others may not see this kind of freedom as a good sign.

After banning cryptocurrency trading in the country it is good to see the RBZ taking new technology seriously. It’s not clear what this CBDC plan will mean for cryptocurrencies like Bitcoin and our local project ZimboCash which has thus far found little joy. Hopefully, the regulation will encompass these and other currencies in a positive manner as we are seeing unfold in South Africa.