Technology is changing money as we know it. Financial technology or fintech as a form of financial innovation has reshaped the financial services industry, particularly in Sub-Saharan Africa. More recently, the advent of central bank digital currencies (hereafter CBDC), presents a transformative opportunity for the global financial sector. New analysis shows over 90 percent of global economy exploring a CBDC. According to The Atlantic Council’s CBDC Tracker, nine countries have now fully launched a digital currency. Nigeria is the latest country to launch a CBDC, the e-Naira, the first outside the Caribbean. The e-Naira is expected to boost cross-border trade and financial inclusion, make transactions more efficient as well as improve monetary policy, according to the Central Bank of Nigeria.

So, what exactly is a CBDC? Simply put, a CBDC is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.

The idea of digital money is not new, many of us use debit and credit cards or payment apps for transactions. Africa’s reputation for innovation as the global leader in mobile money is a key driver behind the continent’s burgeoning fintech investment scene. The continent is already the largest adopter of mobile money transfer systems, comprising nearly half of the globe’s registered mobile money customers, approximately 70 percent of global mobile money transactions, and two-thirds of the transaction volume by value.

But what would make a CBDC different? One of the big financial developments over the last few years has been the rise in popularity of cryptocurrencies – with one in particular, Bitcoin, standing out. Unlike traditional money, cryptocurrencies are not issued by a central bank, but rather via a decentralized network of computers, typically using blockchain technology. Even juggernauts like Facebook, now known as Meta, are trying to get in on the act with the 2019 announcement that it would develop its own digital currency, known at the time as Libra and now rebranded as Diem. Central banks are experimenting with their own form of digital currencies, to counter the tsunami of cryptocurrencies we are currently witnessing. As a general matter, central banks dislike private, decentralized money (like Bitcoin), since they cannot control the supply of it, and it also threatens the sovereignty of the national currency. Hence, numerous central banks around the world from China to Sweden to South Africa are working on their own state issued CBDC. According to the International Monetary Fund, some 100 countries are at varying stages of CBDC exploration.

While still in its infancy, there are compelling reasons for central banks to issue CBDC’s, including the need to support the digital economy and e-commerce which has been accelerated by the covid-19 pandemic. CBDC’s can also provide a solution to overcome the risks associated with unregulated payment solutions, which are exploding both on the African continent and globally. Unlike public blockchains like Bitcoin and Ethereum, where information recorded is available to all, CBDC’s are private or permission blockchains, accessed only by the central bank and the parties it chooses. There are two kinds of CBDC’s. Wholesale CBDC’s are used to facilitate payments between central banks and commercial banks or the entities that hold their accounts with central banks. The other one is retail CBDC’s which can be used by businesses and individuals. It’s like currency in your mobile wallet issued directly by a central bank. This could be a game changer and have huge implications around the word. Retail CBDC’s could make a strong case for financial inclusion because a central bank could directly transfer funds to the unbanked as long as they have a mobile phone. This is especially promising in Sub-Saharan Africa where the World Bank estimates that up to 65 percent of adults are unbanked. Imagine funds being transferred for covid-19 pandemic relief, assistance from natural disasters, etc. The central bank could also use CBDC’s as a tool to influence monetary policy and spur spending in order to kick-start the economy during recessionary periods. The opportunities are plenty, but there are risks involved as well.

If individuals could all hold their money at the central bank, why hold money at the local branch of a commercial bank? This could lead to a run on commercial banks and could have consequences for the entire banking industry. It’s highly unlikely that central banks want to risk that because a strong banking sector is crucial for the financial health of an economy and central banks just aren’t designed to deal with millions of retail customers. So, the approach by the central banks is most likely to be two-tiered. Issue the CBDC to the banks who then issue it to the retail customers. This would allow the authorities the room to experiment with this new financial tool without disrupting the entire banking model.

Furthermore, there are a number of legal and regulatory gaps towards CBDC implementation in Africa that must be considered. One major impediment is that identified accounts will likely need to be required in order to ensure Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) compliance. Currently, the World Bank estimates that an estimated 1 billion people around the world and 45 percent of women in low-income countries do not have an official ID. Regionally, Sub-Saharan Africa shows the largest coverage gap, where close to one in three people in surveyed countries lack a foundational ID. Additionally, data privacy and protection laws have the potential to impact the roll out of CBDC’s regionally. Over the last decade, African countries have steadily passed laws and adopted regulations on cybersecurity and data protection. To date, 33 countries have data protection laws and/or regulations. Combatting AML/CFT and ensuring data privacy and protection are not core to central bank objectives which is usually price and financial stability. Ultimately, central banks will need to strike a fine balance between public privacy and reducing illegal activity.

As countries begin to experiment with CBDC’s, the design and implementation of these initiatives will likely vary all around the world, across both advanced and emerging markets. Kenya’s central bank has recently requested public feedback on the applicability of a potential digital Kenyan shilling, shortly after it emerged that Zambia is testing its viability too. With the launch of Nigeria’s e-Naira in October 2021 and the fact that Ghana is said to be at an advanced stage of launching its e-cedi, this can serve as a blueprint for central banks across Africa and globally preparing to launch their own CBDC – having a first mover advantage may not be a huge advantage in this instance.

The consideration of digital currencies by central banks has the potential to support financial inclusion and stability as well as to increase efficiency in operations and to secure financial integrity, particularly in cross-border payments. Several significant challenges and considerations, however, remain on the horizon. The growth in cryptocurrencies coupled with the covid-19 pandemic accelerated CBDC discussions globally with enormous upside potential for the financial sector, particularly in Sub-Saharan Africa. What comes next is hard to predict, but an awful lot will depend on how this is managed.

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Iftin Fatah is a Director, Financial Institutions at the U.S. International Development Finance Corporation. The views expressed herein are her own.