Discussion Paper on CBDC in Kenya

You can find a reference to the official CBDC discussion paper by the Central Bank of Kenya here

Core features of a digital currency

1. Ease of use
2. Low transaction cost
3. Convertibility
4. Instant settlement
5. Continuous availability
6. High degree of security
7. Resilience
8. Flexibility
9. Safety

• The paper seems to have a negative view on cryptocurrencies due to its volatility and lack of a peg to a real-world asset, making it very volatile as a currency
• However, they are quite optimisstic about stablecoins and see it as a great tool to drive sustainable adoption and use of digital assets

Why Central Banks are looking at CBDCs

1. Dwindling use of their physical currencies for digital currencies
2. Looking for more effecient ways to issue currency compared to physical currency
3. Issue an alternative to private digital currencies that may pose a damage to the economy

Cross-border remittance costs are meant to hit the SDG target of 3%. In the East African Community, it is at 8.2%. In Kenya, it is at 8%.

The East African Payment System allows banks in Kenya, Rwanda, Tanzania and Uganda to transfer money across the borders.

Idea: Instead of getting detailed information about a personal, you only get access to what is relevant to you and let the user take full control and responsibility for their data.

Twitter Space Notes

1. Transparency when using a CBDC
   • Because of the transparency, we are audit transactions of politicians joining office
   • We can use the open data to track people's spending and provide loans based on their creditworthiness
   • However, the Central Bank will be able to track you
   • Thought: If you think that privacy is a problem, Mpesa has all your transactions and it can block your account with ease
2. Could undermine the banking sector
   • If the CBDC becomes retail, the banking sector will be undermined as most people will bank with the Central Bank
   • The banks will be illiquid and will not give loans to people easily to people

• The pressure to have a digital currency is coming from foreign bodies and not from CBK's own motives
• From my view, the CBDC should be:
  1. An alternative payment system
  2. A distributed ledger that everyone can read and write to. However, it can have permissioned access levels for the CBK to add money into circulation, where can see it
  3. A hedge against other payment systems

Idea

1. Build a test distributed ledger to simulate Central Bank Digital Currency

• The issue I have with current payment systems is that they are not as programmable as we would like. With more open APIs, more decentralisation of currency, we can have the ability to build more innovative solutions in fintech
• The CBDC needs to be a base layer for banks, fintechs and other companies to embed financial capabilities
• The people who have a responsibility to seeing open transaction data
• Privacy should be the most important aspect we should defend in the CBDC proposal
• Right to Currency of Choice - you should have the ability to pay for anything with any currency you see fit
• Internet money can be used to evade taxes
• People are concerned by CBDCs because we have lost trust in our institutions and governments. We are investing in crypto and NFTs because they are a hedge against fiat and fiat-backed digital currencies
• Even if the CBK launches a CBDC, it would instill confidence in our economy but it does not automatically improve our position compared to USD in the currency market
• A CBDC will help with convertibility between different national currencies. However it will open national currencies to tight control from IMF, World Bank, Bank of International Settlements and so on. They will use AML and Anti-terrorism laws to tighten their grip. Eventhough they are not good at preventing these things