The Rwanda’s Central Bank targets to launch its Central Bank Digital Currency in 2026 as an alternative for Rwandans as a safer, free, and convenience way of transacting than physical cash.
The move is expected to increase the country’s financial inclusion, allowing more unbanked people to participate in the formal economy, according to the national lender.
According to the Central Bank, the Rwandan CBDC is important because of developments in other countries, including African nations such as Nigeria, Ghana, and South Africa, which are either in the piloting phase or have already launched their CBDCs.
One of the drivers for this move is seeing the country’s major trading partners test or use the technology. The country’s ambitions and goals for ICT and a cashless economy, it needed to determine whether there would be benefits in following the example of other countries.
Early this year, the Central Bank introduced a feasibility study on CBDC in Rwanda. The study aimed at examining the potential benefits, risks, and practicalities of implementing a retail CBDC in Rwanda.
The National Bank collaborated with the Ministry of Finance, ICT, and Innovation to form a task force for the feasibility study, at conclusion, the study showed numerous opportunities for Rwanda to adopt a national digital currency.
After the feasibility study, the national bank also published a research paper and conducted a public consultation process to address concerns and make the CBDC beneficial to the population to increase adoption. Concerns include data privacy, resilience, and the potential destabilization of the financial system.
Further, after the public consultation process concludes in the next four weeks, Rwanda will embark on a proof of concept to test the technology, design, and speed on a small scale. It will also conduct a six-month international test on the technology for cross-border payments. Following this, individuals and companies will be mapped out to test the digital currency.
While the country considers various CBDC design options, Rwanda prefers a retail CBDC distributed through banks. It’s also considering developing a CBDC that is accessible offline, particularly in areas without internet access or smartphones, or during power outages in the country.
What is a CBDC?
A Central Bank Digital Currency (CBDC) is a digital form of a country’s sovereign currency that is issued and regulated by the central bank. It represents a digital equivalent of physical cash (like banknotes and coins) and can be used for transactions and settlements just like traditional currency. CBDCs aim to combine the advantages of digital payment systems with the security and reliability of central bank-backed money.
Key Characteristics
Digital Form: CBDCs exist purely in digital form and can be stored in digital wallets or accounts managed by the central bank or authorized intermediaries.
Centralized Issuance: Unlike cryptocurrencies like Bitcoin, which are decentralized, CBDCs are issued and regulated by a country’s central bank.
Legal Tender: CBDCs are recognized as legal tender, meaning they must be accepted for all forms of payment and settlements within the issuing country.
Account-Based vs. Token-Based: CBDCs can be designed as account-based, requiring identification and authentication for transactions, or token-based, where digital tokens can be transferred peer-to-peer without the need for a central intermediary.
How CBDCs Work
Issuance:
The central bank creates digital currency units and distributes them through the banking system or directly to the public. This can involve converting existing reserves into digital form or creating new digital units.
Storage:
CBDCs can be stored in digital wallets provided by central banks, commercial banks, or other authorized entities. These wallets can be accessed via smartphones, computers, or other digital devices.
Transactions:
Users can transfer CBDCs between wallets for various purposes such as purchasing goods and services, paying bills, or sending remittances. Transactions can be executed in real-time or near real-time.
Depending on the design, transactions can be recorded on a centralized ledger managed by the central bank or on a distributed ledger technology (DLT) like blockchain.
Intermediaries:
Commercial banks and financial institutions often act as intermediaries, providing infrastructure and services to facilitate the use and distribution of CBDCs. They may also offer additional functionalities like savings accounts, loans, and other financial products using CBDCs.
Benefits of CBDCs
Efficiency: Streamlines payment systems by reducing the need for intermediaries and lowering transaction costs.
Financial Inclusion: Provides access to banking services for unbanked and underbanked populations, particularly in regions with limited banking infrastructure.
Security and Trust: Offers a secure and stable digital payment method backed by the central bank, reducing the risks associated with private cryptocurrencies and unregulated digital payment systems.
Monetary Policy: Enhances the central bank’s ability to implement and manage monetary policy, including more direct transmission of interest rate changes and control over money supply.
Reduction of Cash Use: Decreases reliance on physical cash, reducing costs associated with printing, distributing, and managing cash.
Challenges and Considerations
Privacy: Balancing user privacy with the need for transparency and anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
Security: Protecting against cyber threats, hacking, and fraud while ensuring the resilience and reliability of the digital currency system.
Financial Stability: Managing the impact on commercial banks and the broader financial system, including potential disintermediation and changes in bank funding models.
Interoperability: Ensuring CBDCs can be used seamlessly with existing payment systems and across borders for international transactions.
Regulatory Framework: Developing comprehensive regulations and legal frameworks to support the issuance and use of CBDCs while addressing concerns related to data protection, consumer rights, and systemic risks.
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