Central bank digital currency (CBDC) is a new type of digital money that central banks around the world have put forward to counteract the effect of stablecoins.
CBDC, with its backing from national fiat currencies, aims to become a widely accessible digital form of fiat money. It has already received backing from the International Monetary Fund (IMF). The organisation sees CBDC as a more active way to regulate the issuing and use of digital currencies across the globe.
The main benefit of CBDC is that it reduces costs for consumers and enable financial inclusion, particularly in emerging markets and lower-income countries. This, it does by allowing individuals to hold liability in a central bank, instead of commercial banks. With the protection of a central bank, consumers will be able to pay less to maintain a payment system such as MPesa.
While CBDC could be offered successfully without blockchain, many central banks are exploring the possibility of designing as a blockchain-enabled token. One main benefit of this model is that it can facilitate the trading of blockchain-based assets—which is cheaper and more efficient than traditional means of payment like cash and wire transfers.
Tunisia central bank digital currency
Until now, central banks around the world have only been exploring the potential of launching a central bank digital currency. But the latest reports suggest that Tunisia has become the first country in Africa to issue a digital currency.
Dubbed E-dinar, the currency was issued in a testing form at the Forex Club of Tunisia on Friday. In the test launch, Tunisia’s central bank chief Marouane El Abass transferred one dinar to an IMF representative to symbolise the historic event.
E-dinar will be powered by Russian-based blockchain platform Universa. The digital money is now available to Tunisians to transfer between one another while merchants can expect to start accepting payments in E-dinar sometime next year.
Last July, Division Chief in Monetary and Capital Markets Department at the International Monetary Fund (IMF), Tommaso Mancini-Griffoli suggested that any central bank wishing to issue digital currency could offer it through a private/public partnership. Also known as, synthetic central bank digital currency, this model ensures that all the aspects of digital currency are continually moved to the private sector so that the central bank acts only as a backup system.
However, fiat currency must support a token issuance so that the money that a customer deposits with the stablecoin issuer arrives in a reserve account at a central bank.
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It appears that is the route Tunisia has taken with its E-dinar currency. The Tunisian central bank partnered with Universa last year to develop E-dinar on its behalf. As part of the partnership, Universa will receive a percentage of each transaction on the system, but it does not have access to any encryption keys or permission to see records.
The CBDC will be issued to Tunisians online and through several kiosks spread across the country. They will then use a browser application to load funds to a digital wallet of their choice. In the future, this process could be made more convenient using a mobile app. Transfers, meanwhile, are completed between people and businesses by scanning a QR code.
Universa CEO Alexander Borodich explained that CBDC is not a cryptocurrency and that they are using blockchain to provide provenance to digital money. He commented:
“Electronic banknotes cannot be faked – each such banknote, like the paper version, is protected by cryptography, it, like the paper counterpart, has its own digital watermarks. And the production of such a banknote is 100 times cheaper than wasting ink, paper, electricity for the printing press.”
The main risk of CBDC is that might result in the disintermediation of the banking sector, impacting the stability of banks and credit providers. However, the central bank can offer interest rates on CBDC to restore stability. Because the central bank is the only body with the authority to oversee the digital currency, Universa is launching the CBDC under Universa Hub Africa Company to protect Tunisia’s sovereignty.
With Tunisia becoming the first nation to take the plunge into CBDC, it remains to be seen whether the move could prompt other African countries to follow suit. Morocco, Algeria, and Mauritania are the three Maghreb countries that also participated in the presentation of the CBDC.
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