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CBK Digital Currency

Following the outbreak of the coronavirus (COVID-19) pandemic, digital platforms have emerged as important financial inclusion tools across the world. To reap the full benefits and manage risks, policymakers are looking to step up. Central Banks are exploring the possibility of rolling out Central Bank Digital Currency (CBDC) solutions to meet their future payments needs in a digital economy. The Central Bank of Kenya (CBK) intends to roll out the digital Kenya Shilling, which will be a digital currency intended to serve as legal tender.1

The CBDC will be applied in various payment landscapes including Retail payments, large value payments and Cross boarder payments. The payments landscape has dramatically changed over the last few years particularly during the COVID-19 period. New technologies and innovations, including Distributed Ledger Technology (DLT), Decentralized Finance (De-Fi)2 and embedded finance, are at early stages of implementation. Their proponents indicate that they present potential opportunities to transform the payments landscape enhancing access, efficiency, convenience and lowering costs.

The CBDC is expected to have some benefits such as financial stability and payment resilience, mitigation of financial systemic risks through significant reduction in liquidity and credit risks in payment systems, enhanced cross-border payments and promotion of innovation as an open CBDC platform could allow a range of firms to innovate around CBDC-related payment services and also be able to re-innovate the payment services they provide to consumers.

While CBDC could potentially have a significant positive impact on the financial system, it presents challenges and risks. The CBK would enter into direct competition with the banks and payment service providers it regulates. Banks’ ability for credit creation could get constrained if significant deposit balances are moved from bank deposits to CBDC. This will also be a challenge to the private sector considering that the CBK does not provide credit to the private sector. There are no universally applicable best practices or prescribed rules that will guarantee the ultimate success of CBDC issuance.

Other jurisdictions that are using, implementing or testing CBDC include; Bahamas, South Africa, Singapore, England, Sweden, Canada, Australia, Malaysia, UAE, Thailand, China, USA, Turkey, and India. The discussion on the launching of Kenya’s CBDC has been started following the release of a Discussion paper on the CBDC by the CBK, available at: https://www.centralbank.go.ke/uploads/discussion_papers/CentralBankDigitalCurrency.pdf

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