The East Africa Community member states have announced plans to explore the potential of a central bank digital currency (CBDC) as a shared payment system.
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the government’s full faith and credit.
The digital currency expected to end reluctance by member countries to trade in each other’s currency, promoting trade within the region.
In 2014, the EAC launched the East African Payment System (EAPS), an efficient funds transfer system that was supposed to enhance the efficiency and safety of payments and settlement within the EAC region. However, the EAPS has faced many challenges since the launch, such as Varied payment system development, Inconsistent legislation and regulatory framework, and developed and underdeveloped Communication infrastructure.
In light of the challenges they faced, the EAC has started exploring another digital currency that will be advanced with the current technologies and innovations.
“ Review of recent advances in technology and innovations have created the potential for new payment infrastructures and arrangements that could be applied to cross-border payments. The consultant will conduct an exploratory scoping of such developments, as well as emerging technologies and their adoption, including but not limited to technologies involving the use of Central Bank Digital Currencies (CBDCs),” EAC in a media advertisement for a consultant on cross-border payments
A CBDC uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation or region. These digital currencies are centralised and are issued and regulated by the competent monetary authority of the country.
The CBDC acts as a digital representation of a country’s fiat currency and would be backed by a suitable amount of monetary reserves like gold or foreign currency reserves. However, the digital token will be different from other cryptocurrencies that have developed recently as it will not be subject to the high volatility that the cryptocurrencies are facing.
Recently Ghana announced they were in the advanced stage of developing a digital currency, the e-cedi, to protect the citizens from cryptocurrencies such as bitcoin, which is too volatile.