Development of Central Bank Digital Currencies (CBDC) are sprouting around the world, Africa included. The Bahamas, Jamaica and Nigeria have already launched digital currencies backed by their central banks, with several other countries, including China, running trial projects.

The United Kingdom is moving closer to it by asking for public input on the idea. The U.S. and European Union are considering similar moves. Nigeria’s digital currency is called e-naira.

The countries that introduce Central Bank Digital Currencies into their economic terrain do so to address specific economic problems such as the issue of the cost of printing currency, depreciation, hyperinflation, theft and infection or disease associated with handling banknotes and coins. Digital currencies are also implemented to offer better payment prospects in retail.

Zimbabwe will launch a digital currency on the 8^th of this month by introducing “tokens” that are backed by gold reserves. In Zimbabwe’s case, the digital currency is aimed at strengthening Zimbabwe’s fast depreciating national currency, the Zimbabwean dollar.

Authorities believe that the tokens will allow gold coins to be widely traded and, in the process, expand tradable assets in the economy for store-of-value purposes, increase divisibility and shore up the local Zimbabwe dollar.

Mind you, CBDC differ from cryptocurrencies. In that, CBDC is the electronic form of a country’s fiat currency whereas cryptocurrencies are digital assets on a decentralized network. CBDC is issued by a country’s central bank.

The use of a country’s digital currency has some advantages. The major advantages of a CBDC for Africa would be the potential to foster greater interoperability, improve payment efficiency, facilitate cost-saving gains by minimising cash handling costs, as well as reduce key payment risks typically associated with mobile money. It also promotes financial inclusion by making financial services available to people who do not have enough banking opportunity.

Additionally, CBDCs can ease cross-border payments, but only if they are built with interoperability in mind. In 2021, a paper on cross-border CBDCs, published by the Bank for International Settlements (BIS), in conjunction with the International Monetary Fund (IMF) and World Bank, urges collaboration among countries in designing CBDCs to enable cross-border payments.

“If CBDCs are not designed with the international dimension in mind, fragmentation of CBDC systems similar to the existing fragmentation of payment systems is possible,” the paper noted.

Some countries have ongoing collaborations for cross-border CBDCs—Project Jasper–Ubin, between Canada and Singapore in 2019; Project Jura, the recent trial between France and Switzerland; Project Inthanon–LionRock, between Thailand and Hong Kong; Project mCBDC Bridge, between Thailand, Hong Kong, China and the UAE; and Project Aber, between the United Arab Emirates (UAE) and Saudi Arabia.

Digital currencies are anticipated to replace physical cash in the near future. However, the fate of commercial banks will be in limbo, in that the transfer of funds to the digital wallet may create a run on the banks while the loss of income will erode their bottom line.

Also, if implemented incorrectly, CBDC could undermine the financial stability, security and inclusiveness of an economy.

Digital Currency May Be Devalued

Reserve Bank of Zimbabwe Governor, John Mangudya, has disclosed that the new tokens will be fully backed by physical gold held by the bank. He added that international gold prices determined by the London Bullion Market Association will dictate the local pricing of the tokens. This shows that whiles Zimbabwe’s digital currency is backed by its own reserves, the local pricing will be left in the hands of fate. This may affect the value of the digital currency.

Zimbabwe has substantial gold deposits and exports of the precious metal is one of the southern African country’s major foreign currency earners but gold smuggling has been rampant. Smuggling is costing the country about 36 tons of gold annually, according to a report issued this month by the Center for Natural Resource Governance, a local natural resources watchdog.

Legally, all gold mined in Zimbabwe is supposed to be sold to the central bank, but many producers prefer to smuggle the gold out of the country in order to get payment in U.S. dollars. This can also affect Zimbabwe’s gold reserves’ strength to back the new digital currency.