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The concept of a central bank digital currency predates the most recent crypto market. However, it has steadily gained ground as governments recognize the need to modernize payment systems as they face various economic and technological challenges. There are currently about 134 nations and currency unions that have explored or are exploring the use of CBDC, of ​​which three have already launched: Jamaica, the Bahamas and Nigeria.
These nations and currency unions have different, but sometimes overlapping, reasons for wanting to explore the option of digitizing their money, and they may not always be in the best interest of the public.
On the positive side, however, many governments are trying to boost financial inclusion by providing unbanked individuals with an accessible digital payment option while allowing easy transfer of funds, such as welfare payments, for example. They do so in hopes of reducing reliance on banks to handle transactions, allowing ordinary people to send remittances easily and affordably, and enabling simplified international trade.
In addition, the exploration of CBDCs can enhance economic transparency through the immutability of the block chain, which would combat money laundering, tax evasion and other financial crimes. CBDCs also promote the further expansion of the fintech sector, future-proofing the economy and encouraging advanced financial innovation.
Ethiopia, Africa’s second largest nation and fifth largest economy, made headlines after approving a updated monetary policy framework from the National Bank of Ethiopia which, among other things, includes a plan for a CBDC. Economists believe the move would be a major boost to financial inclusion and efficiency in a country that was once seen as a rising economic power before a recent civil war disrupted momentum.
As the country rebuilds itself after the 2022 peace agreement, the NBE sees an opportunity to liberalize the economy and attract foreign investment. Ethiopia hopes to reform its economy, and much of its success may depend on how it implements a CBDC.
CBDCs can undoubtedly unlock economic advantages that could help developing and underdeveloped countries improve their financial situation while playing a bigger role on the global stage. In any case, whether a specific CBDC is for retail, wholesale, or a hybrid, the development of these digital currencies can allow governments to assert more control over financial systems.
From a crypto perspective, if CBDC adoption becomes the norm, it could disrupt the blossoming decentralized finance space. For one, CBDCs could threaten privately issued stablecoins, which serve an infrastructural role, facilitating DeFi activity.
For countries like Ethiopia that are strongly considering issuing CBDC, Nigeria’s use case should serve as a cautionary tale. When the Central Bank of Nigeria issued the eNairaused the open-source Hyperledger fabric protocol, which is secure and can process up to 3,000 transactions per second. However, CBN has never connected eNaira to the existing or developing financial infrastructure.
Ultimately, CBN controls all nodes and blocks outside of blockchain data access, raising concerns about centralized authoritative control. Since its launch in late 2021, the eNaira has not been widely adopted and is seen as a failure.
If CBDCs are future-proofing national economies, they must be compatible with all digital financial systems, including interoperability with public blockchains. In this case, the technical and regulatory considerations are relatively simple to implement; comes to the policies and vision of financial decision makers.
Any CBDC program must collaborate with all licensed banks operating in the country while working with fintech and blockchain technology providers to ensure that the CBDC is interoperable with traditional financial systems, DeFi and other digital payment rails.
Kima, an interoperability protocol that unites crypto and fiat, represents the kind of technological infrastructure that can enable CBDCs to facilitate real economic advancements. Last year, Kima participated in a pilot project administered by the Bank of Israel to assess the feasibility of adopting a CBDC. As part of the project, Kima successfully demonstrated a transfer of a tokenized stock via a digital shekel.
Showing the utility of his protocol, Kima built a demo trading platform to facilitate an atomic exchange of the tokenized stock. Kima’s decentralized settlement layer handled the transaction, linking the buyer interested in buying the share with digital shekels with the seller, who held the tokenized stock in a cryptographic wallet. The seller received the payment directly into his bank account in the form of regular shekels. Using two API calls, Kima ensured that the transaction was secure and verified as it happened instantly without intermediaries or smart contracts.
This process—linking a CBDC, tokenized asset, digital wallet and bank account—is what governments need to see as the goal of any CBDC initiative. If they intend to future-proof their economies, governments must use CBDC to join old financial systems with modern digital financial instruments in a safe and accessible way.
