Analysts hail BoT’s digital currency move

What you need to know:

  • Digital currencies are marketed as providing better transparency and monitoring of transactions, but they are also seen as being more vulnerable to cyberattacks and privacy issues

Dar es Salaam. A decision by the Bank of Tanzania (BoT) to opt for a ‘cautious’ and risk-based approach toward the adoption of central bank digital currencies (CBDCs) is good and will safeguard Tanzania’s recent economic gains, analysts say.

“The BoT has made a significant and wise move. Before launching a digital currency, make sure you have a fully functional financial system to reduce risks because there is a chance that a slight change in the currencies could start an economic crisis,” a financial expert, Dr Donath Olomi, told The Citizen yesterday.

Despite being touted for offering greater transparency and oversight of transactions taking place, digital currencies are also viewed as being prone to privacy threats and cyberattacks.

“There are cyber dangers like hacking of institutional or customer data that can cause serious risks to the national economy,” asserted seasoned banker and analyst Kelvin Mkwawa.

Mr Mkwawa said considering that over 70 percent of the Tanzanians still reside in rural areas, CBDC adoption - be it retail (which are issued to the general public) or wholesale (financial institutions carrying reserve deposits with a central bank) - would require more time to be fully integrated into Tanzania’s financial system.

A partner at Bankable Tanzania, Mr Ivan Tarimo, said whilst a phased approach by the central bank could be a safe bet, the BoT can continue to explore CBDC through trials to a particular segment of the market.

“Before integrating it into our monetary system, there must be time to study more and conduct further research. The authorities may gain a better understanding of a particular market segment by conducting extensive trials,” he said.

While the CBDC is also associated with improving financial inclusion for the unbanked population, its adaptability also depends on the demand and willingness of the general public to use it as a form of payment.

An economist from the University of Dar es Salaam, Dr Wilhelm Ngasamiaku, said CBDC could be a boon for financial inclusion. However, he added that before Tanzania completely commits to it, it needs time and resources in addition to ongoing learning from experience, including shared experiences across countries.

“The rapid development of mobile money transactions and mobile banking shows how we are improving every day. Over time, we will catch up with digital currencies,” said Dr Ngasamiaku.

The World Bank had also suggested that understanding each jurisdiction’s landscape and the key stakeholders is an important first step to assessing whether a CBDC might be an effective option for addressing financial exclusion.

With the public awaiting to know the BoT’s decision on the adoption of digital currencies following its statement in June, 2021, the central bank now says after thoroughly researching the topic, it has decided to opt for a ‘cautious’ and risk-based approach.

CBDCs are digital versions of cash that are issued and regulated by central banks.

They are different from Cryptocurrencies which are tradable digital currencies or assets built on blockchain technology.

The BoT said in a statement released over the weekend that it will keep looking into and figuring out what technology would be the most appropriate and suited for issuing Tanzanian shillings in digital form.

“Upon conclusion of the research phase, the bank will provide information to the general public on the way forward, which may include a roadmap for transition to the adoption of CBDC,” the central bank said in the statement from its directorate of financial deepening and inclusion.

According to the World Bank (WB) to date, only three jurisdictions have fully launched retail CBDC, and those are the Bahamas, Jamaica, and Nigeria.

Several others have advanced pilots underway for instance Eastern Caribbean Central Bank, China and Ghana while others are in different stages of assessing the feasibility.

In a paper published in December last year, the WB also warned that central banks across the world must carefully evaluate all implications before CBDC adoption and create a plan to prevent and mitigate its risks.

“While introducing CBDCs could be beneficial, they have to be tested further, across time and jurisdictions, to draw reliable conclusions regarding their impact in practice,” the WB’s paper reads in part.

The International Monetary Fund (IMF) has also reported that while CBDCs are more secure and inherently not volatile, unlike crypto assets, the currencies come with risks that central banks need to consider.

“While a CBDC may have many potential benefits on paper, central banks will first need to determine if there is a compelling case to adopt them, including if there will be sufficient demand,” the IMF publication said in part.

The BoT has also indicated that the decision to remain cautious of the currencies is also attributed to the fact that one of their research outcomes showed that the majority of central bankers across the world have taken to in order to avoid any potential risks that can disrupt the financial stability of their economies.

“It was observed that six countries have cancelled their CBDC adoption mainly due to structural and technological challenges in the implementation phase,” the central bank said.

The structural challenges they say include the dominance of cash in making transactions and the existence of inefficient payment systems, high implementation costs, and the risk of disrupting the existing ecosystem.