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CBDC: the Next Big Disruption 

By Philemon Kajewole | Tue Jan 11 2022
Digital currencies generally refer to acceptable means of payment completed through electronic forms. The last couple of years have seen a record number of entrants into the digital currency space, which has largely been dominated by cryptocurrencies, whose value seems to keep rising with every bout of human acceptance. In Africa, monthly cryptocurrency transfers to and from Africa under $10,000 increased 55% over the past year, reaching a peak of $316M in June (1). Also, according to the 2020 Global Crypto Adoption Index from blockchain analytics firm Chainalysis, South Africa, Kenya and Nigeria are among the world leaders in peer-to-peer cryptocurrency trading (2). Accordingly, Nigeria recorded weekly peer-to-peer volumes between $5M and $10M. Kenya and South Africa followed with an average of between $1M and $2M per week (3).
The statistics above solidifies one thing – blockchain technology is here to stay! And the reality of this statement begs the question of how we can fully maximize the benefits that blockchain technology brings. Over the last couple of years, the biggest issues on acceptance have centered on two main factors. Firstly, the erratic nature of these cryptocurrencies being mined, and secondly, the unregulated nature of these cryptocurrencies, which is where the Central Bank Digital Currency comes in.
The Central Bank Digital Currency (CBDC) is a form of blockchain technology that assumes the benefits of having a digital payment system but is particularly used as a virtual form of a country’s fiat currency. Simply put, it is an electronic record or digital token of a country's official currency. The major difference between this and the regular cryptocurrency is that the CBDC is typically heavily regulated by an individual country’s central bank, given it closely represents the country’s fiat currency. The reality is, central banks across the world now face stiff competition with their country’s currency due to the increasingly rapid nature of acceptance of cryptocurrencies. Currently, there are more than 87 countries exploring the possibilities of having their own CBDC (4). 
African countries are currently closely monitoring the global trends, with Nigeria now leading the pack to become the first African country to create its own CBDC, effectively becoming only the 7th country in the world to develop its own crypto asset, with the U.S. still in the research stage and China currently in its pilot phase.
The importance of these digital currencies in Africa cannot be over emphasized, largely due to some of its benefits, the first of which is its ability to facilitate financial inclusion. For example, according to a report by Enhancing Financial Innovation and Access (EFInA), only 64% of Nigerian adults were financially included, while 36% of Nigerian adults (which translates to 38 million) were completely financially excluded as of 2020 (5). An individual country’s digital currency would typically allow rolling out of the USSD (Unstructured Supplementary Service Data) version of the e-currency as an alternative to downloading the digital wallet for people who do not have access to the internet. This would allow for people without any level of sophistication whatsoever to still be able to use the e-payment system.
Secondly, and perhaps most importantly, the CBDC helps to create a relatively easier system of payment. In essence, the CBDC is expected to create a more secure, faster and cheaper means of carrying out financial transactions and currency exchange. This could be a major game changer for cross border trade as it could drastically reduce the cost of doing business with other countries as there are typically no middlemen with blockchain technology. An exciting possibility is the creation of one unique digital currency which can be used for cross-border trade in Africa, with acceptance by other African countries. For years the dream has remained elusive for East and West African regional blocs to create common currencies that will improve trade among member states. This could finally start looking like a not too far reality for the region as a lot of African countries have started showing some genuine interest in blockchain technology, and a willingness to explore its potential benefits. For example, in April, the Ethiopian government confirmed that it had signed a deal to create a national database of student and teacher IDs using a decentralized digital identity solution (6). The deal involves providing IDs for 5M students across 3,500 schools which will be used to store educational records. This deal is perhaps the largest deal to be signed by a government and has been making waves in the crypto-asset industry. Akin to this, Ethiopia has also adopted a Digital Transformation Strategy, where the government explicitly underscored the willingness to adopt a decentralized ledger technology that underpins cryptocurrencies. This is specific to the agricultural sector with the aim of benefiting farmers who are currently getting minimal amounts for the hardest work they put in the value chain. The adoption of the technology will allow traceability of transactions and is expected to force companies to ensure that their farmers adhere to Fairtrade Standards. In addition to the agricultural sector, the country’s Digital Transformation Strategy also incorporates the use of this technology in the tourism sector.
In conclusion, Africa may become the next big digital currency market – leapfrogging the migration from cash to credit cards, and moving directly into digital currencies. While the emergence of digital currencies presents several challenges in regards to global adoption, due to its privacy and security concerns, it clearly has benefits that cannot be completely overlooked, especially for Africa. We at RENEW are closely monitoring developments, to ensure we can take advantage of opportunities that these developments may create for the IAN in the not-too-distant future.

Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.

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