Over the years money has undergone a lot of changes, moving from coins to gold-backed paper notes and then eventually to fiat money which is backed by central banks through law.
The easiest way to think about the current payment system in the world is that banks have in the past served as intermediaries between central banks and ordinary people.
Named after the Greek goddess Juno Moneta, money has existed in various forms for a long time. According to ancient history, Rome’s currency was first minted at Juno Moneta’s temple in coins.
Over the years money has undergone a lot of changes, moving from coins to gold-backed paper notes and then eventually to fiat money which is backed by central banks through law.
Now we have digital money brought into place by the Internet.
Yet today, in response to competition from privately developed digital currencies, central banks have started working on digital currencies that promise to disrupt money as we know it today.
The easiest way to think about the current payment system in the world is that banks have in the past served as intermediaries between central banks and ordinary people.
Banks are middlemen in the same way we have maize brokers, tomato brokers and so on.
But what if we didn’t need these banks to make payments and deposits? What if we could cut out the middleman and have people and businesses transacting directly with the central bank using an advanced and secure automated system?
Mind-blowing, right? Well, that’s what the central bank digital currencies (CBDC) might do and is likely to be the reality in coming decades.
Competition might force banks to increase interest rates on deposits to compete. It would also attract more competitive and faster payments, which would further cut transactions costs.
Banks would be forced to find more creative ways to provide value to customers to stay in business as they have done in the past.
Instead of payments technology like M-Pesa or Jumia or Flutterwave first transacting with the bank, they could just set up accounts with the central bank and, in the process, significantly cut the cost and turnaround time of transactions as observed from China’s CBDC trial.
Since Kenya wants to position itself as an African technology hub, the Central Bank of Kenya should go ahead and launch the digital currency.
If we help pioneer bolder variations of the CBDC by opening it to not just people but also technology companies and foreign central banks, our financial institutions could be forced to be better prepared for the inevitable transformation of money and would be able to attract and create exportable talent and services to the rest of Africa and the world.
MPESA started as a micro-finance pilot program ran by Vodafone Group with support from UK’s Department of International Development grant.
Over time it adapted to failures and successes and has changed in ways different from what it was originally contemplated to be. Today it handles significant volumes of transactions and has transformed financial inclusion.
Now the service is being exported by our very own Safaricom to Ethiopia along with Kenyan expertise. Why not use CBDC as the next spark to innovation and establish dominance as a financial services hub?
You can’t stop the force of disruption especially if it’s coming from the private sector as it means there is a gap in the market. Introducing CBDC early in parallel to existing channels will force banks to be better prepared.
From a continental trade perspective, it would fast-track settlement in intra-Africa trade and increase remittances once we set up an interoperable CBDC which would extend more broadly to even better global reach.
It’s time we started working towards preparing the next generation in Kenya for a technology-led future.
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