Waning Allure and evolving landscape of Central Bank Digital Currencies: A Prudent Approach for Kenya

  • 12 Jun 2023
  • 4 Mins Read
  • 〜 by Kennedy Osore

Central Bank Digital Currencies (CBDCs) have become a hot topic in global finance. These digital currencies issued and regulated by central banks are sparking intense discussions and research. CBDCs have the potential to revolutionize monetary systems, reshape transactions, and improve financial inclusion, security, and efficiency worldwide. 

Last year, the Central Bank of Kenya (CBK) released a discussion paper on CBDC, which garnered responses from a diverse array of stakeholders, including individuals, government entities, commercial banks, Payment Service Providers (PSPs), technology providers, academia, the legal fraternity, and international development partners. Notably, responses were received from nine countries: Kenya, South Africa, the US, the UK, the Netherlands, Germany, Switzerland, Sweden, and Japan.

Initially, there was a global race among central banks to be the first to adopt CBDCs. However, the practical challenges of implementation have tempered this enthusiasm. Moreover, recent volatility in the cryptocurrency market has underscored the need for a cautious assessment of innovation and technology risks. Consequently, major central banks worldwide have postponed the adoption of CBDCs, aligning themselves with the measured approach taken by the CBK.

It is essential to recognize that the introduction of CBDCs should not be driven by a desire to be the first but rather by a vision of creating a secure, efficient, and widely accessible payment system that caters to the needs of the people. In Kenya, the existing pain points in the payments landscape can be addressed by bolstering innovations within the current ecosystem. Thus, the implementation of a CBDC may not be a top priority for Kenya in the short to medium term.

Financial inclusion emerged as a significant theme in the responses to the CBK’s discussion paper. Many respondents believed that CBDCs could positively impact financial inclusion by reducing costs, expanding access to financial services, eliminating intermediaries, increasing competition, and facilitating interoperability across platforms. However, some concerns were raised regarding the reliance on smartphones and internet access for CBDC adoption, as this could create barriers to entry, particularly in rural areas with limited connectivity.

Another issue highlighted by respondents was the potential lack of attractiveness of a non-interest-bearing CBDC compared to cash. This underscores the need to carefully consider the design of CBDCs to ensure their appeal to the public.

Regarding cross-border transactions, respondents expressed optimism about the potential of CBDCs to enhance efficiency, reduce costs, and improve transactional transparency. However, they also cautioned against the vulnerabilities of CBDCs to system failures, cyber-attacks, and conflicts with other payment systems.

In the financial sector, CBDCs were seen as a means to increase efficiency through real-time settlement, lower transaction costs, transparency, and diversified payment options. Nonetheless, concerns were raised about the disintermediation of banks, threats to financial stability, and conflicts between the roles of the central bank and commercial banks.

The advantages and disadvantages of CBDCs were examined by the respondents. Potential advantages were identified as lower transaction costs, faster cross-border payments, improved forex rates, and enhanced transparency in combating money laundering. Conversely, concerns were raised about financial exclusion resulting from limited access to technology, potential conflicts between CBK and banks, and the negative impact on economic growth.

The introduction of CBDCs presents both opportunities and risks. Respondents highlighted the potential for increased efficiency, interoperability, and financial inclusion, while also expressing concerns about privacy, cybersecurity, infrastructure costs, and the disintermediation of banks. They urged the CBK to consider robust policies, regulatory frameworks, and safeguards to address these risks.

As the concept of CBDCs continues to be explored, it is crucial to address the risks associated with their implementation. Several risk mitigation measures have been proposed to protect the integrity of financial systems and ensure a smooth transition. These measures include:

Design principles to safeguard bank deposits and prevent disintermediation

Implementing a hybrid model that combines CBDCs with traditional banking systems can strike a balance between innovation and stability. This could involve imposing transaction and balance limits, eliminating interest on CBDC balances, preventing the convertibility of bank deposits to CBDCs, and establishing a fund to support financial institutions adversely affected by CBDCs.

Utilising smart contracts, offline capability, and interoperability

Embracing smart contract technology can enhance security and transparency in CBDC transactions. Offline capability ensures accessibility even in areas with limited internet connectivity. Interoperability with existing payment systems promotes seamless integration and reduces the risk of exclusion. It is crucial to prioritize consumer education and ensure that CBDCs address genuine needs to foster adoption and usability.

Employing quantum-resistant technology and permissioned distributed ledger technology (DLT)

As cyber risks loom large, leveraging quantum-resistant technology can safeguard CBDC systems against emerging threats. Permissioned DLT enhances transparency, thereby mitigating risks related to money laundering and terrorism financing. Combining robust security measures with transparency can instill trust in CBDC systems.

Encouraging collaboration and partnerships

Collaboration among stakeholders is vital to address resource gaps in blockchain technology, secure funding for CBDC initiatives, and develop ecosystem-level monitoring tools. Threat intelligence and information-sharing mechanisms can strengthen the overall security posture of CBDC systems. Additionally, investing in capacity building for the implementation team ensures expertise and efficiency in CBDC deployment.

Appointing independent trustees and ensuring data privacy

Independent trustees can play a crucial role in overseeing and addressing data privacy risks associated with CBDCs. Establishing legal and governance frameworks, adopting tiered Know Your Customer (KYC) processes, and storing only the minimum required data can enhance privacy protections and mitigate potential risks.

Standardizing interoperability requirements

Establishing a standardized set of requirements for interoperability among different CBDC systems and existing payment systems promotes efficiency and compatibility. This ensures seamless cross-border transactions and reduces friction in the adoption of CBDCs.

Piloting CBDCs with smaller populations

Conducting pilot programmes with smaller populations allows for a thorough assessment of the benefits, challenges, and risk mitigation strategies associated with CBDC implementation. This phased approach enables valuable insights to be gathered before scaling up to larger populations.

Evaluating the impact on monetary policy tools

It is essential to conduct a comprehensive review of existing monetary policy tools and their compatibility with CBDC implementation. Assessing the potential impact on monetary policy transmission channels helps maintain financial stability and facilitates effective policy formulation.


It is crucial to evaluate Kenya’s unique context, considering the country’s high financial inclusion rate of 83.7% as of 2021. Opportunities and risks associated with CBDC implementation must be carefully weighed. It is worth noting that major global central banks have taken a cautious stance, deferring the adoption of CBDCs. The CBK aligns with this measured approach, prioritizing thorough assessment and collaboration with stakeholders to develop data-driven policies and regulations.

The responses to the CBK’s Discussion Paper emphasized the importance of people-centricity, country-specific considerations, and striking a balance between opportunities and risks. These overarching themes must be carefully evaluated before making a decision regarding CBDC implementation. For Kenya, the short to medium term may not be the optimal period for prioritizing CBDCs. Nevertheless, the CBK remains committed to monitoring CBDC developments and engaging in collaboration to ensure informed decision-making in the future.