Despite the current crypto crash, “it’s clear that institutions are preparing for a digital future,” says Richard Dennis, CEO of Temtum Group, a blockchain provider.

Countries in Africa are looking to use Central Bank Digital Currencies (CBDCs) to overcome infrastructure issues affecting the banking sector.

And far from being motivated by a desire to profit from cryptocurrencies as a “hyper-capitalist technologylike millions of enthusiasts at the start of the decade, their purpose is to promote financial inclusion. Using the technology behind cryptocurrencies, they aim to boost the supply of financial services to the hundreds of millions of Africans without bank accountsfacilitate national and cross-border payments and increase trade.

“The CBDC model will be very beneficial for Africa because it allows anyone to trade, it does not need an internet connection, financial policies can be implemented much faster, taxation and accounting are simplified and, most importantly, in CBDCs there are no transfer fees,” says Dennis, whose company advises central banks in Africa on how to implement the CBDC model.

What are CBDCs?

CBDCs are not cryptocurrencies. They are simply the central bank’s digital representations of money, and the government regulates them.

The value of a CBDC will rise or fall against the dollar in the same way as the currency it is based on, rather than fluctuating wildly like bitcoin.

However, CBDCs use the technical capabilities arising from innovations in the crypto space to strengthen the central bank monetary system.

Although based on the use of electronic wallets, CBDCs also differ from mobile money systems such as M-Pesa and Orange Money.

While the money used in the latter is based on regular cash and requires an intermediary to authorize payments, CBDCs can be used to make payments directly – for example, eNaira in Nigeria (see below) allows peer-to-peer payments to anyone with an eNaira wallet, without any fees.

Because the government controls the digital currency, situations like the one that happened with EcoCash in Zimbabwe cannot happen either.

“In the case of EcoCash in Zimbabwe, for example, the company had more money in the network than it had in bank accounts. At some point it started printing its own currency. EcoCash became the Zimbabwean dollar because everyone was using them,” says Richard Dennis.

Implementation of CBDCs

To implement CBDCs, Dennis says it’s “imperative” for central banks to work with existing private crypto and blockchain companies, “who would use their expertise to implement such a network.”

Additionally, Dennis argues that CBDCs do very little for the environment because they do not add physical silver to circulation or utilize the energy-intensive mining processes required by cryptocurrencies such as the bitcoin.

“In Africa especially, you don’t want power as a form of security. So what you get for CBDCs are consensus algorithms based on simple math,” says Dennis.

Asked about the main challenges of implementing CBDCs in Africa, Dennis does not see the lack of infrastructure in some countries as an obstacle.

“Deploying the technology is really simple, you can onboard 60 million people in a month, that’s not a problem. The challenge is to get everyone to accept the generational change that is digital currency,” he says.

Although Dennis acknowledges that this will be a long and very time consuming process, he considers that Africa is becoming more tech driven, especially the youth, which will make it easier to implement CBDCs.

Case study: a year of eNaira in Nigera

Last year, columnist Mushtak Parker wrote that, if carefully implemented, CBDCs could “produce significant economic gains by increasing financial inclusion and reducing friction within the system.”

Meanwhile, the Central Bank of Nigeria (CBN) launched Africa’s first-ever CBDC, eNaira, following a ban on crypto transactions within the country’s banking sector.

eNaira aimed to leverage the hype surrounding cryptocurrencies such as bitcoin to provide people with a regulated digital currency, which would complement Nigeria’s physical currency and not be subject to the volatility of the crypto market.

As cryptocurrencies grew in popularity in Nigeria, especially among young people, eNaira was launched almost hastily to counter popular demand for bitcoin, which was seen as funding terrorism and encouraging tax evasion.

However, after almost a year of use, the eNaira app has only been downloaded by 80 merchants across Nigeria, and of the 700,040 individual downloads, only 14,000 people are now funding their eNaira wallets.

While technical issues with the release of the eNaira app didn’t help promote the CBN initiative, Frank Eleanya, head of eNaira’s technology news desk Business day in Nigeria, identifies a few other important factors.

“Banks and fintech companies in Nigeria were already providing all the services that eNaira was supposed to provide,” says Eleanya.

“If you then tell the banks to go ahead and promote this product, what will happen to the products that they already have in the market and have spent millions on?”

The very essence of the CBDC project, namely a regulated digital currency controlled by the CBN, has been questioned by banks in Nigeria.

“The blockchain that controls eNaira was going to be controlled by the Central Bank, which means banks would not be able to put their services on the technology,” Eleanya explains.

“But banks have shareholders they have to answer to, and eNaira doesn’t guarantee them any incentive, so they slowly let it go,” says Eleanya.

On the user side, the promise to “bank the unbanked” has yet to materialize in the African Giant, where 36% of adults remain totally financially excluded.

However, if financial inclusiveness has not improved under eNaira, this has more to do with current mobile money regulation in Nigeria than the effectiveness of CBDCs.

“In Nigeria, when it comes to mobile money, the mobile number used must reside with a bank. If not, you are not allowed to have financial services in the country. This is the barrier we have,” says Eleanya.

Thus, the promise of financial inclusion has has not materialized for the 40 million Nigerians currently without bank accountswhether or not they have a cell phone.

Lessons from eNaira

What is happening in Nigeria should not argue for the future implementation of CBDCs in Africa, but help us understand the limitations of the system.

A lesson to be learned from the Nigerian case study is that future CBDCs in Africa cannot be implemented without discussions between central banks and mobile money providers.

“There are trust issues in Nigeria. People cannot trust CBN to be an operator. It doesn’t even make sense: you can’t compete with the market you’re trying to regulate,” says Eleanya.

“Regulations need to change so telecom operators can go into rural areas and open bank accounts for people.”

Trust issues could also emerge in other parts of Africa as other governments begin to create their own CBDCs.

With bitcoin, governments feared market instability. With the CBDCs, when it comes to Nigeria, people feared government mismanagement.

Accordingly, a blended solution involving telecom operators that have a significant footprint in the local financial market and central banks could pave the way for successful digital currencies in Africa.