IMF backs CBDC but urges African central banks to prioritize privacy

The International Monetary Fund (IMF) has called on African central banks targeting to issue digital currencies to be keen on user privacy as it backs the assets to deepen financial inclusion in the continent.

This comes as the world looks for a regulatory framework on cryptocurrencies which have gained popularity worldwide amid rising cybersecurity risks.

According to IMF, crypto-assets market capitalization reached $2.3 trillion by end of last year as it warns of their potential danger to the monetary system.

“Insofar as their movements are correlated with those of other financial instruments, crypto assets could lead to the amplification of shocks. They could, in some circumstances, replace local currency as a medium of exchange, a store of value, and a unit of account—a risk which has been dubbed as “cryptoization.” And they can be misused for money laundering, terrorist financing, and other illegal activities,” said IMF Deputy Managing Director Bo Li.

While addressing Central Bank Digital Currency and Crypto Assets seminar during the celebration of the 20-year anniversary of the African Regional Technical Assistance Centre (AFRITAC) East, Li said the development of Central Bank Digital Currency (CBDC) by African central banks should tailor the digital coins to meet their specific objectives and needs, reflecting country circumstances as there is no single outright approach.

“If designed prudently, CBDC could reduce incentives for adopting crypto assets, and at the same time support public policy objectives such as efficiency and stability of the payment systems in the digital age,” said Li

In February, the Central Bank of Kenya (CBK) published a Discussion Paper on Central Bank Digital Currency with the public expected to submit their views by May 20, 2022.

CBK is seeking to apply digital currency in the retail space and cross-border payments by pegging its success on the increased use e-money in the form of mobile money which has become robust and inclusive in the country.

“The key elements to be considered by CBK before issuing a CBDC are legal and institutional preconditions. These would include infrastructure, regulatory and supervisory framework, governance and risk management, central bank resources, and central bank legislation,” said CBK.

CBK says besides supporting public policy, the digital currency would be a sovereign currency in an electronic form and it would appear as a liability on CBK’s balance sheet and an asset to users holding it.

Central banks have been forced to explore the issuance of their own digital currency amid rising adoption of cryptocurrency especially in Kenya, South Africa, Nigeria and Tanzania according to IMF.

Li says in some countries it has observed that central banks are keen to minimize the impact of CBDC on financial stability and eliminate intermediaries in the banking sector.

“The countries we studied offer CBDCs that are not interest-bearing—which makes CBDC useful, but not as attractive for savings as traditional bank deposits. We also saw limits on holdings across active CBDC projects—again, to prevent sudden outflows of bank deposits into CBDC,” said the IMF Deputy Director.

African central banks have now been urged to ensure there is privacy in transactions in order to be attractive to users but be vigilant to curtail illicit financial flows.

IMF says it is taking part in international efforts to develop appropriate policies, regulations, and standards to support the development of digital coins.

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