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CBK Explores Possible Introduction of Digital Currencies as Payment Option

The Central Bank of Kenya (CBK) has announced plans that could see the introduction of digital currencies into the country’s national payment system.

CBK on Thursday published a Discussion Paper on Central Bank Digital Currency inviting public input on modalities of possible introduction of a digital Kenyan shilling, citing growing innovations which have seen emergency of new digital payment methods.

“Rapid technological innovations and developments are accelerating the pace of digitalization. New digital payment methods have emerged to facilitate transactions, including CBDC, issued by central banks to serve as money in a digital form. Naturally, the balance of risks and benefits of CBDCs will vary from one economy to another,” said CBK Governor Dr. Patrick Njoroge in a statement.

The CBDC whose value will be equivalent to the ordinary legal tender in use today is backed to help expand payment channels and support cross border transactions.

Among digital payment systems that have emerged include electronic money, CBDC, Stable Coins and cryptocurrencies.

Unlike cryptocurrencies which are distributed on a public ledger, CBDCs are centralized and are issued by central banks as sovereign currency in digital form using in their own blockchain.

The digital asset is further backed to expand financial inclusion especially among the unbanked, reduce the cost of transactions, expanding the scope of translocation and enhance security in the payment system.

“A CBDC issued by CBK would be a sovereign currency in an electronic form and it would appear as a liability on CBK’s balance sheet and an asset to users holding it. The most valuable opportunities that encourage issuance would be where a CBDC can support CBK’s public policy objectives,” the paper reads.

For those wondering how the e-shilling would work, here is how. For instance, if a customer has purchased goods worth Kshs. 500, instead of paying the amount in cash or using mobile money wallets, she would instantaneously pay the amount electronically from her e-wallet to the sellers e-wallet thereby eliminating transaction charges that come with using payment options such as credit cards or mobile money.

A 2021 survey of central banks by the Bank for International Settlements (BIS) indicate that 86% of central banks are actively researching the potential for CBDCs, 60% are experimenting with the technology and 14% are deploying pilot projects.

CBK now becomes the latest regulator in Africa to explore the use of digital currency after Nigeria Central Bank launched e-Naira last year while South African Reserve Bank has since commenced trial.

However, CBK says in the paper, “Kenya’s assessment of CBDCs must be focused on potential opportunities and risks. Fundamentally, given the wide-ranging implications of CBDC to the wider economy, any eventual decision to introduce a CBDC would involve the government, regulatory authorities, private sector and engagement with society more generally. CBK, therefore, welcomes comments on this discussion paper.”

CBK has given Kenyans up to May 20, 2022, to submit their views on the possible applicability of CBDC in the Kenyan market.