Currencies

Digital shilling risks harming price stability goal, says CBK

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The Central Bank of Kenya building in Nairobi. PHOTO | DENNIS ONSONGO | NMG

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Summary

  • The proposed Central Bank Digital Currency (CBDC) will be a virtual version of the shilling, exchangeable on a one-to-one basis with hard cash.
  • The regulator is proposing alternative means of managing the digital currency which would involve banks as intermediaries to handle retail payments done using the virtual currency.

The Central Bank of Kenya (CBK) has raised concerns that running a digital currency will interfere with its core mandates including stabilising prices, raising the possibility that it might allow banks to execute retail payments on its behalf.

The proposed Central Bank Digital Currency (CBDC) will be a virtual version of the shilling, exchangeable on a one-to-one basis with hard cash.

But unlike the normal currency, retail holders of the coin would directly hold accounts at the apex bank.

This would allow them to bypass banks in making and receiving payments, but in doing so push the CBK into direct competition for deposits with commercial banks, which it also regulates.

The regulator said in a discussion paper on the digital currency that its issuance will therefore require national and international consultations.

“…a CBDC could potentially lead to major disruptions affecting monetary policy transmission, financial stability, financial sector intermediation, the exchange rate channel, and the operation of the payment system,” said the CBK.

It added that while there will be minimal monetary policy impact of the actual issuance —which would mirror that of existing hard cash— the changes in behaviour of the public holding the digital coins might be significant, triggering a review of the monetary policy framework.

The regulator is thus proposing alternative means of managing the digital currency which would involve banks as intermediaries to handle retail payments done using the virtual currency.

One is an intermediated model where the CBK only maintains a wholesale ledger of payments between financial service providers (banks) and not for individual currency users, while these intermediaries’ on-board clients and execute retail payments.

The other would be a hybrid where CBK retains a copy of the retail client ledger, but leaves the role of onboarding clients and executing retail payments with intermediary banks.

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