Senegal recently became the second country in the world, After Tunisia, to introduce a national digital currency. The digital currency, known as eCFA, will be a legal tender, just like country's the current currency, CFA Franc, is.
Borrowing a leaf from Tunisia's national digital currency method of implementation, Senegal’s eCFA also operates via a partnership between the country's central bank and a trusted fintech platform, whilst the central bank retains the responsibility to issue the digital legal tender.
For clarity, National Digital Currencies, also known as Central Bank Digital currencies (CBDCs) are digital forms of fiat money (a currency established as money by government regulation or monetary law), and as such, they are issued by the state and have the legal tender status.
Although the current concept of CBDCs is directly inspired by Bitcoin, they are different from virtual currency and cryptocurrency, for being centrally issued and regulated.
These pioneering efforts towards mainstreaming digital currency in Africa, alongside blockchain experiments, further cements Africa's current place as the world's most fertile innovation ground for FinTech solutions.
Pitching in with the current global tune of digital currency probes, plans and pilots, of which China, US, Russia, Ukraine and the UK are its most vocal singers, sequel to co-introducing eCFA in Senegal, WAEMU plans to introduce the eCFA in Cote d’Ivoire, Benin, Burkina Faso, Mali, Niger, Togo and Guinea-Bissau.
What Do Countries Stand To Gain from CBDCs, Anyway?
First off, introducing a national digital currency can help to absolutely increase and simplify tax collection, as it will effectively help the government to keep track of the movement of money within the economy. The downside, though, from the citizens' perspective, is that the state will have a large amount of data about citizens and their finances. Some fear that this would mean citizens giving up their privacy, as far as their finances go. However, the transparency that the CBDC blockchain technology provides also works in the opposite direction.
The technology would also invariably allow citizens and other stakeholders to track state spending, to follow where each penny of national and state budget has been spent, thus effectively helping the citizens and independent institutions to hold their governments accountable in the discharge of their service to the public. For example, it will be easer to find accurate answers to questions like, did all the donated and borrowed monies the Nigerian government received to fight COVID-19 virus outbreak really go to fight the coronavirus in the country, or did part of it stray into corrupt accounts?
Furthermore, using a national digital currency will also help to target social assistance to the sectors and places they are most required, properly and cheaply too, as financial intermediaries like commercial banks and payment gateways will be easily bypassed, thus ridding the payments process of the need to remit commissions to the said intermediaries.
Digital currencies, when freely convertible, can also be used for global settlements, thus effectively weakening the dependence of national economies on the US dollar.
What's To Lose?
In spite of all the advantages of adopting a national digital currency, many countries are still largely ambivalent about implementing it.
For one, global competition and the protection of private and national interests are still of high importance, so the issue of who "authors" and controls the nation's money is of supreme importance. Therefore, the currently most popular means of launching CBDCs, which involves the nation's government partnering with private fintech companies to author the digital currencies is a risky proposition.
That, of course, renders Tunisia and Senegal's method of implementing the launch of their national digital currencies fundamentally flawed, as letting a private company become the author of a national digital currency, as they have done, puts the country's financial market at risk of being jeopardized by the company in pursuit of its own profit and organizational interests.
Furthermore, it is also possible that the company’s employees could create hidden vulnerabilities into the operating technology of the digital currency, so as to allow them to take advantage of such vulnerabilities in the future. And what if the profit-seeking private company transfers its ownership to new investors who decide to sell the data gathered to interested bodies acting in interests contrary to that of the country in focus?
Therefore, for countries to be able to successfully launch and operate their own digital currencies, maintaining monetary monopoly is not enough. The country's central banks would invariably need to become technology companies as much as financial authorities. However, this is a serious ask to answer, and as such, most countries are in no hurry to launch digital currencies before they are convinced that they have everything in their necessary place to make it fully and safely operational - from advanced technologies to a reliable team of professionals able to provide as secure and reliable an infrastructure as is possible, seeing that the countries' entire economies will be depending on the said team to keep it efficient and safe from hackers who will be trying to penetrate the system.
And besides all that is the famous argument that a CBDC could encourage bank runs. i.e. discourage citizens from holding their monies in the bank as deposits, as everyone might switch their deposits to the new CBDC. All the same, sufficient deposit insurance should dissuade runs. In fact, CBDCs might make it easier for central banks to respond to liquidity needs if a run occurred.
Eventually, many analysts and policymakers across the globe seem to believe that the pros of operating a national digital currency outweigh its cons, and this gives reason enough to believe that many more countries will launch their own national digital currencies over the coming months and years, with African countries sure to follow in Tunisia and Senegal's suit, but hopefully with better overall infrastructure. In fact, China has already launched a pilot version of its "Digital Yuan" across Beijing.
How To Make It Work
To solve the problems of commercial banks being sidelined out of profitability, central banks could distribute the digital currencies through commercial banks, following a 'two-tiered model'. This would be a less disruptive scenario for banks and for the financial system at large.
Yes, the decreased availability of deposits in banks would likely reduce the supply and increase the price of credit to businesses and households, but the financial market and economy gets to take four steps forward without having to take more than a step back.
Tellingly, a source in Senegal, speaking with an Inclusion Times correspondent, said that the majority of Senegalese citizens are not even aware of the launch or existence of a national digital currency in Senegal. And that probably goes to show how successful eCFA's launch was.
This, however, does not necessarily signal a bleak future for the adoption and operation of CBDCs across the globe and across Africa, but it does imply a reality check, and a warning to proceed intelligently, and strategically. It would be interesting, therefore, to see how quickly Tunisia and Senegal, are able to put a fool-proof infrastructure for their digital currencies in place to help it succeed, and how quickly the rest of Africa would follow in their suit.
Senegal In Focus
Population: 16.296 million (Compared to Tunisia's 11.694 million)
GDP: $23.578 billion (Compared to Tunisia's $38.797 billion)
GDP Per Capita: $1,460 (Compared to Tunisia's $3,370)