This is how Bitcoins, central bank digital currency differ

Digital currency

Early this month, the Central Bank of Kenya (CBK) issued a discussion paper on the potential for implementing a Central Bank Digital Currency (CBDC) in the country and invited the public to comment on it.

To begin with, Kenyans need to understand that digital currencies are not new in our economy, and we have been using them for over a decade. A digital currency is any money transacted and stored electronically such as an M-Pesa wallet or the bank balance that one transacts using a credit card.

What distinguishes CBDCs from other digital currencies is that they are issued exclusively by a central bank and that they give direct control of the currency to a government.

Bitcoin, on the other hand, is a fully decentralised digital currency with no singular issuer. It is stored on a distributed ledger technology that is secure, transparent, and permissionless.

CBDCs and Bitcoin facilitate financial inclusion since anyone with a smartphone can use it for transactions. However, those without smartphones or a basic understanding of internet usage may be left out.

For a person looking to own and transact with Bitcoin, they do not need to complete a know your customer (KYC) process. However, CBDCs, based on the existing CDBCs across the world, require a user to be known. This raises a fundamental issue for both Bitcoin and CBDCs.

A government can track all currency transactions using a CBDC and associate them with a person or company. This helps solve corruption, money laundering, and terrorism deals.

On the other hand, it removes all privacy on how citizens use their money, and the data can be used to create a social credits system as is the case with China.

Additionally, for citizens to exercise their rights and freedoms, they require money in one way or another. This ranges from paying for transport to move around, buying a domain to blog your thoughts, or buying coffee during a demonstration.

By having a CBDC implemented, a government gains the power to freeze any persons’ money at the touch of a button thereby infringing on their ability to exercise their rights or freedoms.

In contrast, Bitcoin is semi-anonymous and allows non-KYC’d citizens to use it to purchase anything from anywhere. This creates a fundamental risk of people using it to do illegal transactions such as money laundering and funding terrorism.

Yes, Bitcoin gives people the freedom and privacy to transact without being censored, but it also allows for illegal transactions such as the ones done using cash. In recent developments, technology companies have come up with ways to track illegal Bitcoins and arrest criminals who use the network to do illegal things.

In governance, a Bitcoin-friendly nation such as El Salvador uses a Bitcoin wallet for public accounting. This means that citizens can verify the taxes they pay and track every expenditure that the government makes. This eliminates corruption just like CBDCs.

If a central bank implements a unilateral CBDC, it comes with the creation of a State wallet where citizens can store their money, send, and receive. This eliminates the need for payments service providers such as Safaricom and Pesalink.

Since people can store their money in their digital wallets on smartphones, the need to keep their money at commercial banks reduces thereby setting the central bank in direct conflict with commercial banks.

To implement a secure CBDC, the government may be forced to implement a statewide communications network accompanied by a nationwide power supply.

Without this, the monetary system would be exposed to the risk of depending on private communication service providers, electric power distributors, and electric power suppliers.

Bitcoin doesn’t require this and is privately managed by global distribution of miners who run copies of the distributed ledger for a reward of the transaction fees on the network.

Since the CBDC case in Kenya is still at a discussion stage, the Central Bank of Kenya needs to consider the above-mentioned issues and find amicable solutions that ensure a stable and inclusive digital financial system.

On the other hand, there is a need to create a crypto-friendly framework for Kenyans to benefit from the Bitcoin technological advancements such as the lightning network that allows users to send and receive Bitcoin at meagre transaction fees.

This would provide Kenyans with sufficient exposure and perspective to build and invest in the next phase of payments processing infrastructure, decentralised finance, and decentralised applications.

Rufas is a research and markets analyst at Scope Markets Kenya. Email:[email protected]