The notion that government control in the adoption of CBDCs in Africa represents the only means of advancing policy remains idyllic.
- The most prominent justification for government-backed consumer wallets emanates from the idea of banking the unbanked.
- Regionalising the power balance between central and commercial banks can address the identified risks of the adoption of CBDCs in Africa.
- One intriguing aspect of money privatization and the adoption of CBDCs in Africa is the link between monetary digitisation and financial globalisation.
The most prominent justification for government-backed consumer wallets emanates from the idea of banking the unbanked. As early as 1987, economic researchers like James Tobin outlined the idea of government-backed collective banking as a technological issue.
Variants of the argument are gradually evolving. They now contain twists such as the argument that if governments failed to intervene, digitisation of money would entail privatisation because fiat currency would be reduced to electronic inputs in corporate-controlled e-wallets.
The expansion of direct cash transfers to modernise the welfare state, which international foundations and NGOs have strongly supported, has also been noted as requiring government control at the retail end of disbursements.
A careful examination reveals that many private financial providers remain eager to stay competitive and serve as government vendors. Thus, the notion that government control in the adoption of CBDCs in Africa represents the only means of advancing policy remains idyllic.
The globalisation of financial technology
One intriguing aspect of money privatization and the adoption of CBDCs in Africa is the link between monetary digitisation and financial globalisation. The enterprise-level bank-to-bank and payment system connection networks that African governments seem to have handled effectively occasionally span national boundaries, increasing the space for private fintech innovation.
Senegal’s wave saw its subscriber base surge to over 5 million. The surge was mainly because central and commercial banks throughout Franc Zone Africa have actively networked their national payment switches. WAEMU, for instance, currently runs complex real-time gross settlement systems that connect several nations and private institutions.
As a result, when the Swedish government contemplates how digitalisation may be the only way to save its low-volume, isolated currency, the Krona, from destruction by corporate-owned global digital currencies, the fate of many African national currencies comes to light. Concerns of marginalisation due to private multinational wallet providers monopolising the digital money supply struck a raw nerve in Africa. Notably, Sweden has a GDP roughly equivalent to the combined GDP of West Africa’s 15 nations.
READ MORE: Economic growth: Africa should redefine its role in the global economic sphere
The existing power balance and digital seigniorage
Digital seigniorage refers to the measurable gains central banks reap in pursuing more control over the fintech ecosystem. The crucial point here is not to claim that governments and central banks wish to generate e-money to compensate for the losses that would occur from a shift from paper currency, which they now control totally, to digital wallets held by the private sector.
Instead, it encompasses any and all monetary benefits that a government expects from managing e-money issuance and circulation at numerous levels of the monetary structure, from the interbank sphere to the retail-consumer end.
Within the traditional financial system, commercial banks at home and abroad cooperate via networks like SWIFT to drive the majority of economic globalisation. Forex and commodity trades, and even interpersonal cash transfers, are mainly controlled by global networks of primarily private correspondent banks.
Central banks in Africa, in turn, control enterprise-level payment infrastructure and settlement systems, hence dominating domestic payment networks in their respective nations. So far, this power balance has been maintained exceptionally well. However, the rise of cryptocurrencies and its substantial abridgement of settlement systems that respect jurisdictional borders threatens to mix the domestic and foreign domains, upsetting this balance.
Like many others globally, African central banks have responded mainly by banning cryptocurrency. They are proactively going further into the retail-consumer end with universal digital currencies, possibly upsetting the power balance to their advantage.
Challenges with government control in the adoption of CBDCs
The security system of the issued and proposed CBDCs remains typically rooted in a single software framework. Thus, the decision by Nigerian and Ghanaian authorities, for example, to use systems designed by foreign vendors—with limited involvement by the rest of the domestic fintech network—means that any security flaw will be complex and challenging to identify and fix.
The incumbent regime, vulnerable to CBDC disruption, is robust because of the multiplicity of banking and payment system linkages, suppliers, protocols, and cybersecurity procedures.
Worse, central banks declined to reveal specific architectural blueprints for independent examination. Consequently, the developing African central bank digital currency system has been purposefully protected from security surveys and criticism. For instance, the Ghanaian banking association denies general knowledge of the Central Bank’s CBDC program (the “e-Cedi”).
Finding solutions through a proper balance of power
Regionalising the power balance between central and commercial banks can address the risks associated with the adoption of CBDCs in Africa. Commercial bank digital wallets can thus reduce the costs underlying the correspondent banking channels. These wallets can also promote cross-border trade in Africa by restricting the focus of central banks to the B2B and interbank payment ecosystems. Central banks have traditionally managed this well while incorporating these systems across borders. In such a scenario, each actor—public and private—does what it does best.
The Pan-African Payments and Settlement System (PAPSS) platform, launched recently, offers a blank canvas for developing such regional ecosystems. The incentive of the African Continental Free Trade Agreement (AfCFTA) fuels the debate over how to make PAPSS work. This clearly shifts the focus from petty squabbles between commercial and central banks for influence in shaping consumer payments to the much larger existential issue of marginalisation in the face of digitalisation in global finance.
Individual African nations have relatively weak economies. As such, they lack the resources to develop a worldwide plan to foresee the growth of private transnational digital currencies.
AfCFTA provides the foundation for African central banks to align their digital currency activities with regional economic integration geostrategic aims rather than local paternalism. It also catalyses African governments to create defensive and exploratory control of the masses through CBDCs.
Recent developments in government control in the adoption of CBDCs
Nigeria’s government has had little success in its quest to popularise its CBDC, the e-Naira. Recently, Nigeria Central Bank has capped weekly ATM withdrawals to $225. This way, the government aims to encourage the population to uptake CBDC in their digital transactions. It also seeks to gain more control of digital finance. The sudden reduction in the withdrawable amount intends to spur Nigeria towards a cashless economy.
On December 6, 2022, the Nigeria Central Bank capped daily withdrawals for businesses at $45, translating to ₦20,000. The circular pointed out that businesses executing over-the-counter will have withdrawal limits set at $1,125, being ₦500,000 weekly. Nonetheless, withdrawals exceeding the caps would attract a 10 and 5 per cent fee for businesses and individuals, respectively.
The head of the banking supervision unit at the Central Bank, Haruna Mustafa, encouraged customers to consider alternative channels. These include USSD, eNaira, mobile and internet banking and cash-based withdrawals. Mustafa further clarified the new caps represent cumulative limits. Individual daily over-the-counter and ATM transactions exceeding$45 attract a 5 per cent service fee.
The current cap on cash withdrawable revises previous limits of $338 for individuals. It translates to ₦150,000 daily and $1,128, yielding ₦500,000 for business transactions.
The latest adjustment traces the admission of low e-Naira adoption rates since its introduction in October 2021. The Central Bank confessed its struggle to convince Nigerians to embrace CBDC. The Central Bank noted that only 0.5 per cent of the citizens had used the e-Naira since its introduction.
READ MORE: A common Africa currency and CBDC’s unlikely future
