CBDCs & The Possibility of Financial Inclusion In Africa, Pt.2
In our first post on this topic, we took a look at what Central Bank Digital Currencies (CBDCs) are and their potential to advance financial inclusion in African countries. We established that CBDCs – and more generally digital currencies – have different applications and use cases, chiefly as the core of more efficient transactions & delivery of public services, which lead to economic growth. While the uptick in global CBDC exploration is encouraging, there is still much to be addressed in regard to how the implementation of these digital currencies will impact society and the primary hurdles on the road to achieving the vision of a more financially inclusive future.
Key Use Cases: A Quick Recap
In the first post, we identified two primary use cases where we see CBDCs having the biggest immediate impact on financial inclusion across the payments and financial landscape: cross-border transactions and access to peer-to-peer (P2P) loans. Let’s explore two more.
Business-to-Consumer (B2C) Transactions
To achieve its goal of financial inclusion, CBDCs must deliver a perceptible benefit to the consumer compared to the status quo. At the business-to-consumer level, there’s a lot of friction involved when it comes to small transactions including an inefficient process for recurring merchant transactions and costly credit card fees. The use of CBDCs can help remove thisfriction and serve as a settlement medium for digital transactions online and at the point of sale without the need to install new infrastructure. The programmability of CBDCs could also allow retailers and banks to impose restrictions on transactions, trigger additional validation requests, and set transaction limits through safeguards.
Business-to-Business (B2B) Payments
B2B payments are an interconnected web of relationships: from senders and receivers to banks and other financial intermediaries. The nature of B2B payments has historically been one of batch payment terms and complex payment arrangements. Wholesale CBDC can change that. The use of digital currencies would support alternative and more efficient options including conditional payments (e.g. contingency payments when a good is delivered or service is completed), micropayments (e.g. payment is made at each incremental delivery of value), and platform service arrangements for more complex, multi-party payment agreements without all the intermediaries. All of this would contribute to a diversification of national payments and enhance resilience and security in large-value payments.
Other advantages of token-based CBDCs include:
Supporting digital business models by enabling payment automation on (blockchain) platforms for trade finance, procurement, Internet of Things etc Direct access to central bank money that eliminates counterparty risk
If properly planned for and implemented, the application of digital currency technology to these use cases has the potential to dramatically change the landscape for the better, making the world a more accessible and inclusive place. Across all of these use cases, however, there is a consistent set of practical hurdles to solve. Let’s take a look at some of them and how CBDCs can help clear them.
Critical Barriers Impacting Adoption
Resistance to Change
While the existing money transmittal system is inefficient, the general public is accustomed to this system and naturally resistant to change. Credit & debit card payment systems have been around for a long time, and so has the technology infrastructure that those transactions run on. Additionally, many people still don’t have the technical expertise to store and use cryptocurrencies safely.
In Africa, fintech apps and solutions like BuyCoins and Mara are ensuring that individuals in sub-Sahara Africa are not left out of making the most of the financial-growth opportunities available in the cryptoeconomy. Initiatives focusing on educating Africans on crypto & blockchain technology also exist. Binance recently announced the launch of a crypto education hub in Yaoundé, Cameroon, in collaboration with Inoni Tech, a non-profit tech hub providing resources and trainings for young people across Francophone Africa. This is a first-of-its-kind crypto hub and it will be a training center for blockchain education sessions.
However, while incremental improvement on existing technologies or one-off solutions like these are a great start, they ultimately limit innovation and prevent broader adoption if there is no implementation of a widespread solution.
Security
While the use of digital currencies and digital wallets holds a lot of promise for financial inclusion, it also poses potential security risks. With a bigger chunk of the global population making payments, transferring funds, and managing finances on their mobile devices, new vulnerabilities arise.
CBDC access credentials are needed for accessing and transferring funds. Such credentials could be given in the form of a passphrase that could be easily communicated even on paper, or a hardware token that stores the private keys. Regardless of the form, the threat of theft and credential loss is significant, meaning account funds and data could be compromised. Virtual risks can include anything from phishing scams and social engineering hacks, to Denial-of-Service (DoS) and double-spend attacks. While a lot of people already use financial apps on their mobile devices and are aware of these risks, many do not and this will likely be a barrier to entry for those people.
Luckily there are ways to avoid and mitigate these risks with the use of CBDCs. One of them is a blockchain-based CBDC that uses a multi-signature (“multi-sig”) wallet where at least two other trusted parties hold credentials to the same wallet. Additionally, by imposing transaction limits and safeguards the potential impact of such attacks would be greatly reduced.
Offline Access
In order to access and use CBDCs, internet access is required. CBDC usage will grow with internet usage through mobile devices, especially given the increasing rate of smartphone penetration throughout the world. However, implementing critical telecommunications infrastructure won’t be enough to match the pace of innovation needed to ensure constantly available internet access on a 24/7 basis. This goes for both developing nations and countries like the US, where only 7% don’t have access to the internet.
Having internet access as a prerequisite to success may harm CBDC adoption and usage, both for those without regular access to the internet and for instances when the Internet is down or devices run out of battery. With this in mind, offline access has to be considered while designing a CBDC as it will be critical to implementation. One example of how to solve for offline access could be a solution that mirrors Nigeria’s eNaira which includes provisions for users to access their wallets with offline forms of identification like USSD.
Paving a Path Forward
While there is work to be done to pave the way for a CBDC-driven future, the journey ahead is an exciting one and undoubtedly promises a more inclusive, sustainable financial system. Digital currencies offer many additional benefits that are currently unmatched in today’s financial landscape, and we’re confident that central banks, financial institutions, and society as a whole can work together to overcome the hurdles and create a clear path forward that will ensure equal and equitable access to financial services in the world.
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