The publication of this discussion paper signifies a notable shift in the CBK’s approach towards fintech.  Only four years ago, in 2018, the CBK cautioned against the use of virtual currency as legal tender and issued a notice to this effect, reasoning that transactions involving virtual currencies were largely untraceable, had highly speculative values, and lacked proper regulation – all of which exposed users to potential risks that the CBK could not prevent.

The effect of this cautionary notice led commercial banks to dissuade customers from buying, trading, and holding virtual currency and, in some instances, led to threats of account closures for customers who created accounts to trade in virtual currency.

A welcome shift

The current discussion about a potential CBDC therefore represents a welcome shift in the CBK’s perspective and is seen as a positive step towards exploring and addressing the financial needs of an increasingly digital economy. According to the CBK MSME Access to Bank Credit Report (2021), financial inclusion in Kenya was at 83% in 2021, whereas the mobile penetration rate was at 129,1% in 2020, according to the CBK Bank Supervision Annual Report (2020). Additionally, during the COVID-19 pandemic, digital payments in Kenya increased from 55,7% to 79,6% of the share of all financial transactions, and accounted for 81,5% of the value of all financial transactions. As stated in the discussion paper, “digital platforms have emerged as important financial inclusion tools in Kenya. Considering a CBDC is therefore critical, given that policy choices among central banks should reflect the specific jurisdiction requirements and circumstances at that point in time.”

Notably, these recent discussions position the CBK alongside the 86% of global central banks that are actively researching the potential for centralised digital currencies. Jurisdictions such as Sweden, Singapore, England, Canada and the Bahamas are currently considering the opportunities and approaches to take in implementing a digital currency. In Nigeria, the central bank successfully launched a CBDC called eNaira in October 2021. Importantly, Nigeria took four years to implement its currency to ensure that the correct infrastructure and regulation were in place across the entire country prior to the adoption of the CBDC. In its discussion paper, the CBK highlighted the cost of infrastructure and the need for a legal and regulatory framework as some of the challenges involved in implementing a Kenyan CBDC. Given that an effective CBDC will need to be universally accessible, easy to use, and highly inclusive, the CBK is aware that it will need to resolve these challenges to ensure equal access across Kenya. It is arguable and foreseeable that significant investment in Kenya’s infrastructure will be required before the CBK can effectively implement a CBDC. Nevertheless, a CBDC provides many opportunities for Kenya in terms of financial stability, payments resilience, enhanced cross-border payments and greater financial inclusion.

The publication of the discussion paper indicates that the CBK is aware of the need to keep up with evolving global digital transformation. Physical currency is becoming less viable and less desirable in a COVID-19 world. In particular, the rise of mobile money payments demonstrates that the “technology and innovation wave has brought about a paradigm shift in the way money is handled”. Moreover, the uptake of virtual currencies in Kenya, despite the CBK cautionary notice, indicates that there is an interest in the use of virtual currencies, which the CBK can leverage and cultivate by providing a more accessible and inclusive virtual currency in Kenya. The CBK has invited public discussion on the applicability of a CBDC in Kenya’s payments landscape, and provided a list of 12 guidance questions to aid this discussion. To participate in this discussion and review the questions, refer to pages 21 and 22 on the link below:

Discussion Papers - Central Bank Digital Currency