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The concept of central bank digital currencies predates the recent bear market in cryptocurrencies. However, the movement is steadily gaining momentum as governments realize the need to modernize payment systems while addressing a variety of economic and technological challenges. Currently, there are approximately 134 countries and currency unions that have considered or are considering using CBDC, and three of these have already started: Jamaica, the Bahamas, and Nigeria.
These countries and monetary unions have different and sometimes overlapping motivations for wanting to explore options for digitizing their money, and they are not always in the best interests of their citizens.
But on the positive side, many governments are looking to strengthen financial inclusion by providing accessible digital payment options for unbanked individuals, while also enabling easy transfer of funds such as welfare payments. I am. This is being done in hopes of reducing dependence on banks to process transactions, making it easier and more affordable for ordinary people to send money, and enabling streamlined international trade.
Moreover, considering CBDCs, the immutability of blockchain can improve economic transparency and fight laundering, tax evasion, and other financial crimes. CBDCs will also facilitate further expansion of the fintech sector by future-proofing the economy and fostering advanced financial innovation.
Ethiopia, Africa’s second-largest country and fifth-largest economy, has been in the headlines following the National Bank of Ethiopia’s approval of its latest monetary policy framework, which includes a CBDC plan, among other things. Economists believe the move would be a major boost to financial inclusion and efficiency in the country, which was once seen as an economic powerhouse until a recent civil war ended its momentum.
As the country rebuilds after a peace agreement in 2022, the NBE sees an opportunity to liberalize the economy and attract foreign investment. Ethiopia wants to reform its economy, and much of its success may depend on how it implements a CBDC.
CBDCs can undoubtedly unlock economic benefits that could help developing and underdeveloped countries improve their financial positions, while playing a greater role on the world stage. However, whether a particular CBDC is retail, wholesale, or hybrid, the development of these digital currencies could potentially give governments greater control over the financial system.
From a cryptocurrency perspective, the blossoming decentralized finance space could be disrupted if CBDC adoption becomes the norm. First, CBDCs could threaten privately issued stablecoins that serve as infrastructure and facilitate DeFi activities.
For a country like Ethiopia that is strongly considering issuing a CBDC, Nigeria’s use case should be a cautionary tale. When the Central Bank of Nigeria launched eNaira, it used the open-source Hyperledger Fabric protocol, which is secure and capable of processing up to 3,000 transactions per second. However, the CBN did not connect eNaira to existing or developing financial infrastructure.
Ultimately, the CBN controls all nodes and blocks external access to blockchain data, raising concerns about centralized authoritarian control. eNira has not been widely adopted since its launch in late 2021 and is considered a failure.
If CBDC is to become a future-proof national economy, it must be compatible with all digital financial systems, including interoperability with public blockchains. In this case, technical and regulatory considerations are relatively easy to implement. It all comes down to the policies and vision of financial decision makers.
The CBDC program works with fintech and blockchain technology providers to ensure that CBDCs are interoperable with traditional financial systems, DeFi, and other digital payment rails. must work with a licensed bank.
Kima is an interoperability protocol that bridges cryptocurrencies and fiat currencies and is the type of technological infrastructure that allows CBDCs to drive real economic progress. Last year, Kima participated in a pilot project run by the Bank of Israel to assess the feasibility of implementing a CBDC. As part of the project, Kima successfully demonstrated the transfer of tokenized stocks via digital shekels.
To demonstrate the utility of its protocol, Kima built a demo trading platform that facilitates atomic swaps of tokenized stocks. Kima’s decentralized payments layer handled the transaction, connecting buyers interested in purchasing shares using digital shekels with sellers who held the tokenized shares in their cryptocurrency wallets. The seller received payment directly into his bank account in the form of regular shekels. Kima leveraged two API calls to ensure that transactions were secure and verifiable, as they occurred instantly without any intermediaries or smart contracts.
This process of linking CBDCs, tokenized assets, digital wallets, and bank accounts is what governments need to envision as a goal for their CBDC initiatives. If governments are to future-proof their economies, they must use CBDCs to bridge old financial systems with modern digital financial tools in a secure and accessible way.
