CBK digital currency plan freeze welcome

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Kenyan financial industry players, including banks, have warned that issuing a Central Bank Digital Currency (CBDC) may spark the collapse of an unspecified number of banks. FILE PHOTO | SHUTTERSTOCK

The Central Bank of Kenya’s (CBK) decision to delay the implementation of its digital currency is prudent in light of the concerns that such a move could destabilise the banking system and its critical role in financial intermediation.

Global regulators have been thinking of the best ways to respond to the mushrooming of virtual currencies and financial assets, also known as cryptocurrencies issued by individuals and companies operating under little to no regulation.

These innovations have attracted trillions of dollars of investments and deposits but have also resulted in major losses due to a mix of fraud, technology failure and wild price swings amid increased speculation.

One of the proposed solutions is the rollout of government-backed digital currencies that will offer more stability, with central banks leading the implementation that will mark a major departure from physical currency.

In the case of Kenya, the proposal is to have a Central Bank Digital Currency (CBDC).

After engagements with stakeholders, however, the regulator says it has paused the issuance of such currency in the short to medium term.

Among the pitfalls flagged is that CBDC risks killing commercial banks since customers could convert their deposits to virtual currency, which has the backing of the State.

Only a fraction of deposits at commercial lenders is guaranteed, exposing customers to major losses in the occasional bank failures.

The regulator rightly noted that issuing CBDC is not a compelling priority at the time.

Issuing CBDC would therefore mark out the new currency as much safer compared to existing bank deposits.

Other anticipated problems is that the CBK would now be a direct banker of millions of customers, a major task that could also distract it from its key mandates including the pursuit of price stability.

The apex bank noted that inefficiencies in the country’s payments system continue to be addressed by innovations from multiple players including local and foreign firms.