Accessibility, privacy and interoperability: key lessons for Africa’s new CBDCs

Some 15 years after the launch of the world’s first significant mobile banking propositions, Africa is once again at the forefront of a new digital finance wave, in the form of central bank digital currencies (CBDCs). In October 2021, Nigeria became the first major country in the world to launch a CBDC, branded as the eNaira. Several other countries across the continent, including Ghana, South Africa, Zambia, Tanzania and Kenya, have announced plans for similar schemes.

CBDCs are in many ways a natural extension of the dramatic growth of mobile banking and payment providers across Africa since the early 2000s. Central banks across the continent are hoping that officially sanctioned digital currencies such as the eNaira will improve access to financial services among the unbanked, reduce the reliance on physical cash and decrease the cost of cross-border transactions, especially in the all-important area of remittances.

The launch of the eNaira cements Nigeria’s position as one of Africa’s key digital hubs, with a growing list of fintech ‘unicorns’ (with valuations of $1bn plus) hoping to cash in on the growth in digital financial services. Yet the continent’s first CBDC has had a bumpy first few months thus far, offering lessons for other digital currency projects across the globe.

Digital money

The story of Africa’s digital money revolution is a familiar one, with mobile operators, banks and fintechs reaching large swathes of previously unbanked populations with financial services delivered over mobile phones. The continent remains mobile money’s greatest success story, accounting for just over half of all active mobile money accounts worldwide in 2020, according to data from the GSMA. CBDCs represent a natural evolution of such initiatives for governments and central banks that are looking to boost financial inclusion and reduce the use of cash.

Lessening the reliance on physical cash — which still accounts for 95% of transactions in Africa (compared with around 73% in Europe in 2020) — would reduce the high handling costs associated with banknotes and coins, and give authorities greater oversight over financial transactions across informal economies.

Perhaps the greatest benefit, as touted by CBDCs’ supporters, is a reduction in cross-border remittance costs. A World Bank study published in 2021 found that the cost of sending remittances in sub-Saharan Africa was 8.2%, compared with just 4.9% in south Asia, with the cost of remittances from Tanzania to Kenya and Uganda averaging between 17% and 21%.

“The cost of remittances is high not because of the individual payment providers, but because of the correspondent banking system and the paperwork, compliance and cash handling charges associated with it,” says Co-Pierre Georg, associate professor at the University of Cape Town and the South African Reserve Bank (SARB) research chair in financial stability studies. “If you have a vertically and horizontally integrated CBDC platform that you can build with a distributed ledger, then you don’t have this kind of friction with either remittances or domestic transactions, meaning that you can significantly reduce the cost of payments.”

In addition to such benefits, the rise of cryptocurrencies — increasingly popular across Africa as a means of bypassing foreign exchange controls and hedging against depreciations in local currencies — and stablecoin offerings (such as Facebook’s now-abandoned Libra) have all but obliged central banks to step in with similar solutions. Nigeria’s eNaira launch came eight months after the country banned trading in cryptocurrency through licensed banks.

“If you, as a central bank, don’t provide a digital payment infrastructure, somebody else will, and that puts your monetary sovereignty at risk,” says Mr Georg.

“Being disrupted by a financial technology infrastructure beyond your control directly affects the mandate of central banks in providing price and financial stability.”

Shaky start

After a flourish of publicity at its launch on October 25, 2021, the eNaira has so far gotten off to a shaky start. Developed by Barbados-based fintech Bitt — the company behind the Eastern Caribbean Central Bank’s CBDC DCash — the eNaira wallet was briefly withdrawn from the Google Play store days after its launch after several negative reviews.

Local press has reported that just under 700,000 Nigerians had downloaded the wallet app as of late-January. The Central Bank of Nigeria (CBN) did not respond to a request for more up-to-date data.

While impressive, such numbers should be seen in the context of Nigeria’s total population of 206 million and the 18 million unique users of local payments firm Paga. Local press reported that eNaira transactions had thus far been dominated by bank-to-person transfers, with very few merchant transactions, as retailers are hesitant to accept eNaira payments.

While the early bugs at launch have been ironed out, the new CBDC’s feature set remains limited compared with other domestic payment wallet providers, with no cross-border transactions permitted. Critically, eNaira wallets are currently available for smartphone users only.

“People that already have access to smartphones and mobile data have access to competing forms of digital payments,” says Mayowa Kuyoro, McKinsey’s financial institutions practice leader in west Africa. “To have greater potential, it needs to be available on more widely available platforms such as USSD, so it can be used by those who only have a basic mobile phone.”

Accessibility issues

While eNaira wallets can be opened with only a phone number, users require a bank verification number — available only to customers that already have bank accounts — to be able to store more than N300,000 ($722) and conduct more than N50,000 worth of daily transactions.

Such restrictions demonstrate the difficult balance that central banks contemplating launching CBDCs will need to strike between expanding inclusion and compliance.

“Balancing know-you-customer and anti-money laundering regulations with expanding access to people who are not yet in the financial system is a key design choice that central banks are going to have to think long and hard about,” says Ms Kuyoro.

While welcoming the introduction of eNaira, the International Monetary Fund in February cautioned that prospective upgrades enabling “cross-border fund transfers and agency bank networks may cause new money-laundering/financing of terrorism risks”.

At the other end of the spectrum, concerns over government access to transactions data from existing digital channels — particularly within the large informal sector — have dampened the take up of digital financial services across much of the continent.

In an interview with the Financial Times in November, Ronak Gadhia, an analyst for EFG-Hermes, noted that the CBN had frozen accounts of people involved in anti-police brutality protests held across the country in 2020.

In spite of such concerns, Mr Georg, who has acted as an advisor to a number of CBDC projects, believes a middle way can be found. “On the whole, central banks don’t really want the power to monitor every little transaction that is made,” he says. “They need to be able to audit large value transactions in line with Financial Action Task Force-Financial Intelligence Centre guidelines and, at the same time, give consumers the privacy they require so as not to worry about ‘Big Brother’ looking over their shoulder all the time.”

New approach

One proposal being mooted is for CBDC users’ personal information to be recorded by licensed entities (including banks and agent networks) that perform onboarding, with such entities responsible for providing said information only when formally required by authorities.

“I think that a tiered approach, where you waive the stronger privacy protections for low-value transactions and have high auditability for high-value transactions, is going to be a model that most of the world can live with,” Mr Georg says.

Beyond privacy and compliance concerns, interoperability between CBDCs is key to facilitating seamless cross-border transactions, for remittances and other purposes.

To this end, the Bank for International Settlements (BIS) in November announced Project Dunbar in collaboration with the central banks of South Africa, Australia, Malaysia, and Singapore to test the use of CBDCs for international settlements.

Participants in the initial pilot scheme could hold each other’s CBDCs directly without the need for opening accounts with correspondent banks, enabling participant banks to directly transact with one another and access foreign currencies.

In late March, BIS announced that the initial phase of the project “successfully developed working prototypes and demonstrated practicable solutions, achieving its aim of proving that the concept of multi-CBDCs was technically viable.”

In a statement, the South African Reserve Bank deputy governor Rashad Cassim said that while many unknowns remained, the project had highlighted the possibility of such a shared platform for international settlement.

The development of the internet provides a model for the working out of such factors, says Mr Georg, where experts patiently sat on working groups over several years to develop common standards and systems ahead of a mass deployment.

“The consequence of that process — which took over 30 years — was a level playing field that resulted in gigantic value creation,” he says. “For CBDCs I don’t think it’s going to take anywhere near that length of time to get right, but it’s not going to happen in six months.”