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CBK Digital Currency: How The Government’s ‘MPESA’ Works

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digital currency Kenya
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The Central Bank of Kenya (CBK) has recently announced the exploration of a virtual version of the Kenyan shilling. This is a digital currency similar to cryptocurrencies, but issued by the central bank and pegged to the country’s fiat. If there was a spectrum for money formats, it would be right above MPESA but just below Bitcoin.

Sounds confusing? Here is a brief explainer.

CBK Digital Currency(CBDC): What It Is and How It Works

According to a discussion paper from the CBK, their digital currency will still be a sovereign fiat currency, but just in an electronic form. The digital token of the Kenyan shilling will be exchangeable on a one-to-one basis with the printed Shilling.

Such digital forms of money allow nearly instantaneous transactions over the internet and reduce the cost associated with printing and distributing notes and coins.

By using this virtual currency, individuals, private sector companies, and non-bank financial institutions can settle directly in central bank money, rather than rely on the banking system. Payment chains will be greatly simplified here.

The central bank will essentially be entering into direct competition with the banks and payment service providers it regulates. All deposits including those accessed at low costs will easily be processed from phone to Central bank. So in layman terms, “MPESA” but through the CBK.  Actually, the intense and robust and very active adoption of mobile money in Kenya seems to be a good sign for the CBDC.

“Therefore, the consideration to introduce a CBDC in the payments system in Kenya would not majorly focus on enhancing access to financial services given the existing and growing penetration of mobile money,” CBK.

While cryptocurrencies are decentralized, CBK will reserve and deposit funds to back up digital currencies. Therefore, there will be paper money that has a corresponding electronic version. As a centralized form of currency, they may not anonymize transactions, as some cryptocurrencies like Bitcoin do.

Over 100 countries in the world and their central banks are already exploring their versions of digital currency, some having already implemented. Just last year, Nigeria became the first African economy to launch their CBDC known as eNaira.

Kenya joins a list of others in Africa like Zambia and Ghana who are developing and monitoring their versions before launch.

Public Participation

The Central Bank of Kenya has invited the public to provide their comments on the applicability of this digital currency.

“In its pursuit to address the aforementioned questions, CBK reiterates that people must be at the centre of assessing any innovation. The usefulness of technology does not lie in its uniqueness but in its ability to solve a pressing societal problem.”

Written submissions or representations should be sent to CBK by Friday, May 20, 2022, at 5.00 p.m.

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