Why more Central Banks in Africa should adopt CBDCs


Central bank digital currencies (CBDCs) have recently emerged as a hot topic in the financial space. Banks, Institutions, and governments are performing research and analysis on the economic and technical feasibility of introducing a new form of digital money and its impact on monetary and fiscal policy. CBDC is short for Central Bank Digital Currency, an electronic form of central bank money that citizens can use to make digital payments and store value. A CBDC offers three main elements: 

  • A digital currency
  • Issued by the central bank
  • Universally accessible

A central bank digital currency increases the safety and efficiency of both wholesale and retail payment systems. On the wholesale side, a central bank digital currency facilitates quick settlement of retail payments. It could improve the efficiency of making payments at the point of sale or between two parties. No physical coins or notes are available to individuals in a digital society, and all money is exchanged digitally. If a country intends to become a cashless society, a digital currency with government / central bank backing is a credible alternative. 

Issuing a CBDC would give governments an edge over the competition from private e-money. The pressure for governments to adopt a CBDC is strong, as the market for private e-money is rising. If it becomes mainstream, beneficiaries are disadvantaged because e-money providers aim to maximise their profits instead of the general public’s. 

In addition to domestic transactions, the current cross-jurisdiction payments model depends heavily on central banks operating the real-time gross settlement (RTGS) infrastructure within which all local banks’ obligations must settle. Since time lags exist in cross-border payments, participating parties are exposed to settlement and credit risk. A CBDC is available around the clock, while privacy is considered to eliminate counterparty credit risk.

Retail Central Bank Digital Currency

A retail central bank digital currency focuses, in particular, on supporting the general public. Additionally, it helps lower the cost of cash printing and promotes financial inclusion. There are two types of retail CBDCs:

  • Value or cash-based access

According to Riksbank, developing a value or cash-based access system is easier and quicker than token-based access. This system involves CBDCs passed onto the recipient through a pseudonymous digital wallet. The wallet will be identifiable on a public blockchain, and, much like cash transactions, it will be difficult to identify parties in such transactions.

  • Token or account-based access

This is similar to the access provided by a bank account. Thus, an intermediary will verify the recipient’s identity and monitor illicit activity and payments between accounts, providing more privacy. Personal transaction data is shielded from commercial parties and public authorities through a private authentication process.

Advantages of CBDCs 

  1. CBDCs simplify the process of implementing monetary policy and government policies.
  2. Disbursement of money through intermediaries introduces third-party risk to the process. CBDCs eliminate third-party risks.
  3. A value-based retail CBDC functions like cash and preserves privacy by making transactions pseudonymous. On the other hand, account-based access to CBDCs functions like a regular bank account and can be equipped with privacy features.
  4. CBDCs can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.
  5. CBDCs can prevent illicit activity because they exist in a digital format and do not require serial numbers for tracking.

Disadvantages of CBDCs 

  1. CBDCs do not necessarily solve the problem of centralisation.
  2. Users would have to give up some degree of privacy since the administrator is responsible for collecting and disseminating digital identifications. Criminals could hack and misuse information, or central banks could disallow transactions between citizens.

Countries that embraced CBDC


China’s central bank (PBoC) was one of the first to focus on developing a CBDC, forming a special task force already in 2014. In April 2020, the project gained traction as the testing of a CBDC prototype was announced. Currently, the prototype of the Chinese CBDC, DC/EP (digital currency/electronic payment), is being tested by the private and public sectors. 50% of the mobility subsidies for employees in the public sector are being paid out directly onto the digital DC/EP wallet. Further testing was announced to take place during the Winter Olympics in 2022. The role of cash in China is declining. In 2016, only 40% of all payments were carried out with cash (Statista, 2019) — in 2018, only 20% (Bundesbank, 2019). In the Euro area, this share amounts to 79% (Esselink, Hernández 2017, p. 4). China is consequently one of the few countries worldwide where the currency in circulation (CIC) as a share of gross domestic product (GDP) decreased. 


In March 2017, the Swedish Riksbank started its CBDC project, the e-krona (Riksbank, 2017). A pilot is planned from 2020 until February 2021. 


The Bahamian CBDC project is called “Sand Dollar”, and its prototype was already initiated in the district of Exuma in December 2019 and two months later also on the Abaco Islands. The Central Bank of the Bahamas (CBoB) plans to expand the project to all islands by the second half of 2020. Currently, around 380,000 people live scattered on the 700 islands that form the Bahamas. The national currency, the Bahamian Dollar, is kept at a 1:1 peg with the U.S. dollar. 

Eastern Caribbean Currency Union

In March 2019, the Eastern Caribbean Central Bank (ECCB) initiated its CBDC project called DXCD. Since March 2020, the CBDC has been tested in selected pilot countries for six months. The ECCB issues the Eastern Caribbean Dollar (ECD), which is the legal tender in eight of the eleven member states of the Organization of Eastern Caribbean States (OECS), together forming the Eastern Caribbean Currency Union (ECCU). The islands that constitute the OECS are located in the Caribbean Sea and are inhabited by more than 1.4 million people. Since 1976, the ECD has been pegged to the U.S. dollar. 

Marshal Islands

In February 2018, the Republic of the Marshall Islands (RMI) revealed plans for issuing a digital currency, the Sovereign (SOV). With a population of only 58,000 inhabitants, the costs of a physical national currency are currently exceeding its benefits. This is why the U.S. dollar currently serves as the legal tender in the RMI. With the SOV, the RMI plans to introduce a second, exclusively digital, legal tender. It is motivated by expensive and inefficient payment methods in the RMI. For instance, remittances cost 10% of the total funds transferred (SOV Foundation 2019, p. 7).

Further, only “very few people have bank accounts or debit cards” (ibid., p. 7). Consequently, the country’s payment system is dominated by cash. With the SOV, the RMI wants to offer the unbanked an attractive digital payment service. 


More and more central banks show interest in CBDCs. The presented pioneer projects are motivated by several reasons. Interestingly, a too dominant role of cash in the payment system and decreasing cash usage are mentioned as motivating factors. On the other hand, China and Sweden see the importance of declining cash usage and stress the negative implications of lower cash usage as a motivation for their CBDC. Note that the impact of a CBDC on the financial system could so far only be theoretically analysed. Therefore, it remains to be seen how citizens would react to the concrete implementation of a new variant of central bank money. Given the advanced status of the presented projects, we might soon be able to observe this reaction.

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