Players in the Kenyan banking sector, including banks, have issued a warning that the introduction of a Central Bank Digital Currency CBDC in Kenya could cause a number of banks to fail as consumers hurry to convert their funds from the present form of deposits. cbdc digital currencies kenya
Many of them are worried about the prospect that the digital currency may start a bank run, according to a paper from the Central Bank of Kenya (CBK) that incorporates comments from different sources like individuals, public organizations, and commercial banks.
The regulator agrees with the many concerns, saying the rollout of the digital currency should not be “a race to be first” and that this form of currency may not be a priority in Kenya “in the short to medium term.”
The CBK released a discussion paper in February of last year in response to the Kenyan CBDC, whose arrival has been debated for the past few years, but the reaction indicates more risks than opportunities.
Respondents warned the CBK that Kenya’s financial stability would be threatened by the digital currency, particularly if the regulator provides the currency directly to clients, putting the regulator in a direct competitive position with the firms it regulates. cbdc digital currencies kenya
The stakeholders cautioned that such a move would cause clients to withdraw their deposits—which are currently over Sh4.828 trillion—and convert them into digital money, which would lead to bank collapses.
It was noted that CBDC may lead to CBK competing with banks, resulting in system-wide bank runs.
This is because customers would perceive CBDC as risk-free and convert their deposits to CBDC. This would in turn stress bank deposits, threaten financial stability, and adversely impact monetary policy transmission due to an increase in central bank-issued money, and a reduction in deposits held by banks.says the CBK in the paper published last Friday, capturing public input.
As part of their function as financial intermediaries in the economy, banks rely on customer deposits for the money to lend to both the government and the private sector.
Bank interest margins would be squeezed by the loss of deposits, especially those accessed at a cheap cost, prompting them to increase loan rates to offset the risk of lower profits.
The depositors in Kenya have seen a prior wave of bank failures that included 12 between 1984 and 1989, 19, between 1993 and 1995, 6, between 2000 and 2005, and 3, between mid-2015 and 2016.
According to the CBK, its goal is for Kenyans to be able to use a safe, effective, and widely accessible payment system.
The rollout of CBDC should not be rushed just to be first or ride on trends. Presently, Kenya’s pain points in payments can potentially be solved by strengthening innovations around the existing payment ecosystem.said the CBK.
In contrast to the proposed CBDC, which respondents claimed may exclude many people unless it is constructed on low-cost technology that allows both online and offline transactions, the CBK claims that mobile money has been a game changer in Kenya, considerably boosting financial inclusion to 83.7 percent.
The regulator observes that Kenya has become a hub for innovation as a result of the growth of mobile money and that each new technology should be evaluated for its potential to address urgent societal issues rather than just being novel.
Therefore, the focus of the assessment of CBDC innovation must be on functionality and the problem it resolves for the people rather than the technology.says the CBK.
Some of the respondents have requested that the CBK adopt a non-interest-bearing retail CBDC to deter conversion or cap the amount that can be converted into digital currency in order to reduce the risk of deposit loss.
Additionally, the CBK is being urged to think about prohibiting the conversion of bank deposits into digital currency and creating a fund to help financial institutions make the transition if digital currency is ever implemented.
For other respondents, a smart banknote—a physical banknote with capabilities that can communicate with an electronic network—would be preferable to the idea of digital currency because they believe it would use fewer resources.
The CBK is advising caution so that the drawbacks do not ultimately outweigh the benefits, even if the paper lists various benefits of introducing a digital currency, including easing and lowering the costs of cross-border transfers and increasing transparency.
The CBK is advocating a gradual approach instead, in line with the actions taken by many of the world’s largest central banks, some of which have postponed their decision to implement digital currencies.
Numerous responders also warned the agency that the digital currency will be susceptible to cyberattacks and other risks because it is a technology product.
The appeal of CBDC has been fading on a worldwide scale, particularly in light of the recent turbulence in the market for crypto assets, which was characterized by excessive volatility and the failure of stablecoins and crypto exchanges last year.
When compared to 2021, the market capitalization of crypto assets decreased by more than half in 2018, which caused investor caution and decreased interest in crypto assets.
Source: Business Daily cbdc digital currencies kenya